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 labor in the industry changes, the consequences of these Focusing on a broader set of actors than just competitors changes, and the role that firms play in the process. has helped researchers better understand the process of In recent years these questions have been the focus of industry emergence. For instance, in the case of biotech- much empirical and theoretical work, especially focused on nology, researchers have documented the shifting evolution the analysis of vertical scope, which helped us understand of collaborative activities among university, entrepreneurs, how industry boundaries evolve, and how intermediate venture capitalists, and government agencies and how these markets emerge. Jacobides (2005) provides a framework for networks shaped the opportunity structure of the field explaining the nature and drivers of vertical disintegration (Powell et al., 2005). Kaplan and Murray (forthcoming) trace in the US mortgage banking industry. This study suggests the development of biotechnology in human therapeutics that gains from specialization and gains from trade shape over a 30-year period (1973–2003). They show how it has Building architectural advantage Fabrizio Ferraro and Kerem Gurses 235 evolved toward the current dominant logic after a long product architecture to focus its activities on the modules period of struggle between different actors: dedicated that represent bottlenecks. This choice would result in a biotech firms, large pharmaceutical firms, courts, congress, capital advantage, which could be leveraged to drive government agencies, universities, and scientists. Grodal competitors’ returns below their cost of capital (Baldwin (2007) explored the co-evolution of labels, meaning and and Clark, 2006). resources in the emergence of the nanotechnology field, In this context the key insight, which extends and and concluded that entrepreneurs and scientists did not qualifies the framework developed by Teece (1986), is that play a central role in the emerging nanotechnology label. a firm might be better off by nurturing competition in Instead it was influenced primarily by futurists, govern- complementary assets. This policy would facilitate entry in ment officials, venture capitalists, and IP lawyers. These segments adjacent to the ones they occupy (and protect). macro insights on how industry logics emerge and change Taken together, these articles provide a solid economic speak more to industrial organization (Klepper, 1996) and rationale for the existence of an architectural advantage, ecological (Hannan et al., 1995) models of industry evolution but they do not identify the mechanisms through which than to strategic management’s theories of competitive a firm can build one. Also, generalizing beyond the advantage (Porter, 1980; Teece, 1986). In the latter pers- technology-driven industries studied in this literature, it pective, it is critical to go beyond the economics of the is critical to specify what barriers, other than IP protection, industry, and understand how institutional logic affects the might prevent competitors from imitating this strategy. We economics of individual firms. attempt to address the question of emerging architectural Steeped in the tradition of evolutionary economics (Nelson advantage by analyzing a historical case: the rise of Lew and Winter, 1982), the concept of industry architecture Wasserman and MCA in the Hollywood motion picture might help us bridge the economic and institutional industry. approaches because it considers technological, economic, and institutional factors. An industry architecture consists of (1) a template defining how labor is divided (and value Research methods created) in the industry – who does what; and (2) a Industry evolution and architectural change happen over template defining value appropriation and division of long time periods, and to understand these changes, the surplus – who gets what (Jacobides et al., 2006). A system researcher should employ historical methods (Pettigrew, of interfaces among firms emerges as these architectures 1992). Historical methods are frequently used in strategy become stable. These interfaces are ‘technological, institu- and organizationCOPY theory research (Kieser, 1989; Rao, 1998; tional, or social artifacts that allow two or more indepen- Hargadon and Douglas, 2001; Cacciatori and Jacobides, 2005) dent entities to divide labor’ (Jacobides et al., 2006: 1203). and widely accepted as a fruitful way to develop theory. Since When these interfaces change, as happens with technolo- this approach lets us examine multiple instances of institu- gical and regulatory changes, there is opportunity to tional change over a long period of time, it can provide greater renegotiate the architectures. Industry architecture, there- breadthofknowledgethanparticipant observation or inter- fore, both constrains the action of competitors by defining views (Rao, 1998: 921). We used secondary data to identify rules for competition (formal and informal) and roles for sequences of actions and events and to examine how the interactions, and provides opportunity for entrepreneurial sequences affect the industry’s architecture. players to build a more favorable competitive position. The American motion picture industry is a good case for Jacobides et al. (2006) suggest that firms can benefit from studying industry evolution because (a) the industry has innovation by ‘managing the industry’s architecture care- gone through different architectures over the last century, fully so they become the ‘‘bottlenecks’’ of the industry’ and (b) these changes are well documented by historians (Jacobides et al., 2006: 1208). WhileAUTHOR this concept might of the industry in academic journal publications and books prove valuable in explaining not only the mechanisms of (Balio, 1976, 1985; Bordwell et al., 1985; Schatz, 1999). industry evolution, but also the process through which Furthermore, anthropologists (Powdermaker, 1950), econ- firms can build an architectural advantage, so far most omists (Storper, 1989; Chisholm, 1993, 1997), sociologists work has been focused on how firms can benefit from (Zuckerman et al., 2003; Sorenson and Waguespack, 2006; technological innovation (Teece, 1986; Baldwin and Clark, Cattani et al., 2008), and strategy scholars (Enright, 1995; 2000; Gawer