Lew Wasserman and the Music Corporation of America Fabrizio Ferraro1, Kerem Gurses2
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European Management Review (2009) 6, 233–249 & 2009 EURAM Palgrave Macmillan. All rights reserved 1740-4754/09 palgrave-journals.com/emr/ Building architectural advantage in the US motion picture industry: Lew Wasserman and the Music Corporation of America Fabrizio Ferraro1, Kerem Gurses2 1Strategic Management, IESE Business School, Barcelona, Spain; 2BES La Salle University, Barcelona, Spain Correspondence: Fabrizio Ferraro, Strategic Management, IESE Business School, Avda. Pearson 21, Barcelona 8034, Spain. Tel: þ 34 93 253 64 83; Fax: þ 34 93 253 43 43; E-mail: [email protected] Abstract This article contributes to the literature on industry architecture by identifying the conditions that enable the emergence of architectural advantage. To understand how one firm can shape the industry architecture in its favor, we analyzed a historical case study on the role of Lew Wasserman and the Music Corporation of America (MCA) in the evolution of the motion picture industry in the United States. We focusedCOPY on two major disruptive events: the 1948 Paramount Decree which forced vertically integrated movie studios to divest their theaters, and the explosion of television as a new form of entertainment in the 1950s which became an alternative for exhibiting movies. In both these cases, one company, MCA, managed to improve substantially its standing by occupying and consolidating a position of advantage in the industry or, in other terms, an ‘architectural advantage’. We show how in both cases this was the result of interactions between the Studios, constrained by the institutional logic of the industry, the regulatory framework, and MCA’s introduction of novel practices. The latter consolidated its grip on talents and facilitated the growth of independent production and TV production. European Management Review (2009) 6, 233–249. doi:10.1057/emr.2009.24 Keywords: architectural advantage; industry practices; industry evolution; institutional theory; motion picture industry AUTHOR Introduction n addressing the critical question of industry evolution, of labor in the industry and the related distribution of three research traditions, industrial organization (Bain, value. The process through which firms can achieve an I 1968; Porter, 1980; Gort and Klepper, 1982; McGahan, architectural advantage is a fertile ground for empirical and 2004), institutional and evolutionary economics (Nelson theoretical work, given that much existing research has and Winter, 1982; Teece, 1986; Langlois and Robertson, focused on the consequences of exogenous shocks (for 1995; Jacobides, 2005), and institutional theory (Haveman instance, technical innovation or regulatory change). Such and Rao, 1997; Thornton and Ocasio, 1999; Lounsbury, 2007), a focus obscures the mechanisms that guide the emergence have helped us understand antecedents and consequences of of novel industry structure in the wake of a shock as well structural changes in industries. Nevertheless, most studies as the role that incumbents’ actions play. in these traditions did not specify how the ‘rules and roles’ From 1939 until 1965 Lew Wasserman and his company, that shape division of labor in the industry emerge and Music Corporation of America (MCA), managed to change change. the competitive landscape of the motion picture industry The concept of ‘industry architecture’ (Jacobides et al., in the United States completely. They exploited technological 2006) provides a useful conceptual tool to explore the role and regulatory change and until the 1980s wielded enormous of technical and institutional forces in shaping the division influence. Here we analyze this fascinating historical case, Building architectural advantage Fabrizio Ferraro and Kerem Gurses 234 tracking the relations between exogenous environmental the processes leading to the conditions necessary for market shocks and organizational choices to further our under- emergence: coordination simplification, and information standing of how architectural advantage emerges. standardization. In a study of the British building industry, The article is organized as follows. First, we provide a Cacciatori and Jacobides (2005) found that the vertical short overview of the relevant academic literature on division of labor affected the knowledge base of each segment industry evolution and architecture. Then, after describing of the industry, and established the trajectories for capability the methods and our data sources, we delve into the rich development. These studies help us better characterize the historical narrative of the evolving motion picture industry co-evolution of industry boundaries and firm capabilities in the United States and of MCA’s rise to