Final report hollywood cluster

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Hollywood Movie Cluster Analysis

Hollywood Movie Cluster
Analysis
Ravi Kumar
Joanna Zwirbulis
Aleksey Narko
Michał Goszczycki
Eray Ersöz

Warsaw School of Economics
Microeconomics of Competitiveness
237481-0622
(licensed by HBS)

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I.

Cluster Environment: US, California and LA
1. The United States economy and overall business environment

The United States is considered to be the largest economy in the world with a GDP at purchasing power of
15.68 trillion and growth approximately 2.2% annually. The GDP growth rate has been changing significantly
mainly due to the crisis that started in the U.S in years 2008-2009 and resulted in a enormous decline of GDP
to negative 8.3% in 2009. However, the analysis of the GDP growth provided by the U.S Bureau Analysis of
the Economy, suggests that the economy in the United States is gradually improving and in 2013 GDP growth
rate expanded at the rate of 4.1%.1

GDP is comprised of three main sectors: services, industry and agriculture. The United States has one of the
most diversified and most technologically advanced economies in the world. 40% of GDP is created by
finance, insurance, real estate, rental, leasing, health care, social assistance, professional, business and
educational services. Retail and wholesale trade account for another 12% of wealth, while the government
related services involve 13%. Utilities, transportation, warehousing and information account for 10% of the
GDP and manufacturing, mining, and construction constitute 17% of the output. Agriculture fuels only 1.5%
of the U.S. GDP, yet due to the use of advanced technologies, the United States is a net exporter of food.

Trading Economics. U.S Bureau of Economic Analysis. United States GDP Growth Rate. Available at
http://www.tradingeconomics.com/united-states/gdp-growth
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(U.S. Bureau of Economic Analysis)2
According to Global Competitiveness Index the U.S. is ranked 5th globally in years 2013-2014 and 7th
in years 2012-2013. 3The US market counts nearly 317 million consumers, which makes it one of the largest
markets in the world. Even though US population contains only 4% of the entire world population, it’s GDP
accounts for 26% of the world’s total economic output. The United States dominates in wealth. One third of
the world's millionaires and 40% of the world’s billionaires live in the United States, making it the wealthiest
nation in the world.4 Being one of the richest and largest countries in terms of population, places the U.S.
market in a very dominant position.
In order to analyze the US economy, it is also necessary to mention it’s key sectors such as consumers,
businesses, government, trade, labor and inflation. Even though they are all playing a significant role in US
economy, consumer spending is a sector, which seem to have a major importance when speaking of the United
States and it’s historical and current situation. Consumer spending makes up 70% of all spending in the US
economy so an improvement in the economic and financial well - being of the households contributes to gains
in the broader economy. According to Economic Forecast Industry Outlook 2013-1014 consumer spending
on durable goods, especially cars and trucks over each of the past three years continued to grow by
approximately 6%. Speaking of consumer spending in the US, it is also relevant to refer to Rostow’s Stages
of Growth Model. According to the American economist, the 5th stage of growth model, called “the age of
high mass consumption” perfectly summarizes the economy and the population of the United States and
indirectly explains it’s competitive advantage in entertainment industries such as Hollywood movies.
According to Rostow’s model, this type of economy is consumer oriented and dominated by services.
Furthermore, there is a widespread and normative consumption of high-value consumer goods (e.g.
automobiles) and typically consumers have disposable income, beyond all basic needs, for additional goods.
Here, a country's economy flourishes in a capitalist system and is characterized by mass production and
consumption. Historically, the United States is said to have reached the stage of high mass consumption first,
followed by other western European nations, and then Japan in the 1950s.
The U.S’s economy is considered to be the largest manufacturer in the world, producing a fifth of the

US. Bureau of Economic Analysis. Available at: http://www.bea.gov/
Global Competitiveness Report 2012- 2013. Available at: http://reports.weforum.org/global-competitiveness-report2012-2013/
Global Competitiveness Report 2013-2014. Available at: http://reports.weforum.org/the-global-competitivenessreport-2013-2014/
4 10 Largest Economies in the World. Available at: http://www.celebritynetworth.com/articles/entertainmentarticles/the-10-largest-economies-in-the-world/
2
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entire world's manufacturing output. The largest manufacturing industries by revenue consist of steel,
petroleum, aerospace, automobiles, telecommunications, chemicals, electronics, food processing, consumer
goods, lumber, and mining. It is 3rd biggest oil producer and the second biggest natural gas producer. The U.S.
exports totals $1.612 trillion and its imports equals $2.357 trillion. United States is also regarded to be one of
the most influential and biggest financial markets in the world. More than half of the currency reserves around
the world have been overwhelmingly invested in the U.S. dollar, as opposed to the euro. More than one-fourth
of the 500 largest firms around the world have their main headquarters in the United States.
The American economy is a free-market, private enterprise system that has only limited government
intervention in areas such as health care, transportation, and retirement. American companies are among the
most productive and competitive in the world. In 1998, 9 of the 10 most profitable companies in the world
were American (even the non-U.S. exception, Germany's Daimler-Chrysler, has a substantial part of its
operations in the United States). Unlike their Japanese or Western European counterparts, American
corporations have considerable freedom of operation and little government control over issues of product
development, plant openings or closures, and employment. The United States also has a clear edge over the
rest of the world in many high-tech industries, including computers, aerospace, and military equipment. In
the Global Competitiveness Report 2013-2014, the U.S. ranks as 7th best innovative market on the global
scale. It is very strong in capacity for innovation (5th), companies spending on R&D (5th) and Universityindustry collaboration in R&D (3rd), availability of scientists and engineers (6th). 5
Despite its impressive advantages, the American economy faces a number of problems. Due to the
financial crisis and the recession that hit the US market in 2008, the U.S. economy is still trying to recover,
and in fact recovers very slowly. The areas that are still suffering include mostly: budget deficits, growing
gap of inequality of wealth within the Americans, high unemployment rates, ineffective government, etc. 6
Despite signs of recovery and growth the US has not returned to pre-crisis labor-market performance. Despite
rising employment growth and falling unemployment, the U.S., whose labor force of 155.6 million is the
world‘s third largest behind China and India, is still estimated to have 7.3% unemployment according to data
from August 2013. The unemployment varies by state, however it is estimated that approximately 300,000 or
more new jobs a month need to be created to bring unemployment down with the speed desired.