and Cusumano, 2002; Brusoni and Prencipe, Miller and Shamsie, 1996; Mezias and Boyle, 2005) have 2006; Gawer and Henderson, 2007; Pisano and Teece, 2007). provided useful insights into the industry’s evolution and The literature on platforms, for instance, has shown that the operations of its productive system. firms can control entire ecosystems both by owning a core Historians of the movie industry commonly identify element of the technological system that defines its different stages (Gomery, 1986) precipitated by changes in evolution, and by investing in complementary markets as the market, regulatory interventions like the 1948 Para- Intel and Microsoft did in the PC ecosystem. In the case of mount Decree, or a series of technological innovations like Intel, the firm both committed to making money in the television, cable TV, VHS, DVD, etc. In this article we are complementary markets it entered, signaling it would not focusing on two of these exogenous shocks: the Paramount drive down returns, but also actively gave away intellectual Decree and the diffusion of television. In addition to property to subsidize competitive entry. This latter action describing these changes in the industry as a whole, we will encouraged entrants to contribute to developing and focus on the actions of the MCA: a newcomer to Hollywood widening the platform (Gawer and Henderson, 2007). A small in the 1940s that becomes one of the industry’s most ‘footprint’ strategy might be used when products are influential firms. In addition to the large wealth of material modular, and a firm could leverage its knowledge of the available on the history of this industry, recent publication Building architectural advantage Fabrizio Ferraro and Kerem Gurses 236 of in-depth biographies on MCA’s President, Lew Wasserman, films exhibited. Their budgets (and profit margins) were helped us track the evolution of MCA from the Talent lower and they generally borrowed stars from the majors Agency industry to the Motion Picture Industry. We since they could not afford to keep their own under employed a qualitative research strategy focusing on contract. During the great depression theaters had started ‘activities, choices and events’ over time and identified the practice of showing ‘double features’, charging one who did what and when (Langley, 1999: 692). Hence, we admission price for two movies. This practice was very could develop a timeline of key events in the industry successful and quickly became the norm of the industry and map relationships among its players. We analyzed until the 1940s. Nevertheless, theaters could not afford to the data using Miles and Huberman’s (1994) three steps show two top quality movies together and they needed of data reduction, data displays and interpretation and cheaper productions. B movies, as these productions were verification. The first data display captured Wasserman’s called, were rented to the exhibitors for a flat fee, unlike career history, including work experience before becoming A movies which were rented for a percentage of the box- the CEO and his key relationships with other industry office. Smaller movie producers (and some Minor Studios), players. The second data display focused on the histories of which could not compete on high quality-high cost produc- the most relevant industry players, including MCA, their tions, focused their efforts on these B movies, which role in the value chain, and relationships with other provided low but stable returns. companies. The third data display outlined key industry Before the rise of the studio system, many of the major events and timelines such as law suits, court decisions, and stars had their own production companies, but by the 1930s key regulatory decisions. We relied on our immersion in most stars were salaried employees of the studios, typically the data and our contextual knowledge to assign meaning under a 7-year contract. Talent agents marketed actors, and draw conclusions from the data stream. directors, and writers and found employment offers for them. Their job was to negotiate deals between talents and studios on behalf of the talents. In the studio era, given the Building architectural advantage in the movie industry 7-year contract employment model, rather than securing their clients the best deals on a project-to-project basis, The movie industry from its birth until the paramount decree agents made money by luring stars to break contracts with Prior to 1915, the movie industry consisted of a large their studios to re-sign them at other studios. They also number of production companies that, for the most part, re-negotiated salaries at certain review periods of contracts paid royalties to the trust that controlled all the crucial or followingCOPY the escalating box-office success of their patents associated with moviemaking: the Motion Picture clients. Normally, agents were paid only if they found work Parent Company (MPPC). Simultaneously, there were some for their clients and the payment took the form of a smaller, independent production companies that operated contractual commission of their clients’ gross earnings outside the trust (Mezias and Kuperman, 2000; Jones, 2001; (traditionally 10%). By the early 1930s, four agencies Mezias and Boyle, 2005). In October 1915, a Federal Court represented the majority of members in the Motion Picture found MPPC in violation of the Sherman Act, and by 1918 Academy (Joyce-Selznick, Collier & Flynn, Edward Small, the trust was terminated. In the meanwhile feature-length and Phil Berg). During the studio era agents primarily films had become more popular than the short (one-reel) served star actors and key artists like directors and writers. films usually produced by MPPC companies (Mezias and Less important talents, such as minor actors, craftsmen, art Boyle, 2005), and movie theaters required steady supply of directors, which would work more on a project basis, found these longer films (Izod, 1988). These factors, together with little to no representation from talent agencies (Kemper, rising production costs of the conversion to sound, facilitated 2007). The Screen Actors Guild (SAG), the main union the emergence of nation-wide distributionAUTHOR companies and representing actors, had long forbidden talent agencies eventually the integration of production, distribution, and from