power and industry (Jacobides and Winter, 2005) and clearly state that industry dominance. In the last section, we interpret our findings, participants are actively trying to change the industry: outlining the contour of our contribution and discussing its ‘exogenous factors did not shape this value chain, but rather, managerial and policy implications. the conscious, even if occasionally myopic, efforts of industry participants and potential entrants shaped it’ (Jacobides, 2005: 490). Nevertheless, these studies were narrowly focused on the Theoretical background issue of scope identification, and the question of how novel Economists, sociologists and strategic management scholars rules of the game emerge in an industry was not central to have explored industry evolution from different perspec- their efforts. tives, and provided interesting insights on this process. In From a sociological perspective, institutional theory economics the Industrial Organization tradition (Bain, 1968; might help us better understand where industry rules and Porter, 1980) mainly focused on the structural and technical roles come from, by shifting our focus towards a new unit features of industries as determinants of their participants’ of analysis: organizational fields. It also introduced the profitability. In this tradition scholars have shown how concept of institutional logics (Friedland and Alford, 1991): exogenous factors such as the number of potential entrants, the rules of the game that industry players follow and take- the growth rate of incumbent firms, and the ease of imitation for-granted, and the cultural and institutional antecedents of incumbent firms will influence the structure of the industry of such rules (Hirsch and Lounsbury, 1997; Thornton and (Gort and Klepper, 1982; Klepper and Graddy, 1990) and Ocasio, 1999). how technological innovation affects industry concentration DiMaggio and Powell (1983) define an organizational field (Geroski and Pomroy, 1990). More recently scholars have as ‘those organizations that, in the aggregate, constitute a developed fully endogenous models of industry evolution recognizedCOPY area of institutional life: key suppliers, resource (Klepper, 1996, 2002) but despite the acknowledgement that and product consumers, regulatory agencies, and other firms could and should attempt to influence the structure of organizations that produce similar services or products’ their industries, this research tradition has not explored how (DiMaggio and Powell, 1983: 148). This shift in the unit of changes in the rules of the game can transform competitive analysis goes beyond the traditional industry boundaries dynamics in the industry, and lead to the emergence of employed by both economists and population ecologists entirely new industries. Furthermore, it has not provided (Hannan and Freeman, 1977). The shift also helped much theoretical insight on how to do so (see Geroski (2003) researchers focus on the role of actors so far neglected, and McGahan (2004) for an exception). In the evolutionary such as regulators (Schneiberg and Soule, 2005); social economics tradition (Nelson and Winter, 1982), technological movements (Rao, 1998; Lounsbury et al., 2003; King and changecanhavedramaticimpactonthedevelopmentof Soule, 2007; Sine and Lee, 2009); professions (Marquis industry structure and provides a necessary causal link in the and Lounsbury, 2007); and local communities (Marquis and co-evolution of firms and industry (Murmann, 2003). Malerba Battilana, forthcoming). While most early work in this et al. (2008) suggest that a key factorAUTHOR in explaining changes in literature emphasized the consequences of institutional the vertical scope of firms is the process of accumulating changes, but did not provide much opportunity for agency, capabilities at the firm and industry levels. Another example this initial bias has been challenged by organizational of interactions between firm-level processes and industry-level theorists. Employing the concept of institutional entrepre- dynamics is given by Feldman and Romanelli (2006), who neurship (DiMaggio, 1991), some researchers emphasized studied biotechnology regional clusters in the United States the need for a triggering event that leads to change between 1976 and 2002. They showed that the key factor (Greenwood et al., 2002; Sine and David, 2003). Variously driving the growth of these clusters was the proportion of referred to as ‘shocks’ (Fligstein, 1991) or ‘jolts’ (Meyer, firms founded by former employees of established bio- 1982), such unsettling events create disruptive uncertainty therapeutics firms (breakaway firms). Despite their important for individual organizations, forcing some to initiate contributions, these studies do not explain how the division unconventional experiments upon established practice. of