Global Competitiveness Report 2013-2014. Available at: http://reports.weforum.org/the-global-competitiveness-report2013-2014/
6 What the Current Economic Outlook Means for American Families. Economic Outlook for 2013. Business&Money. January
16th 2013.
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Source: http://www.bls.gov/opub/ted/2013/ted_20130403.htm

Budget problems remain the most significant concerns to faster growth of the United States. Despite
the fiscal cliff deal that reduced deficit almost $1.1 trillion last year, it had very small impact on recovery.
Deficit still needs to be reduced by approximately $300 billion a year. This, however, means further spending
cuts and tax hikes that will be a drag on the economy. The public debt constantly increases and in October
2013, reached the level of $17 trillion.

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2. The US Diamond Analysis
To explain the national environment and competitive advantage of the United States, we use Porter’s
Diamond. It consists of four main attributes, such as Factor and Demand Conditions, Supporting Industries
and Firm Strategy & Rivalry that all together reflect the country’s strengths and weaknesses in comparison to
other nations. The diamond helps to understand the framework for businesses creation and clusters
development in the United States. However, it also summarizes the flows that impact the competitive
advantage of the country. The numbers in the parenthesis explain the global rankings in the Competitiveness
Report.

Availability of the latest
technology (6th)
Infrastructure (15th)
Availability of research
and training services (9th)
Geographical condition
(climate and topography)

Intense local competition
(14th )

Firm Strategy
& Rivalry

Ease of doing business
(4th)
Economic Freedom (10th)

Labor market efficiency (4th)

Macroeconomic
environment (117th)
Institutions (35th)

Inefficient government &
bureaucracy

Total Tax rates/
% Profits (101th)

Factor
Conditions

Demand
Conditions

Cluster Development
(6th)
Strong Innovation &
R&D
Financial market
development (10th)
Budget deficits/ General
debt (140th)

Supporting Industries

Leader in the
market size (1st)
Innovation (7th)
Business
sophistication (6th)
Buyer sophistication(9th)
High mass consumption

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3. California Business Environment
With $2.0 trillion GSP and income per capita of $44 000 California has the most
powerful state economy in the US and 8th largest economy in the world behind Brazil
and in front of Italy (by Gross Product Comparison). State economic performance is
based on the growth rate of 3, 5% in 2012, which is the 5th best in the country, the
largest employment growth since 1990 of 3.3% and high innovativeness, ranking 4th
in science and technology, 1st in the number of patents granted in 2010 and 3rd in
start-ups among the 50 states. The cluster base of the state is also one of the most
powerful in the US (Appendix 1).
In spite of the fact that California has a very powerful economy it is still experiencing
problems. Some of them are:


Barriers to doing business. Small Business & Entrepreneurship Council organization
ranked California 45th among 50 states considering entrepreneur-friendly business
environment. Approximately 254 business decided to leave California in 2011, which
represents a 26% increase compared to 2010. The reasons for this are not only taxes,
but also regulatory restrictions, legal costs, and energy expenses.7



High unemployment rate. 48 out of 50 states of the US have a lower unemployment
rate than the “Golden State” with its official 8,9%8



Problems with law system discouraging businesses from locating in the state.



Negative Migration. People and companies, due to different issues tend to leave the
state. In 2011 for every 100 people who moved in to California 120 moved out. The
reasons for migration are mostly high costs of living and rent as well as high taxes.9



Controversies around state budget. With Jerry Brown- , the California’s longest
serving governor at the top, “Golden State” budget is showing 1, 1 billion surplus in
2013. However, this figures are very controversial, due to the fact of the “Wall of
Debt” around 27 billion, which is not included in the budget.10

Cochran,S., California Business Climate in the Eye of the Beholder., Available from: news.yahoo.com
Morgan,H., Fix California and the country will follow., Available from: forbes.com
9 Kolko,J., Trulia Trends, Why Do People Leave California?, Available from: trends.truliablog.com
10 Del Beccaro, T., Jerry Brown Stands Atop California’s Collapsing House of Cards.
Available from:forbes.com
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4. Los Angeles Economic Environment
Los Angeles City is the most populous city in California and second when it comes to
the country ratings. With a population of 3.85 million people in 2011 the city is
governed by a mayor-council system with 15 districts and occupies the area of 1200
square kilometers. Los Angeles is a very multiethnic city and one out of two cities in
U.S. without a majority population. People from 140 are calling the city as their home
including: Hispanic or Latino (of any race) 48.5% , white, non-Hispanic 28.7%,
Asian/Pacific Islander -11.4%, African-American - 9.6%, American Indian/Others1.8%. About 75% of the population has a high school diploma, while 28% holds a
bachelor's degree or more. Los Angeles is the largest manufacturing sector in US with
more than 430 000 workers in 2008 - more manufacturing jobs than the state of
Michigan. The city has the nation’s largest customs district in the country including
the ports of Long Beach and Los Angeles, Port Hueneme, and Los Angeles
International Airport. This allows the city to benefit from trade and tourism and host
more than 6 million international tourists yearly.11 Comparing the economy of the
world’s top 20 countries; the five-county area of Los Angeles ranks at No. 16 and Los
Angeles County itself ranks at No. 21. Los Angeles has a great support infrastructure
for doing business, including different entrepreneurial trainings at UCLA and USC
(University of Southern California) as well as a good network of small business
development centers. Los Angeles county payroll employment numbered 3,856,800
in 2010 with an annual average wage of $53,143.12 Main clusters of the county
include: Entertainment, Hospitality and Tourism, Business services, Distribution
Services and Education. The main clusters in terms of employment and their national
ranking are presented in Appendix 2.