directly producing motion pictures, because of the exhibition. From about 1915 to 1930 the industry was innate conflict of interest in concurrently being the agent dominated by a small number of vertically integrated firms and the employer, but occasionally SAG would grant them that provided production, distribution, and exhibition: the the permission to produce a movie. Hollywood Studio System (Schatz, 1988). When the great Studios controlled exhibition directly, given their domi- depression struck, theater attendance decreased by more nant share of movie theaters, and indirectly, by contrac- than 30%, forcing more than 4000 theaters to shut down tually enforcing their conditions to independent theaters. over three years and thus increasing the concentration of With the exception of two relatively large theater circuits ownership in exhibition. The production and distribution (Griffith and Schine), the ownership of independent theaters stages also became increasingly concentrated (Negro and was highly fragmented. Given their limited bargaining Sorenson, 2005). The major studios at that time were 20th power, independent theaters were forced, through the Century Fox, Metro-Goldwyn-Meyer, Paramount, RKO, and block-booking practice, to rent movies in bundles, some- Warner Bros and they controlled the majority of the times without being able to see them in advance. Studios market. The minors (Universal, Columbia, United Artists) could bundle their best productions, the movies theaters owned no theater chains. Collectively, the majors controlled (and audiences) really wanted, with many lower quality 3000 theatres of the 18,000 operating nationwide: 70% of productions, and could therefore operate at full capacity first-run theatres in cities of more than 100,000 population (Schatz, 1999). In sum, the Studio System operated and 60% of those in cities of 25,000–100,000 (Stuart, 1982). according to an integrated logic, in which the Studios The minors and other smaller players, which did not own exerted direct control over production and distribution, theater chains, relied on deals with the majors to have their and indirect control over creative talents and exhibition Building architectural advantage Fabrizio Ferraro and Kerem Gurses 237

Integrated Logic Exhibition Talents Production Distribution (1930-1948) (Theaters)

Exhibition Talent Logic Talents Production Distribution (1948-1952) (Theater)

Integrated Exhibition Logic Talents Production Distribution in TV (TV Networks) (1952-1978)

Studios’ Direct control Studios’ control through institutionalized practice (lock-in) – 7 years contract & Block booking MCA MCA’s control through institutionalized practice – packaging - Market Figure 1 Industry logics in the motion picture and television industry (1930–1978).

Table 1 Average production costs (in million of dollars), 1920–1975 and $60 million in 1950. Industry profits also fell from $119 Year Average Average Increase in million in 1946 to $50 million in 1950 (Table 2). production production production TheCOPY Justice Department began an antitrust investigation costs nominal costs inflation costs inflation into the industry’s business practices in 1940; eight com- ($ mil) adjusted adjusted panies were named as defendants: the five majors and ($ mil in 2009) (in percentage) the three minors. The defendants were charged with anti- competitive dominance of the three major segments of the 1920 0.1 1 industry. Eventually, the Paramount decision in 1948 forced 1930 0.4 5.1 410 the separation of exhibition from production and distribu- 1940 0.4 6.2 22 tion (Miller and Shamsie, 1996). The court ordered the five 1950 1.0 8.9 43 majors to spin off their theater holdings, and it ordered the 1955 1.5 12 35 spun off circuits to divest one-quarter to one-half of their 1960 2.0 14.6 22 theaters. The prohibition against block booking1 enabled 1965 2.5 17.1 17 the Minors (Universal, Columbia, United Artists) to capture 1975 3.1 12.4 27 a larger share of the production market. Moreover, on the exhibition level, divestiture weakened the buying power of Source: The film daily year book. NewAUTHOR York, 1947, p. 53; 1956, pp. 103,105. the former affiliated circuits and the block-booking ban enabled independent exhibitors to gain more control of their operations. Since the studios could not control the production and exhibition at the same time, they reduced through the 7-year-contract and the block-booking indus- their output and dramatically cut back on the number of try practices (Figure 1). stars (Balio, 1985). The combined effect of the Paramount During World War II the Studio system experienced a decree and the decline in attendance (Caves, 2000) led period of strong growth in revenues and profitability: com- major studios to decrease their production of feature films bined industry profits went up from $20 million in 1939 to by more than 50%, adjust their cost structure, and concentrate over $60 million in 1945. During the war the number of more on distribution and film financing 2 (Christopherson movies produced was significantly reduced. Between 1937 and Storper, 1989). and 1941, the Big Eight released 1833 feature films, while between 1942 and 1946 they released only 1395. Most of the cuts affected B-movie production, and therefore average Lew Wasserman and MCA production costs started to rise. Between 1942 and 1945, the In 1936, at the age of 23, Lew Wasserman joined Chicago- average cost per movie grew from $336,600 to $554,386 based MCA which was a successful band booking agency (Table 1). By 1945, the majors were concentrating almost at that time. In 1939, Wasserman moved to Los Angeles to exclusively on A-class production, while the minors focused help Jules Stein, MCA’s founder and President, to build MCA’s more on B productions. After the war, movie attendance, movie business. MCA started acquiring stars’ contracts which had peaked in 1946, went spiraling down, falling and talent agencies. In only a few years, MCA bought the from $90 million admissions in 1948 to $70 million in 1949 contracts of top stars such as Bette Davis, Errol Flynn, Joan Building architectural advantage Fabrizio Ferraro and Kerem Gurses 238

