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Empire of the Rats: Disney, Eisner, and the Rot in Hollywood

by on April 12, 2005

Michael Eisner is either the biggest liar in Hollywood, or he has been the object of more scurrilous lies than anyone else in Tinseltown.

DisneyWar is peddling trivia, not data. In 2003, only 18% of Hollywood’s total revenues came from the US box office. The rest came from foreign sales, TV sales and DVDs. In all these cases, the revenues realized by the studios are influenced by the grosses generated on an opening weekend but hardly determined by them. HBO, NBC, and independent stations typically pay a flat fee for broadcast rights, and that fee does not rise or fall much based on how well the film did at the box-office. (In many cases the producing studio will own the network it sells the film to. Thus, the studio can record almost any price it wants while the network simply profits off a steady stream of advertising dollars. The amount of money “made” in the broadcast arena is likely an accountant’s artifact.) A movie’s success on DVD, meanwhile, seems to be more a function of brand-awareness than its success in theaters. A marketing campaign that can “open” a film in theaters can also “open” it on DVD. This is especially true of films aimed at young audiences, who buy most of the DVDs that Hollywood sells. Indeed, while reading The Big Picture‘s chapter on DVDs I had the awful vision of a teenager in a black T-shirt chatting on his cellphone as he walks out of an auditorium: “Worst movie ever. I can’t wait until I can buy it on DVD.”

In short, it is hard not to conclude that Hollywood has successfully created a business model in which economic success is more strongly correlated with hype than with quality. And that is because Hollywood today primarily caters to an audience (kids and teens) that is more likely to reward hype than quality filmmaking. No matter how much you bellyache about Batman and Robin, just remember that you likely saw it on opening day, and that you rushed to catch it because you just couldn’t wait.

Furthermore, even though the studios, like Disney, are dependent on kid-friendly blockbusters, that does not mean that a kid-friendly film is likely to become a blockbuster. And so the studios (including Disney) become creatively risk-averse, inclining toward formula (see the billion-dollar club above) and coarsening their films with elements that will “sell” but not improve them. Roy Disney has famously complained that his family’s company is not a “brand.” Unfortunately, the market strategy that his uncle created has come to rest on so narrow a base—its popularity with kids—that the company runs the risk of crashing if it isn’t exploited it as a “brand.” The stakes are so high and the risks so great that Disney executives cannot afford to gamble on something as mysterious and ineffable as “quality.” Instead, it is more rational to try game the system.

Disney-lovers and Eisner-haters may wish to pretend that Walt Disney never consciously designed or intended this model, that for Disney it was always about “the dream,” and that Eisner is merely an evil genius who has helped corrupt it. Well, maybe. But we still have to face the plain fact: It did not take much to “corrupt” the Disney company. Once you’re in the business of selling dreams, it becomes very easy to lose the dream and keep only the salesmanship.

Consider the Hollywood company that most closely resembles Walt Disney’s original enterprise: Lucasfilm Ltd. Like the Walt Disney Productions of old, Lucasfilm produces very few films and releases them only irregularly. The Star Wars movies are Disney-esque stories (tales of youngsters or adolescents fighting battles of good vs. evil in an expensive—and mostly animated—fantasy world) set in an enveloping notional universe whose fabric is mostly created and sustained by ancillary products—games, toys and books. Devotees of Star Wars mentally inhabit it as an almost parallel universe, such that its products are not merely toys but elements of a kind of personal identity. The films themselves are almost an afterthought and are mostly used to drive the sales of products other than movie tickets: Attack of the Clones returned $155 million in rentals (the box-office take not kept by the theaters) to Twentieth Century Fox; worldwide, from all sources, the film returned $1.087 billion to Fox and Lucasfilm. And those sales (along with the $1.185 billion returned by The Phantom Menace) rolled in despite strong fan dissatisfaction with the two prequels. This is the new Hollywood, where the producer and distributor can collect more than $2 billion in revenues off a product that is widely execrated. And there is scant evidence that the take would have been more lucrative if the movies had been better loved. The dream is profitable because it grips the mind of a large fan base. The movies do not entertain; they only stimulate a hunger for product; and that is sufficient to make George Lucas very, very rich.


Must matters be this way?

You might think that there is one exception to the above analysis, a company the shows Hollywood the profit that derives from giving creators their freedom and lets them craft idiosyncratic, quality films. After all, at Pixar Steve Jobs and John Lasseter have apparently produced a run of phenomenally successful pictures by gambling on artistic quality. Why can’t Disney do the same?

Sorry, but as much as it would thrill me to believe this, it just isn’t so. Pixar functions as it does because it has a different business structure than Disney and hence pursues a different market strategy.

As an independent producer, Pixar must rely on the service organizations of a major studio (such as Disney) to distribute its product and collect revenues from vendors. These erstwhile partners, in fact, actually compete over the fortune they have made off Toy Story, Finding Nemo and The Incredibles. As a distributor, Disney maximizes its profits by diverting funds into its own pockets through arcane accounting tricks*; Pixar therefore can only maximize its profits by driving box-office and DVD revenues as high as possible, and quality control is a key strategy for maximizing a lengthy and lucrative theatrical release and extraordinary DVD sales.