11The

Kyser Center for Economic Research, 20 Reasons to locate your business in Los Angeles county.
Available from: chooselacounty.com
12 Discover Los Angeles., Facts about Los Angeles., Available from:discoverlosangeles.com

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II.


Motion Picture Industry
Nowadays almost everyone is watching movies. It is one of the greatest providers of
entertainment for people of different ages all over the world. According to the
Entertainment Economy Institute it is estimated that consumers spend around
5, 5% of household income on entertainment which is close to 5, 9% spent on
healthcare.13 At the time when other means of entertainment appear very quickly, people
are still spending a considerable amount of their time on watching films at home, buy
DVDs, watch in the internet, go to the cinemas, and buy toys for their kids from favorite
cartoons, soundtracks and all kinds of merchandise. At the beginning of the 20th century
Hollywood merged with the city of Los Angeles and soon after that the motion picture or
film industry started to emerge. While Hollywood, municipality of Los Angeles is still
the biggest center of motion picture industry not only in the US, but all over the world,
there are other big players at that arena, such as Hong Kong and India in Asia and
Germany, Spain, Italy and France in Europe.

1. Short History of Motion Picture industry.
History of cinematography dates back to antiquity and human interest in communicating
with shadows and light. The first camera, ever projected, was camera obscura- sunlight,
passing through a small hole, projected an inverted image on the wall of a darkened
room. It was done long time ago by Aristotle. Later, in 1545 first drawing of the camera
was drawn by Gemma Frisius. The occurrence of camera obscura has led to the
development of the first photographic cameras. During this time it was simply the light,
coming inside of the box and strucking a sensitive solution on a glass, metal, or paper
base. The first practical photographic system was created in 1837 by Nicephone Niepce
and Louis Jacques. It was recording sharp, simple images on silverized copper plates. In
1872 the first recorded attempt of the motion picture photography was made by
Eadweard Muybridge. Californian Governor Leland Stanford hired him to win a bet and
prove that there are moments during the horse race when the animal has all of its feet off

Milnes,A.K., The Big Picture: Economic and Workforce Trends in Entertainment. Available from:
www.entertainmentecon.org
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the ground. Muybridge installed 24 cameras up in a row along a racetrack and was
making photos one by one to prove that the governor is right. At the end of 19th century
first primitive motion pictures started to appear. They were created by brothers Lumiere
in France and Thomas Edison in the United States. They usually emphasized only the
movement such as men playing cards, street vendor selling his wares or waves crashing
at the ocean. At the very beginning it was a simple motion reproduction, however in 1903
Edwin Porter has created a first “story-telling movie "The Great Train Robbery". Many
of this time motion picture creators wanted to produce even more complicated movies in
spite of one-reelers and limited storytelling cuts, however the industry was controlled by
the owners, resistant to any changes, who owned the machinery, patents and distribution
channels. Therefore many dissidents left the East and moved as far as they could - to Los
Angeles. After the First World War many powerful European countries such as UK,
France and Germany started to develop their own motion picture industries. After the
Second World War Asian players appeared in the motion picture production. These were
Hong Kong and India, with its Bollywood production with movies, mostly produced for
domestic purposes.
The popularity of movies continued to increase with the appearance of sound in the
motion pictures. Since then the industry was changing rapidly. In 1945-1948 90 million
tickets were sold to the cinemas each week, however in 1960s this number dropped by
half. The reasons for this were the changes in the industry such as the appearance of TV
sets, innovations (such as wide screen cinemas and 3d movies in 1950s), emphasis on
blockbusters and formulas (since 1950s segmented or niche movies started to be
created)14. Despite all the changes in the industry and many decades since the appearance
of the first motion picture the key point hasn’t changed – the superiority of Hollywood
and US in the movie production sector.

14

The History of Motion Pictures. Available from: faculty.washington.edu/baldasty/JAN13.htm

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2. The motion picture industry market and value chain
The way of the movie starting from the idea to the final consumer is very long and
complicated, even a small movie-project consists of several steps. Many of them are
different depending on the type of movie being created,which can be seen from the
example of Canal+ Advertisement at Appendix 3.
The value chain of today’s movie industry is much more complicated compared to what it
was at the early stage when motion pictures used to have a fairly simple business model.
Whole process of movie planning, budgeting, pre and postproduction as well as
distribution is kept by the studios behind the closed doors. Nevertheless, any film goes
through almost identical value chain as any other consumer product.

Whole process of movie creation starts with production.15 This stage is divided into 4
parts. Development – finding an idea continuing with the process of writing a script and
finally pitching it. The idea can be taken by the project producer from the play, book,
film, true story or an original one. Stage of pre-production which consists of developing,
planning and visualizing the idea. During this stage budget for the movie is being
prepared, members of the crew are hired and the schedule is made. This process
continues with production which includes: working with cast and locations, reviewing the
footage and shooting the scenes and finishes with post production when the film is being
edited, and music, titles and special effects are added.