Table 2 Personal consumption expenditures on motion picture admissions and net income of seven major studios, 1940–1956 Year Gross receipts Deflated by Average weekly As % of Total net income on admissions admission attendance all PCE of 7 major films ($ millions) price indexa (millions of admissions) ($ millions) 1940 735 1182 80 1.02 22 1941 809 1235 85 0.99 35 1942 1022 1481 85 1.14 51 1943 1275 1695 85 1.27 60 1944 1341 1543 85 1.22 59 1945 1450 1586 85 1.2 65 1946 1692 1798 90 1.15 119 1947 1594 1620 90 0.97 86 1948 1506 1514 90 0.85 56 1949 1468 1439 70 0.81 45 1950 1394 1372 60 0.72 50 1951 1338 1298 54 0.64 41 1952 1284 1235 51 0.59 20 1953 1252 1149 46 0.54 28 1954 1275 1099 49 0.54 44 1955 1286 1055 46 0.51 46 1956 1298 1041 45 0.49 41 Source: (US Department of Commerce, National Income Supplement to the survey of current business (Washington DC, 1954) and ‘Personal Consumer Expenditures by type of product, 1952–56’, Survey of Current Business, July 1957, p. 21. a Index from US Bureau of Labor Statistics, ‘Consumer Price Index: Price Indexes for Selected Items and Groups’ (Annual indexes for 1935–1955 published in the July 1956 number). COPY Crawford, and many others. Other higher status agencies, ‘stock’ of talents and their ability to use them efficiently. incumbent players such as the Selznicks and William As a consequence studios were now more than happy to let Morris, would not try to buy star’s contracts: ‘They felt they their talents go, opening up an opportunity for agents such didn’t need to, they were kings [y] it was beneath them’, as MCA. The number of actors under contract to major Wasserman said (Bruck, 2004: 73). In the early 1940s, studios, which had been as high as 804 in 1944, fell first to MCA bought a large number of agencies, including Alan 474 in 1949, and then to 164 by 1961. Similar declines are Miller; Associated Artists, Zeppo Marx, and Myron found for directors (99 in 1949 to 24 in 1959), producers Selznick. In 1945, Wasserman bought Hayward-Deverich (from 149 to 50), and writers (from 91 to 47). Studios now Agency, with its excellent list of several hundred perfor- had less control over talent, but in their attempt to keep mers, including Greta Garbo, Ginger Rogers, Fred Astaire, production costs down, they became more aggressive in and Billy Wilder. With this move MCA became the largest negotiating with them. agency in Hollywood. By 1960, it was still the largest talent This led to another opportunity for MCA. In 1950, agency in the business, with doubleAUTHOR the revenues of William Wasserman negotiated a deal for Jimmy Stewart in the Morris, its nearest competitor. Universal movie Winchester 73. At that time, Universal To explain MCA’s ability to grow so quickly and the was in financial difficulty and could not afford Stewart’s limited reaction of competitors, it must be said that the agency normal salary of $250,000. Instead, Stewart got no fixed business was not very profitable. Because the widespread salary but did get 50% of the net profits over the life of the 7-year contract industry practice tied artists to one of the film. The movie was a hit, and Stewart quickly became the studios for a very long time, agencies were of limited value richest actor in Hollywood. Profit-sharing contracts had to the talents. More established Hollywood agencies such been used sporadically before by Charles Feldman of as William Morris and Famous Artists Agency did not see Famous Artists Agency, but it is only through MCA that acquisitions as an opportunity. For instance, William Morris, this practice diffused widely and became institutionalized. which had a strong position in Hollywood, was focused on It helped MCA attract more Hollywood stars, lured by the other, more profitable businesses, such as talent for radio, potential of profit sharing, and cemented their relationship vaudeville, clubs, and theater. Only after MCA had shown in the long term. that, in post-Paramount decree Hollywood, representing In addition to the diffusion of profit-sharing contracts, movie talents could be truly profitable would William MCA also packaged the script, director, stars, and producer Morris start acquiring other agencies (Kemper, 2007). for several RKO pictures in late 1939 and early 1940. MCA Why would the studios let agents control the talents that had no control over the actual production, nor did it have were so critical to their business? The combined effect of any financial stake in the finished pictures. But packaging the Paramount decree, decreasing attendance, shrinking facilitated the shift in filmmaking authority, especially profits (Table 2), production cuts, and rising production the initiation and development of movie projects, away costs (Table 1) increasingly worried the studios about their from the studios and into hands of individual filmmakers Building architectural advantage Fabrizio Ferraro and Kerem Gurses 239

(Schatz, 1999). Over time other agencies like William Morris regulatory nature, but stems from the development of a followed suit in the attempt to maintain their market share novel form of movie exhibition: television. of talents and also acquired other smaller agencies. But MCA was now well established as one of the top agencies in Hollywood. The rise of television Note that what opened the door to profit sharing and By 1950, 25% of American households owned a television packaging was the need for the studios to reduce their set, and TV’s penetration had doubled to 50% by 1952. From risk exposure: as Mel Sattler, who negotiated the 1949 to 1953, cinema attendance decreased considerably Winchester 73 contract on behalf of Universal, put it: and then stabilized at about 40 to 50 million admissions per ‘Universal accepted the proposal because it permitted the week. Television was, in the view of the Studios, the main company to put substantially less at risk by reducing its cause for this fall. However, motion picture producers immediate production costs’ (cited in Weinstein, 1998). believed that TV had inherent deficiencies as well. First of Both the agencies and the Studios were still operating all, the smaller television image did not allow the audience under ‘integrated logic’ so agents were not particularly to be as directly involved in the action as a large movie interested in growing a roster of talents that were not screen. Furthermore, the budget for television production particularly profitable. Studios were just trying to reduce was much smaller than the average production costs their production costs. for motion pictures ($40,000 vs an average