[* Students of Hollywood will find The Big Picture most rewarding in its description of the “royalty” system the studios use to divide up non-theatrical income. Pixar may have a special deal with Disney. But if it doesn’t, then the company likely receives only a small fraction of the income that its films generate in the DVD market. If Disney treats Pixar as it does most of its producers, only 20% of Finding Nemo‘s DVD revenues will go into a pot from which Pixar can draw compensation.]

Moreover, it’s not clear where or how Pixar can invest its film earnings, with the result that the company will, over the long term, be unable to sustain itself as it is currently constituted. The movie business is notoriously volatile, and the major studios use their non-film holdings as investment centers that can capture windfall profits and turn them into more-reliable profit generators that can then cover any future shortfalls. With the income off Harry Potter, for instance, Time Warner can upgrade its cable systems or launch new cable channels or magazines. Disney can put its Pirates money into theme parks. Sony can invest Spider-Man profits in research and development for new technologies. But Pixar must either lose control of its profits by paying dividends, park its profits in low-yield investments, turn itself into a full-fledged studio by capitalizing new distribution and sales subsidiaries, or renew its gamble on production by plowing the profits into new feature films. The first strategy would cripple the company if an expensive production flopped after it depleted its cash cushion. The second carries high opportunity costs because it does not put the company’s profits to maximal use. The third, by altering its business structure, would change the company’s market strategy and make it more like Disney and give it Disney’s incentive to play cautiously. The fourth would merely put off the day it had to choose one of the other three options.

Production companies that, like Pixar, lack distribution arms are rarely stable for long periods of time. They either evaporate when bankrupted by a string of flops (as Terminator-producer Carolco fell apart after a bad run at the box-office), are acquired by a major studio that wants to capture it as an exclusive supplier (as Miramax was bought by Disney), or are dissolved when their principals find themselves with an embarrassment of riches (as Selznick International dissolved after Gone With the Wind broke box-office records). There is no telling where Pixar will end up, but the company emphatically does not make movies in a way that Disney or the other studios can safely emulate. Economic structure isn’t destiny, but it’s an influence of such overbearing power that it can rarely be defied, and never for long. Pixar, in its current form, is likely not long for this world. The only question is whether it will evolve, die, or be absorbed by one of the majors.


Classical Hollywood has been sentimentalized as a “dream factory,” a place where dreams were made with care and efficiency. However gauzy the image (shot, like a bad fantasy sequence, through camera filters and make-believe fog), there was an element of truth to it. Old Hollywood was a highly profitable business, but it was also a place that could tell stories that were surprising, evocative, unexpected, intelligent and challenging: Gone With the Wind, Casablanca, Frankenstein, Singing in the Rain, Citizen Kane, Harvey, Snow White, Duck Soup, Mr. Smith Goes to Washington, The Thin Man, Notorious, Cat People, The Adventures of Robin Hood, Tarzan, White Heat, Bringing Up Baby and hundreds more. “Dream” applies to these films in one very apt way. Just as you can never quite know what you’ll dream as you drift off to sleep, you could never be quite sure what you’d find when you went to the movies. And because everyone went to the movies, Hollywood could rationalize the production of a wide variety of genres with the relatively secure gamble that enough people would slip into the dream to make it profitable.

Contemporary Hollywood would also like to be known as a dream factory, but the phrase is far less appropriate. The studios are, in Epstein’s word, “clearinghouses” for copyrights and participation rights, not factories. They concentrate not on the efficient manufacture of a quality product but on clever marketing. Nor is there much surprise left in their product. The biggest films are based on pre-existing franchises (kids books, comic books, or sequels) that are already known to their intended audiences, so that the only surprise comes in seeing how the already familiar elements will be created on the screen.

“Once you’re inside Disneyland’s gates, the outside world disappears,” Michael Eisner said in his 2000 letter to shareholders. The other studios don’t have theme parks to give their dream worlds physical reality, but with Star Wars, Star Trek, Harry Potter, X-Men and other films they are trying for the same effect: the creation of an all-enveloping world in which the consumer will be content, ambitious even, to purchase an extraordinary and highly profitable array of products. But it’s the essence of a dream that it be temporary. The studios today are creating something more like parallel realities. “Escapism” is good, but there’s a difference between the escape into a dream—which refreshes and fortifies—and the escape into another world. The former is a vacation; the latter is more like emigration or self-imposed exile.

It’s not clear (at least to me) that a dream (the temporary respite of a movie) is superior or inferior to, more dangerous or less dangerous than a parallel world (the encompassing verisimilitude of a franchise). But I wonder if much of the dissatisfaction people feel toward Disney and toward the mega-franchises of the other studios derives from a feeling that they are being cheated by the very familiarity, the imprisoning “seen-it-all”-ness of the products created by the Disney market strategy. Youth is supposedly adventurous. So does youth subconsciously resent the staleness of the safe franchises that it nonetheless rushes to embrace?

Michael Eisner, I suggested at the start of this too-long meditation, is a habitual liar. But maybe the biggest liars in the Disney empire—in all of Hollywood—are the fans, who are lying to themselves about what they want and what they think they need. And, I’m sorely tempted to suggest that, in scapegoating Eisner, they are merely scapegoating the man who has done the most to reward their self-deceiving behavior by giving them products they’re eager to buy even though they don’t really want them.

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