Jehoshua.E.,Elberse,A., Leenders Mark A.A.M., The Motion Picture Industry: Critical
Issues in Practice, Current Research, and New Research Directions. Marketing Science., Vol. 25, No. 6,
November–December 2006, pp. 638–661
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Next is the Distribution phase16. At this point the distribution studio is signing a
licensing agreement with the distribution firm. Distribution company decides how many
copies of the motion picture to make and takes the finished product to the theatres,
television, home video, internet and other venues for final consumers to watch it.
Another level of the value chain is exhibition which is basically the issue of where, why,
and how people have come together to show and watch films. There is a comment about
this process:” Theatrical exhibition is the major factor in persuading the public what they
want to see, even if that public never sets foot inside a motion picture theater.
And how well and how long a picture plays in theaters has everything to do with its
value in other markets" (Daniels, Leedy and Sills, 1998, p. 34).
Exhibition is also about time, when the movie is shown at the cinemas or appears for the
first time in the Internet. It is about the techniques and technologies used to show the
movie to the customer: 2dimensional, IMAX or 3d.
The last stage of the motion picture value chain is consumption of the final product after
the theatrical release. Most of the movies, even the most popular ones, would hardly be
able to bring back the money invested in the previous stages of value chain only from the
first market. Distribution of the films on DVD and CD, broadcasting and Merchandising
nowadays provide more revenues than theatrical releases. Some sequels like Batman,
Harry Potter or Star Wars can easily raise millions to the studios long after the movie
release dates. However, in most of the cases studios are licensing the characters to tshirts, toys, cups or other merchandise manufacturers for fees and percentage of retailers
even before the movie is shown. Therefore, in such examples, as the ones mentioned
above, as much as 40% of the motion picture merchandise is sold before the movie
release. The amount of revenues are getting from merchandise can be sky high. In the
case of the Lord of the Rings Trilogy the merchandise is said to have attracted more than
1.2 billion dollars.17

Motion Picture Association of America. The Economic Impact of the Motion Picture & Television
Industry on the United States.April 2009. Available from: mpaa.org
17 The Merchandising process., Advamag Inc., Available from internet encyclopedia:
filmreference.com
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3. The US motion picture industry domination.
Although France was a dominant player at the motion picture industry market before the
1st World War, it lost its share later on, while US was gaining power and was able to get
an influential position at the European market. In 2007 the industry was responsible for
2,5 million jobs in US and 41 billion dollars in wages as well as 13$ billion in income
and sales taxes. United States and Canada were the absolute leaders when it comes to the
markets of the box office with 10,8$ billion, five times more than the closest competitorChina and one third of the whole amount. During the period of 2005-2009 US produced
half the number of movies produced in Nigeria and India separately (around 554),
however much more money was invested in the production of the motion pictures
compared to the competitors. The most powerful motion picture distributors which
include Dreamworks, Paramount Pictures and Walt Disney Pictures are also originating
from the United States.18
III.

Analysis of LA motion Picture Industry Cluster

For almost a century, the Los Angeles was the biggest market of the world motion picture
production. Before starting to analyze cluster, let’s have a look at a short history of
Hollywood and its performance over recent years.
History of Hollywood
From 1910, movie companies started to move from the New York area to Hollywood
because of weather. In Hollywood, it was better to make outdoor shootings. And also
labor costs was cheaper in California at that time than on the East Coast. Also there was
another reason, Tomas Edison, who held the patents on the movie equipment of these
years, employed a large group of lawyers to enforce these patent rights, and California
was almost out of reach for them in the times before air travel. The producers had set up
and elaborate system to hide either hide the equipment before the lawyers came by train
or move quickly into Mexico.
From 1927 until 1948, it was the “Golden Age of Hollywood” which were the years end
of silent film. Major Studios which located in Los Angeles controlled the whole value
chain film production to exhibition and consumption.

Statistic Brain. Motion Picture Industry Statistics. Available from: www.statisticbrain.com/motionpicture-industry-statistics/
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The first Academy Award ceremony was held in 1929. The studios themselves owned
most of the movie theaters around the country, so they could country so they could
control every aspect from promoting and scheduling to ticketing. This system came to a
sudden stop in 1948: The landmark Anti - trust decision in the case “United States versus
Paramount Pictures” forced studios to sell their theaters and broke up the vertical
integration. .19
Not only the legal decision, but also technological progress challenged the studio system:
From the 1950s on, home television spread at a very high speed around the country.
Reluctant at first, studios recognized that the additional outlet did not threaten the motion
picture industry, but offered additional revenue. However, the quality of movies produced
during the 1960s was considered lower than in previous decades. The studios overcame
this crisis from the 1970s on, when the “New Hollywood” era brought about what was
soon called “post-classical cinema”: The companies developed a mix of culturally
influential blockbusters and high-quality independent movies that fascinated the audience
worldwide.
This time of relative comfort was soon to be finished, with the 1980s and newly available
technologies such as VHS, which made household ownership of entire movies possible
for the first time. Again, after certain difficulties, the industry managed to embrace this
change and learned from its mistakes by actively pursuing the next step, the use of digital
technology. The cluster expanded and approached its current shape, going far beyond
studio and distribution companies to a broad range of supporting and related industries,
especially in the technical fields. At the same time, certain activities were relocated:
while conceptual work and post-production was still mostly done in the Los Angeles
area, shooting often took place in locations all over the world, from Canada to the United
Kingdom, New Zealand and Eastern Europe. However, the studio companies could not
escape the concentration process in the media business: large media conglomerates now
own most of them.