of $1 million; Another factor that helped MCA better leverage its Table 1). Finally, TV production required a large amount of investment in talents was the growth of independent writing and acting talent: approximately 11,000 shows per production (Balio, 1976). This growth was facilitated by year during prime evening hours alone compared to 400 the studios’ decision to focus on distribution and financing, pictures per year for the motion picture industry (Stuart, and leave production to independent production compa- 1982). nies, often operating on their own lots. Robins (1993), for Nevertheless, the studios realized television could be a instance, reports that Warner Bros distributed and competitive threat and addressed it in different ways: first financed, from 1946 to 1965, 207 independent and 162 (1) they tried to control TV broadcasting, then (2) they studio productions. The consequences for this explosion invested to make the theater experience unique, and finally in independent production, together with the increasing (3) they tried to starve TV by not providing them filmed reliance on hits, created a more competitive market for content (see Table 3 for a summary of the actions taken by acquiring top talent. The concentration of talents repre- studiosCOPY in reaction to television). sented by MCA and the lock-in effect created by the profit- The largest movie studios (Warner Bros, Twentieth sharing agreement that MCA helped diffuse, together with Century-Fox, and Paramount) initially tried to start the rise of independent production, helped MCA consoli- building their own TV networks, but the Federal Commu- date its powerful position in the Hollywood of the 1950s. nications Commission (FCC) blocked their efforts. As early Packaging and profit sharing became the building block as 1945, the FCC chairman Paul A. Porter addressed a of a novel industry architecture in which studios were now meeting of industry leaders in Hollywood and warned them focused on the financing and distribution of pictures. that the movie industry should not expect a significant Independent producers and occasionally talent agencies role in television after the war (Anderson, 1999: 431). There were producing pictures, often renting the studios’ facil- was also increasing negative public sentiment about movie ities, and talent agencies were much more central in the studios, as depicted by an article in the February 1949 flow of exchanges, given their control of creative talents. Consumer Report. It forecasted dire problems for the future This architecture is founded on a novel institutional logic of television should the studios, with their acknowledged stemming from the centrality ofAUTHOR creative talents and record of monopolistic practices, find a foothold in television. independent production: ‘talent logic’. The emergence of Fuelled by this public sentiment, the FCC inquired into this new architecture was in response to the exogenous Hollywood anti-trust violations and blocked virtually every environmental shock: the Paramount decree and the studios’ television initiative started by the motion picture industry lost control of exhibition, as many have already noticed (Hilmes, 1990). In 1948, Warner Bros had plans to build its (Miller and Shamsie, 1996). Nevertheless, this configuration own networks by acquiring existing stations and had asked of actors and activities was not a natural consequence of the FCC to approve the acquisition of Los Angeles TV Station these shocks, but rather the emergent outcome of the KLAC. In interpreting the opportunities offered by the new interacting players. The introduction of two novel practices technology, studio executives were bound by the traditional enabled the shifts in roles that players experienced, and ‘integrated logic’. This logic was based on direct control of later reinforced these new rules of the game. MCA played a distribution and exhibition and studios saw TV through this critical part in this architectural shift by introducing the lens: an opportunity to get back what the Paramount decree novel practices and, given its control of creative talents, had taken away. Therefore they ‘were not satisfied merely to reaped most of the benefits. In this sense, it is fair to say experiment in a medium controlled by the existing radio that MCA reshaped the industry’s architecture to become networks; they wanted to command the television industry the ‘bottleneck’. just as they dominated the movie industry, by controlling One episode in this story of the motion picture industry the channels of distribution’ (Anderson, 1999: 423). The might not provide enough evidence on how these mechan- Communications Act of 1934 authorized the FCC to refuse isms operate. We will show how the same process can be station licenses to any corporation convicted of monopolistic observed in another key episode in the history of the practices, and therefore after the Paramount decree, the FCC same industry. In this case the exogenous shock is not of was in a position to deny the licenses to the studios (Gomery, Building architectural advantage Fabrizio Ferraro and Kerem Gurses 240 1955 1944 1955 1947 1953 1946 TV production

COPY Aspired to control TV as an exhibition channel 1952 Tried to develop pay-TVtrying to to compete sell with TVthrough free programs theater TV TV, as technology, first a andfor by cinemascope distinctive larger technology cinema screen product projectionfrom in free movies TV to lure audience away Witnessed Disney’s success in TV, and wanted to emulate it 1955 Leveraged their capabilities in thethe production TV of industry B movies in First tried to controlwanted TV, to but starve afterwards televisionTried became by hostile to not and compete providing throughcentury content. theater Fox TV technology like 20th the TV industry. Did not have thestudios, capital therefore to concentrated pursue on diversificationoffset like TV potential major production losses early from to movie production business Similar rationale as above 1949 Similar rationale as above 1956 Sought to diversify into TVaudience and through have its greater access program to ‘Disneyland’ family Their focus on Bindustry movies would benefitTo them take in advantage the ofbusiness TV the (they production saw vacuum thesystem) in TV and the as use TV an TV alternative as to a the new studio distribution channel.

AUTHOR in 1938) Launched an experimental station in 1943 (Anderson, 1994) Developed color theater TV(Hilmes, technology 1990) ‘Eidophor’ and in cinemascope 1949 technology in 1953 same time acquired 25%(Brown, of 1995). the station’s stock in 1956 Abandoned feature film productionentirely to to devote television its film facilities in 1957 (Stuart, 1982) TV was blocked byInvested FCC in Theater TV technology with RCA in 1947 Gems. Became the first studioin to 1955 lease, not (Brown, sell 1995) its films to TV telefilms in 1948 Formed United Artists production in 1956 famous ‘Disneyland’ TV program (Brown, 1995) 1994) and abandoned featurefacilities film entirely production to to television devote film its in 1958 (Stuart, 1982). Movie studios’ reaction to the emergence of television Table 3 StudioMajor studios Paramount Actions Invested in TV technology very early (Du Mont laboratories Rationale Year started 20th century fox MGM Leased 725 of its movies to LA TV station KTTV and at the RKO Became the first studio to produce for TV in 1944. Warner Applied to buy TV stations, but its initial efforts to control Minors and other studios Universal Started TV production quite early in 1947Columbia Started production in 1949, through its subsidiary Screen Leveraged their capabilities in the production of B movies in United Artists Set up a television department not to produce but distribute Disney Expanded into TV production in 1953 with ABC with the Republic Republic pioneered in production for TV in 1946 (Anderson, Building architectural advantage Fabrizio Ferraro and Kerem Gurses 241

1986). Later that year, rather than denying the concession of operated a small studio acquired from Universal. Initially, a license, the FCC placed a ‘freeze’ on TV station licensing, MCA started to bundle its stars with mediocre performers. suspending decisions on all pending applications (the freeze NBC and other networks, which needed content and could lasted until 1952). The FCC freeze helped the radio networks not count on much cooperation from the Studios, were (CBS and NBC) secure their grip on the TV market, and by happy to buy the whole package. In the end, MCA started 1948, CBS was the number one player in the television market, developing complete packages (script plus talent) and followed by NBC and more distantly ABC. shopped them to network television. Instead of earning the The major studios also invested in products and tech- traditional 10% commission on the earnings of their clients, nologies that created theatrical audience experiences that MCA would receive a packaging fee of 10% of the entire television could not imitate. These investments led to the production budget. Packaging for television helped MCA production of films in new widescreen processes as Cinema leverage its roster of talents in much more profitable ways, Scope, an increasing shift to color, huge budget costume because they could now package stars with less well-known epics, and special effects (including 3D) (Stuart, 1982). actors and created more work opportunities for a larger Disillusioned by the failure of their efforts to control number of talents. By 1959, MCA’s annual gross income had the TV industry, studios became antagonistic towards the grown to $58 million: $9 million from commissions, $3 million medium, and this led to a stubborn rejection to provide from studio rentals, and $46 million from television produc- them content. Jack Warner stated in the early 1950s: ‘the tion and distribution (Anderson, 1994). only screens which will carry Warner Bros products will Minor studios had also entered television production in the be the screens of motion picture theaters the world over’ late 1940s, trying to leverage their experience in producing B (Anderson, 1994: 45). He even went further to refuse to movies. But given their lack of control over creative talent, show a TV set in any of his motion pictures. Theater owners they were not able to compete effectively with MCA (Table 4). also lobbied studios not to supply content to television, Furthermore, MCA could leverage its experience in dealing because they reasoned that if the audience could see the with radio broadcasters and their office in New York. Among stars for free in their living rooms, no one would go to the the other talent agencies, the only competitor who could movies. The majors therefore did not release major rely on similar contacts and experience was William Morris, theatrical films to television until the 1960s (Hilmes, 1990). which indeed, followed MCA’s lead to start packaging Hence, in the late 1940s, most of the programs for TV were products for television. produced for live broadcast by New York-based advertising MCA was now de facto more a production company than agencies.3 In 1950, the President of NBC decided to improve a talentCOPY agency, and therefore the 1961 acquisition of Decca the quality of programming by controlling it, ruling that Records and its subsidiary, Universal Pictures (one of the advertisers would be allowed to buy only short segments of three minor studios), only sanctioned the fact that MCA time for their commercials ratherthananentireprogram.This was now a Hollywood Studio. By this time, TV production decision became a norm for other networks as well. When was much more profitable for MCA than the talent agency networks decided to keep the advertisers away from producing business and therefore, when faced with an injunction from for TV, they created a vacuum in the TV production business. the Justice department in 1962 to divest Decca Records and Once again, note how the incumbents’ actions, and their Universal Pictures, Wasserman negotiated a deal to keep constraints, opened the door for players that were not yet both and accepted dissolving the talent agency (Gomery, (directly) involved in movie production, but had access to the 1998). When Wasserman dissolved the agency business and key resource: creative talents. maintained the Production and Distribution business of Universal Pictures and Revue Production, many questioned how he would deal with the soaring production expenses. In From packaging to TV production AUTHORJune 1963, MCA agreed with NBC to produce a full season MCA had already packaged the script, director, stars, and of 2-h feature films for weekly screening on NBC during the producer for several RKO pictures. Wasserman had seen 1964–1965 season. This made-for-TV movie