19

Motion Picture Assosiation of America, Available from: http://www.mpaa.org/about/history

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Description and mapping of the cluster

The Motion Pictures Production and Distribution cluster has linkages with a variety of
other clusters. Some clusters have direct linkages at the factor input level, e.g. sound
recording, specialized training programs etc, while others are linked on the demand side
e.g. home entertainment, theatrical venues. A number of clusters are linked relatively
indirectly e.g. IT, tourism, fashion, publishing and personal services like spa, fitness etc.
The Cluster Map above identifies the value chain as well as linkages with supporting
industries. The LA economic area has the advantage that the entire value chain and its
supporting clusters are present in this area, or very close in the case of IT (Silicon
Valley).
1. Profile of the Entertainment Industry in Los Angeles
Definitions of the entertainment industry vary depending on the area of focus, but in Los
Angeles the entertainment industry invariably begins with motion picture production and
a handful of other industry segments that have a long-standing presence in the area.
Added to these are a number of related industries. For the purpose of this study, the
entertainment industry has been defined to include the following: Motion Picture &

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Video-Related Sectors, Sound Production & Related Sectors, Radio, Television & Cable
Sectors, Live Entertainment Sectors, and both the artistic talent and the business side of
the industry.

Many of the companies and individuals who are the driving force behind creative content,
production, and distribution call Los Angeles County their home. The entertainment
industry is big business in Los Angeles. In 2011, over 13,000 establishments generated
161,862 jobs and over $18.9 billion in payroll. Among these are globally recognized
companies such as Paramount, Warner Bros., NBC Universal, and MTV.
Within the industry, the largest concentration of activity may be found in the Motion
Picture and Video Related Sectors. This sector accounted for the lion’s share of industry
employment with 117,841 jobs last year and payroll totaling $11.3 billion.
Establishments in this sector tended to be relatively fewer in number but larger in size.
The average annual wage for this sector was $96,000, slightly below the average for the
entertainment industry as a whole. 20The other sectors of the entertainment industry were
considerably smaller in terms of employment, annual payroll, and, with the exception of
Agents and Managers, the number of establishments. Average annual wages across

CollegeGrad.,Motion Picture and Video Industries, Available from:
http://www.collegegrad.com/industries/infor02.shtml
20

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different sectors varied widely, from $103,000 in Sound Production to $261,200 for
Agents, Managers, and Independent Artists.

With 161,862 wage and salary workers, industry employment was equivalent to 4.8% of
Los Angeles County’s 3.3 million private sector workforce in 2011. Total employment in
the entertainment industry was 16.9% higher in 2011 than it was in 2001, but fell 8.5%
shy of peak employment in 2004 when 176,830 worked in the industry. While part of the
decline in recent years may be attributed to the Great Recession, runaway production was
also a likely contributing factor as motion picture and video production alone lost over
16,100 jobs from 2004 to 2011. In addition to wage and salary employees, the
entertainment industry is noted for its reliance on free-lance talent. Freelance artists,
writers, lighting, sound, and other production professionals, as well as agents and
managers provide the industry a diversified labor pool. These individuals who are
generally self-employed and have no employees numbered 85,032 in 2010, the most
recent year for which information is available. 21
This segment of the labor pool has grown consistently over the past 10 years. Actors,
writers, and other professionals in the entertainment industry are represented by an array
of labor unions and guilds. The most notable is the Screen Actors Guild-American
Federation of Radio and Television Artists (SAG-AFTRA), which resulted from the

21

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merger of those two entities earlier in 2012. Nationally, this organization alone represents
over 160,000 actors, announcers, broadcasters, journalists, dancers, DJs, news writers,
news editors, program hosts, puppeteers, recording artists, singers, stunt performers,
voiceover artists and other media professionals nationally. Similarly, the International
Alliance of Theatrical Stage Employees (IATSE) counts over 100,000 members in its
ranks nationally. Other organizations include the Writers Guild of America, the Directors
Guild of America, and the Teamsters, to name a few. Finally, several companies in the
entertainment industry that are “household names” are located in Los Angeles County.
These include Paramount, Warner Bros., Sony, NBC Universal, Walt Disney, ABC,
CBS, and Fox. Most of these companies are located in Burbank, Universal City, Culver
City, Santa Monica, and West L.A. Paramount is the only one of the six major studios
that still calls Hollywood its home. However, Hollywood houses numerous independent
studies, including: Sunset/Gower and Bronson Studies, Raleigh Studios, RED Studios,
and Prospect Studios. As for the rest of the entertainment industry, local network and
independent television and radio stations are located in several parts of Los Angeles
(City), as well as Glendale and Burbank, while live entertainment venues are scattered
throughout Los Angeles County, with the largest facilities including Staples Center in
downtown Los Angeles and the Hollywood Bowl in Hollywood. 22
2. Economic Impact
Analysis of employment, wages, and the number of firms for a given industry within Los
Angeles County offers only a partial assessment of that industry’s presence and economic
impact on the county economy. An economic contribution analysis goes beyond the
industry itself and describes that portion of the county economy that can be attributed to
an industry.
The table used to determine the value of the industry’s contribution includes
employment, labor income and the value of output. Employment includes full-time, parttime, permanent and seasonal employees and the self-employed, and is measured on a
job-count basis regardless of the number of hours worked. Labor income includes all
income received by both payroll employees and the self-employed, including wages and
benefits such as health insurance and pension plan contributions. Output is the value of
22

Cluster Mapping., Entertainment Cluster, Available from: www.clustermapping.us

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the goods and services produced. For most industries, this is simply the revenues
generated through sales; for others, in particular retail industries, output is the value of
the services supplied.
The total impacts include direct, indirect and induced effects. Direct employment refers
to the personnel hired by firms in the industry, including rank and file employees,
administrative, management, maintenance, retail, food service, parking attendants and so
on. Direct output is the value of the services provided by each business firm or entity.
Indirect effects are those which stem from the employment and output in the industry’s
supply chain. Induced effects are those generated by the household spending of
employees whose wages are sustained by both direct and indirect spending.