strategy proved this practice being employed in band booking by the highly successful. In October 1965, MCA and NBC made a founder of MCA, Jules Stein, and adopted the same practice $60 million film deal. The deal included 60 Universal films in movies. Having a tight grip on the talent, MCA could for network screening at about half a million dollars each: now package movies and content for TV networks. In 1952, 40 for screening on the network’s owned and operated The SAG granted a blanket waiver to MCA that would stations at about a hundred thousand dollars each; an permit the talent agency to take on TV production. When uncertain number of made-for-TV feature films for an in 1961 SAG eventually terminated the MCA waiver, it estimated subtotal of 15 million dollars. The steady flow of explained to its members that the waiver had been granted TV production stemming from contracts like the one with to ‘encourage the growth of the TV film industry and the NBC made it possible for Wasserman to organize Universal employment opportunities of motion picture actors. At Picture productions in ways much closer to the traditional that time, in spite of the enormous economic impact of Hollywood Studio System he had helped bring down. Given television on the theatrical box office, a large segment the small budgets of the typical TV production, the top of the industry was determined to resist the new talents were out of reach. However, Universal built a list of medium. Under the terms of the waiver, TV production young, affordable talents and started to loan them out to increased substantially and our purpose was fully achieved’ 4 other studios, as Wasserman’s antecedents had done at the (Schumach, 1961). apex of the studio system (Schumach, 1961). Through the Wasserman launched MCA into TV production through 1970s, the power of Universal Television was prevalent all a newly formed subsidiary, Revue Productions, which over Hollywood. No other TV producer came close to MCA. Building architectural advantage Fabrizio Ferraro and Kerem Gurses 242

Table 4 Reaction of different industry players to the emergence of television Actor Actions Rationale Studios Tried to control TV by buying radio stations Perceived the TV first as an extension of and applying for TV station licenses. the studio system and then as a formidable Invested in alternative technologies (theater competitor once it was obvious that they TV, 3D, Cinerama, etc.) could not control TV. Sought to differentiate Minors started to produce for TV early from TV by investing in alternative Most Majors started producing for TV only technologies. Since TV initially demanded after 1952. cheaper programs which they were not Did not release major theatrical films to well positioned to produce after the 1940s television until the 1960s. (due to high fixed overheads, massive administrative offices etc.), TV production came late(Stuart, 1982) Independent producers Produced extensively for TV during 1940s Perceived TV as an opportunity to exploit and 1950s their capability to produce cheap movies, which TV required Other talent agencies Since most did not have a strong roster of Used their extensive experience with radio (William Morris) talent in the beginning they were not very and movies and contacts with advertising active in TV. agencies to move into TV business Of the larger talent agencies, William Morris due to its experience in radio was actively packaging for TV (Balio, 1985) Federal communications Took actions to prevent major studios from Took protective actions in favor of TV commission having a stronghold in TV business (such as networks against major studios due to the TV station freezes)(Hilmes, 1990) negative public sentiment about major studios’ COPYmonopolistic actions after Paramount decree Radio broadcasters Dominated TV broadcasting. Tried to avoid advertisers agencies’ live Entered long-term deals to source filmed productions, reasoning that it is less risky content with independent producers and and more profitable (due to multiple MCA. circulation) to have recorded production (such as movies and series) rather than live TV Exhibitors Lobbied studios not to produce for TV Feared losing business to TV

In the fall of 1976, Norman Lear, MCA’s closest competitor, Table 5 Supplier market share of major movie studios in network television provided 4 h of shows a week onAUTHOR prime-time network series, fall 1978 programming, and MCA provided 14. As of 1978, MCA was Studio Market share (%) still far ahead of all other major studios in network programming as shown in Table 5. Universal 18.6 This episode in the evolution of the industry reinforces 20th Century Fox 4.9 our interpretation of the changes that led MCA to acquire Paramount 3.9 a dominant position in Hollywood after the Paramount Warner Bros 3.9 decree. Once again industry players were coping with an Columbia 2 environmental shock (Tables 3 and 4), and their actions Source: Variety, 14 September 1977, p. 34. shaped the emergence of a novel industry architecture, in which long-term contracts with TV broadcasters generated enough stability to bring back the vertically integrated later on used to enter TV production. Independent producers structure of the studio system in the production, distribu- and minor studios interested in producing for TV and TV tion, and exhibition of TV shows (Figure 1). Incumbents’ broadcasters looking for sources of content alternative to constraints and actions, which were reasonable given the advertising agencies all welcomed packaging as a source of logic in which they operated, the investment they had talents.5 MCA-NBC long-term contracts broke the industry made, and the uncertainty surrounding the emerging TV free from the uncertainty of the box-office and created the business, created a vacuum that MCA and minor studios conditions for reconstructing a vertically integrated archi- exploited. tecture. In both cases MCA pioneered the use of these Two industry practices were critical in the process. practices and the industry architecture that emerged helped Packaging was the stepping-stone MCA and other agencies consolidate their strong position in the industry. Building architectural advantage Fabrizio Ferraro and Kerem Gurses 243