The entertainment industry accounted for 585,800 total jobs (including direct, indirect,
and induced) in 2011, of which there were 246,900 direct jobs (wage and salary workers
plus self-employed), 118,900 indirect jobs, and 219,970 induced jobs. Associated with
these jobs is labor income of $43.3 billion, while the industry output amounted to $121.2
billion, both of which are measured in 2011 dollars. In addition, the industry generated
$5.6 billion in state and local taxes. When placed in the context of the Los Angeles
County as a whole, Entertainment Industry-related employment of 585,800 jobs is
equivalent to 17.6% of the County’s 3.3 million private non-farm wage and salary jobs in
2011. The industry also generates over $120 billion annually in output, with $47 billion
in value added that is directly related to the entertainment industry (the balance
attributable to indirect and induced effects). The industry’s direct value added impact of
$47 billion is equivalent to 8.4% of Los Angeles County’s estimated annual Gross

20


County Product ($558 billion) in 2011. Spending by these businesses and their workers
also yields nearly $6 billion annually in state and local taxes. 23
3. Major Hollywood Movie Studios
In the North American, Western, and global markets, the major film studios, often simply
known as the majors, are commonly regarded as the six diversified media conglomerates
whose various movie production and distribution subsidiaries command approximately
90 percent of the U.S. and Canadian box office.
Most of today’s companies have their own distribution networks that concentrate on
arthouse pictures or genre films.
The Historic M-G-M Studios (Now Sony Pictures Studios)
The vast studios of Metro Goldwyn Mayer (M-G-M) were actually located in humble
Culver City, some seven miles southwest of Hollywood & Vine, closer to Marina Del
Rey than to Hollywood. The studios were born in 1915 as Triangle Pictures. The first
building on the lot (the huge edifice fronting Washington Street, with its classical
colonnades) was built before M-G-M even owned the lot. The studio became Metro
Goldwyn Mayer in 1924. M-G-M was the most powerful studio in Hollywood, renown
for the glossy, bright, technicolor style of its films, complete with lavish wardrobes, high
priced sets, and an unbeatable stable of superstars. in 1985 to 1994, Sony Pictures
recently invested $100 million to refurbish the historic studio and help restore some of
the luster to the lot. They repainted every building, restored the original ironwork gates
on Washington Boulevard, built new walls, added nostalgic Art Deco touches and false
fronts on Main Street, and put up huge, hand-painted murals of old movie posters. Studio
buildings have been named after film luminaries such as Frank Capra, Cary Grant,
Spencer Tracy and Katharine Hepburn. The much needed facelift has made the old M-GM lot one of the most attractive in Hollywood. And considering that Sony wrote off $2.7
billion in losses in 1994, that was quite a laudable accomplishment. 24
In September of 2004, MGM announced that it would merge with Sony Corp. of
America. In short, Sony bought MGM for $5 billion. Sony acquired MGM mainly in

24 Wikipedia., Major Film Studio, Available from: http://en.wikipedia.org/wiki/Major_film_studio
23

21


order to get the company's library of films, which is believed to be its most valuable
asset. It constituted the biggest library of color movies in the world, including franchises
such as "James Bond", the "Pink Panther" and "Rocky". 25
Paramount Studios
Most of the major motion picture studios have fled Hollywood for spots like Burbank or
Culver City. There is only one big name movie studio still actually located in Hollywood:
the huge Paramount Studios. It also happens to be the longest continually operating
studio in Hollywood. And Paramount is also one of the few studios that admit the public
on regular guided tours of the studio's back lot.
Paramount Studios began in 1913 in a rented horse barn near Sunset & Vine, and moved
to its current location on Gower Street in 1926, into an existing studio which had been
built in 1917.
In 2005, Paramount bought out the DreamWorks studio, which became a unit of
Paramount, and as a result has had additional successes with DreamWorks productions
such as "Transformers" and "Shrek the Third".
Paramount is a huge, sprawling studio, covering an area almost as big as Disneyland. At
peak season, the studio employees over 5,000 people. Just driving around the outside of
the studio walls will give you an indication of the studio's vast size. A tall water tower
with the blue Paramount mountain logo still looms over the lot, a throwback to the days
when the studio had its own fire department and hospital.
Warner Bros Studios
Warner Brothers, one of Hollywood's most famous studios, was founded in 1923 by four
actual brothers: Jack, Sam, Harry & Albert Warner. The siblings never seemed to get
along with each other, but Warner Bros Studios managed to produce some of the most
memorable movies in the history of Hollywood, including the world's first "talkie" with
Al Jolson, "The Jazz Singer" (1927), "The Adventures Robin Hood" (1938),
"Casablanca" (1942), "Yankee Doodle Dandy" (1942), "Cool Hand Luke" (1967),

Seeing Stars in Hollywood., The Movie Studios,
Available from: http://www.seeing-stars.com/Studios/
25

22


"Deliverance" (1972), "The Exorcist" (1973), "Chariots of Fire" (1981), "Body Heat"
(1981), and the current string of "Batman" films. 26
The first Warner Bros studio (where they made "The Jazz Singer") was located in
Hollywood, on Sunset Boulevard, in what is now KTLA Television studio. In 1928, with
the success of that famous Al Jolson talkie, Warner’s moved to this 110-acre Burbank lot,
in the east San Fernando Valley, and it has been their home now for 70 years. 27
In 2001, the studio broke all records with the opening of "Harry Potter and the Sorcerer's
Stone," based on the popular book about a boy wizard, and in 2011 released the final
"Potter" film ("Deathly Hallows, part 2"). With a $967 million take, "Sorcerer's Stone"
turned out to be the second highest-grossing movie of all time, behind only "Titanic", and
the Potter series has become the biggest movie franchise of all time, with each episode
making close to a billion dollars. At the same time, the studio hit with another hit
franchise, with the hugely successful "Lord of the Rings" trilogy (from its New Line
division). 28
In January of 2000, Warner Bros was purchased by America Online (AOL), in what was
the largest merger in history. AOL bought Time Warner Inc., which also owns CNN and
HBO cable services, and publishes Time, People, Sports Illustrated, Entertainment
Weekly and Fortune magazines. AOL already owned Netscape, Compuserve, and
Moviefone. The cost of the deal was 163 billion dollars.
Universal Studios
Universal Pictures is actually the largest film and television studio in the world, with
9,000 employees and a long and proud history of film-making. In fact, Universal Studios
produced the two of the highest-grossing movies of all time, "E.T.: The Extra Terrestrial"
and "Jurassic Park."
Founded in 1912 by German immigrant Carl Laemmle, Universal Pictures built their
giant hilltop studio in 1915, on the site of a chicken farm. To make a little extra money,
they used to charge tourists 25 cents to watch the actual filming of silent movies, with

27 Wikipedia., Major Film Studio, Available from: http://en.wikipedia.org/wiki/Major_film_studio
28 Seeing Stars in Hollywood., The Movie Studios,
26

23


stars such as Lon Chaney and Rudolph Valentino on the sets. But the carnival barkerstyle of the tour guides proved too much of a distraction to the film-makers, and the tours
were discontinued. Five decades later, though, the idea was resurrected with a vengeance.
29

In June of 2000, Universal was purchased by France's Vivendi. Four years later (in 2004),
General Electric/NBC bought out 80% of Universal, and the company was then referred
to as "NBC Universal". Seven years after that, in 2011, NBC-Universal was purchased by
the cable giant, Comcast.
DreamWorks Studios
In December of 2005, DreamWorks was purchased by Paramount Studios for $1.6
billion, effectively ending DreamWorks' 11-year run as an independent studio.
DreamWorks was never able to produce enough films to cover the high cost of being
their own distributors.
The move will allow Paramount to increase the number of films it releases each year.
Spielberg will stay on as a director & producer and Geffen will be chairman. The two
agreed to produce up to six movies this year. In addition, Paramount has the right to
distribute DreamWork's future animated features. To pay for the purchase, Paramount
plans to sell DreamWorks' library of movie titles for as much as $1 billion. 30
IV.

Diamond Analysis

Like every other successful cluster there various points which come and work together to
have a successful and sustainable performance. Particularly for the LA motion picture
cluster it’s the collective inputs of favorable conditions like geographical and
economical; availability of a market with huge demand and support from government and
supporting industries.
With changing world and economic dynamics the cluster has faced some tough times. In
this part of the report we will discuss and analyze the LA motion picture cluster based on
the Porter’s Diamond Analysis.

Wikipedia., Major Film Studio, Available from: http://en.wikipedia.org/wiki/Major_film_studio
29
30

24


Following is a graphical representation of Porter’s diamond model in the context of LA
motion Picture Industry

Demand Conditions

Taking a look at the individual points on the diamond and their effect on the cluster as
whole:

1. Factor Conditions: Los Angeles being a part on California offers a variety of favorable
conditions ranging from economic conditions to geographical conditions.
It’s worth mentioning that California has a very diverse geographical features, featuring
close proximity to ocean, desert, mountains and and a busy urban life. And the most
important factor is the weather conditions in California which is not harsh at all and
facilitates a yearlong movie production..
The human factor is probably the most important asset of this cluster. Over the last five to
six decades LA has become the central attraction for film making talent across the world.
There is a large pool of talent ranging from actors to writers, from directors to stuntmen
and the strength of human capital is very much evident from the number of talent

25


agencies registered in LA and number of personals signed with these agencies.
Entertainment is the largest traded industry cluster in Los Angeles county, with 159.000
employees in 2010.31
Another important factor in film making is the capital investment required. Being the #1
international trade center in the US (as LA district handled $387 billion in two-way trade
(2011)32, provides enough financial services to support the cluster.
The demerits of factor conditions in LA is the rising prices of real estate and wages
across all sectors, which increases the overall movie making cost.

2. Context for strategy and rivalry: In the film industry a major film studio is a
production and distribution company which controls the every aspect of films from
production to distribution and finally the box office revenue through it small subsidiaries,
they are often called majors. They are commonly regarded as the six diversified media
conglomerates or the “Big Six”.
Their various movie production and distribution subsidiaries command the major (more
than 90%)33 of the North American box office.
The big six are: Paramount pictures, 20th Century Fox, Universal Pictures, Walt Disney
Pictures, Warner Bros. Pictures and Columbia Pictures.
The decades long competition for biggest share among the big six has shaped the cluster
into being more cooperative this can be seen from the pre-production and post-production
business partnerships among the big six.
But they dominate and influence the market trends in a big way which limits and in fact
diminishes the creative and business freedom of smaller production houses/studioes.
3. Demand Conditions : The demand conditions for LA motion picture industry is not
limited to LA district. Considering the popularity and increase in ease of access to films
the demand conditions are very international.

31, 32

Los Angeles County., The Entertainment Industry and theLos Angeles County Economy.Available
from: www.hollywoodchamber.net
33

Global box office earning. Statistics available from:www.boxofficemojo.com

26


Firstly the domestic market, USA (including Canada) has the biggest box office share in
global market, it accounts for 23.9 Billion USD out of total 34.7 Billion USD34. Secondly
the popularity of American culture and the reputation of Hollywood cuts across
boundaries and reaches every corner of the globe.
Another factor of deep global penetration of American movies is the global acceptance of
English as the international language.
4. Supporting and Related Industries: Movie making is a very intensive process which
involves a lot of support from various different industries like sound recording,
television broadcasting, video games, special/visual effects, computer animation,
photographic equipment and supplies, advertising firms; talent agencies, celebrity
magazines. LA motion picture cluster has good balance of these industries supporting
film making and in turn film making supporting the growth of these industries.
Also, the popularity of Hollywood has given the rise and a market for tourism in LA and
movie based theme parks. It’s the popularity of Hollywood that has turned American
movie awards into global festivals.
5. State government influence: The state government and the federal government offer a
wide array of incentives and aids to facilitate film production and growth of the cluster.
Movie Production incentives (MPI) is a term given to such aids by the government which
mainly includes tax benefits also known as Tax Credits which remove a portion of the
income tax. There are also cash rebates which are paid to small production companies
directly by the state. California and some other states have started ‘fee-free location’
program to encourage production.
The California Film Commission is constant supporting pillar for the growth of the
cluster. Formed in 1985, it works for keeping the film making projects and jobs in the
state of California by using Financial and Tax Incentives.

Motion Pictures Association of America, Theatrical Market Statistics 2012.
Available from: www.mpaa.org/resources/3037b7a4-58a2-4109-8012-58fca3abdf1b.pdf
34

27


V.

Problems facing federal government

Several macroeconomic problems represent a challenge for the federal government. It has
first to tackle the external imbalances and the lack of domestic saving. A persistent trade
deficit could indeed raise some concerns and foreign investors might become more
cautious, which would lead to higher interest rates and a depreciation of the dollar that
would be harmful to investment.
Moreover, higher interest rates would make it harder to achieve fiscal balance, in
particular in the context of an aging population raising the cost of healthcare and social
security. There is thus a risk of “hard landing” that requires careful macroeconomic
policies. At the same time, the US will have to address certain weaknesses of its business
environment, by simplifying and increasing the efficiency of its tax system and by
providing better public education. California is also facing very serious challenges. In
particular, the state is running procyclical budget deficits, which is contradictory to the
principles of sound fiscal policy: while growth is still strong, the expected deficit for
2006 is $6.4 billion.35 California’s business environment also has weaknesses, as it is a
very expensive location to work in: energy prices are still 25% higher than in the rest of
the US and housing prices are booming. Moreover, taxes are quite high: California ranks
only 40th in the State Business Tax Climate Index. This makes it harder for California to
retain businesses within its border 10. Finally, the recent crisis in state politics was
harmful to the confidence of the population in the state’s political leadership and this
confidence has to be restored.
VI.

Challenges of the motion picture industry

The global motion picture industry faces a revolution in the way films are conceived,
produced and distributed. The coming of the digital age affects almost all sections of the
global value chain. The demand side is threatened not only by piracy, made easier
through technologies such as DVD Burners and Recorders, Video iPods and Video-onDemand. The improving equipment for digital home entertainment, creating a movie
atmosphere in the living room, is quoted as major reason for the recent drop in theater
admissions. A first response by the studios was to shorten the life cycle of movies: If they

Feldstein, M. (2005). Rethinking Social Welfare , January 8, 2005, Published: American Economic
Review, March 2005.
35

28


don’t generate sufficient revenue, even movies with high budgets disappear from the
theaters one or two weeks after their release. While releases on VHS in the early 1990s
were scheduled on average nine months after the theatrical release, successful movies are
now available on DVD less than three months later. If a studio wants to have a certain
control over the entire value chain, large investments are required as the number of media
channels is constantly increasing from cable television over the Internet to mobile
communication devices. In the blockbuster segment, movie production is already
dominated by digital compositing and motion capture, where all parts of the image are
digitally reconstructed, including the movements of actors. 70 percent of all shots in the
2004 release “The Lord of the Rings: The Return of the Kings” were not filmed by
camera at all, but produced on a computer. While the price of advanced digital processing
and production is decreasing, the hunt for even more special effects requires high
investments and close cooperation with computer companies, which have an increasing
influence on the motion picture industry. The integration of both industries is also visible
in the area of content: Video games turned movies (or the other way round) is a safe bet
given the importance of teenagers in box office revenues. The next step is digital
projection in movie theaters, Again, the studio companies might lose control over one
part of the value chain: At present, they can control distribution by the number of
physical film rolls they send out around the world and charge high rental films. Under
digital projection, the original film can be copied in a matter of minutes. A prerequisite
for digital movie theaters is a switch from traditional to digital film cameras. While this
technology does not provide the same quality yet, experts consider it to be just a matter of
a few years until digital imaging catches up with the traditional film roll.
According to a report by the Los Angeles County Economic Development Corporation ,
the biggest threat to the LA motion picture cluster is runaway production. The movie
production business is very lucrative as a means to create substantial jobs directly and
indirectly. For this reason, more and more US states are offering incentives to promote
film making in their areas. Moreover countries like Canada, Australia, New Zealand etc
are also very actively marketing their countries as a prime location. According to the
LAEDC study, production expenditure in Louisiana increased from $12 million in 2002
to $330 million in 2004 after adoption of its incentive package. According to the LAEDC

29


study in 2004 only 39% of the movies were produced exclusively or partially in
California, whereas 61% were shot either in other states or foreign countries.36

VII.

Recommendations

Increasing cooperation among the studios in the cluster is one of the solutions to the
serious problems that might come up. These are among others the current prices that
make production of movies more favorable to do in other places in the world and the
availability of digital technology. The studios should also concentrate more on work with
theaters companies in order to enhance the movie aging experience.
The role of the institutions overseeing the cluster should finally be improved as The
Hollywood cluster is in need of such structures which are able to provide strategies for
revitalizing the cluster. To achieve this a decent amount of technological research and
market data is needed. Also the studios admit a need of triad fairs on which the studios
could exchange their experiences with competitors, supporting and related industries as
well as the policymakers.37 This would allow for the creation of a long-lasting vision that
will be shared among the players in the cluster.

Feldstein, M. (2006)., The Effect of Efficiency and Growth, Published: National Association for
Business Economists.
37 Waterman, D. (2005). Hollywood’s Road to Riches. Cambridge (MA): Harvard University Press.
36

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Appendix 2

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