Interpretation and discussion TV production started to take off, it did not take most The industry architecture perspective (Jacobides et al., 2006), studios too many years to follow (by 1955 all the majors which builds on the insights of the modularity (Baldwin were also producing for TV; Table 5), but by then MCA and Clark, 2000) and technological platforms (Gawer and had secured long-term contracts with TV networks. The Henderson, 2007) literature, suggests that architectural integrated logic shaped the way in which studios reacted to advantage stems from the ability to control a critical the emerging technology (Tripsas, 2009). Note that once activity in the value chain to become the ‘bottleneck’ of the Wasserman had rebuilt the integrated logic in the movie industry. Obviously, this investment ex-post appears logical industry, he also fell prey to the same constraint and and essential to the new architecture, but ex-ante is based ignored or could not prevent the rise of Creative Artists on the acquisition of assets that will appreciate if the new Agency (CAA). This company, founded by former William architecture actually develops (Jacobides and Winter, Morris agents in 1975, aggressively recruited a large number 2007). Jacobides et al. (2006) suggest that if (1) a particular of talents, brought the packaging practice back from asset stands to gain from innovation, (2) the asset is in television to the production of movies, and became the short supply, and (3) there is a possibility to invest while third largest agency in the industry and a dominant force they are still cheap, then it is profitable to pursue the in Hollywood in the 1980s. Despite the fact that Wasserman innovation and buy the assets that will appreciate. They had pioneered the use of packaging to leverage his position also argue that ‘an innovator [y] may try to achieve as an agent, once at the helm of a major integrated studio architectural advantage by stimulating ferocious competi- (Universal) he could not stop the growth of CAA (Bruck, tion in the complementary assets rather than in their own 2004). segments’ (Jacobides et al., 2006: 1214). Strategists often invoke constraints to competitors’ actions Our case study provides an example of how a newcomer to explain the existence of a sustainable competitive advantage to the motion picture industry, the MCA, could reshape (Ghemawat, 1991, 1993). For instance, even though many the industry architecture by (1) investing early in creative competitors understood Dell’s business model, they found talents, before their value soared, (2) introducing novel it very hard to imitate without disrupting their existing industry practices (profit sharing, packaging, long-term operations, their asset investments and their channel relation- TV deals) that increased the value of their investment, and ships (Rivkin and Porter, 1999).6 Nevertheless in this case the (3) facilitating the growth of independent production. By trade-off did not stem only from the economics of the themselves, these actions would not have been enough to incumbents’ strategies, but also from the set of institutional secure an architectural advantage. Another essential factor constraintsCOPY in which the incumbents operated. As critical as in the emergence of this advantage, as we emphasized in the incumbents’ actions are in creating opportunities to reshape case study, were the actions (or inactions) of incumbents, industry architecture, they would not by themselves have been channeled or constrained by regulatory and institutional enough to trigger a change in industry architecture with an rules. architectural advantage for MCA. There is wide consensus in the literature that incumbents Introducing novel industry practices (Lounsbury and struggle in adapting to technological (Henderson and Clark, Leblebici, 2004) such as packaging, profit-sharing, and 1990; Christensen and Bower, 1996; Christensen, 1997) and long-term contracts was the other essential step in regulatory change (Smith and Grimm, 1987), and that this developing an architectural advantage for MCA. It resistance to adaptation might be partly explained by the reconfigured the web of transactions among the key existing institutional logic (Thornton and Ocasio, 1999) and players in ways that strengthened its position. These the cognitive frame employed to interpret technological practices not only helped MCA lower the studios’ changes (Tripsas and Gavetti, 2000; Kaplan and Tripsas, bargaining power, but also helped consolidate its control 2008; Tripsas, 2009). In the MCA caseAUTHOR the decisions taken ononeassetthatbecamemuchmorevaluableinthe by incumbents, because of regulatory and institutional con- Post-Studios era ushered in by the Paramount decree. straints, created an opportunity for entrepreneurial actors Here it is critical to stress that both profit-sharing and to experiment with novel practices and influenced the packaging helped created a more modular industry industry architecture in their favor. architecture which benefited players with investments The integrated logic that permeated the Studio System of in relationships, rather than production assets. Miller the 1930s, together with the limitation created by the and Shamsie (1996) interpreted this shift from property- Paramount decree and the FCC actions, shaped the actions based resources to knowledge-based resources through a of the incumbents to open up opportunities for novel players resource-based lens (Barney, 1991). They argued that such as MCA. Other agencies, such as William Morris, were the former are more critical in stable times, while the more focused on other (more profitable) segments of the latter mattered more in times of uncertainty. Our case business and were not particularly interested in controlling study is consistent with their findings, but illuminates Hollywood talent, given the widespread use of 7-year the mechanisms that lead to architectural shifts and how contracts in the pre-Paramount decree era. The Studios one firm managed to benefit from it. were not incompetent, but they were dealing with the rise Our interpretation of the historical evidence is far from of television following a strategic template based on an being uncontroversial, and it is important to specifically integrated logic. They tried to control TV exhibition address other factors that webelievearecomplementary directly, invested in technologies that would make it harder to our analysis. The first factor we need to consider is the for television to compete, and shifted production to Europe role of Wasserman’s individual characteristics. Historical to reduce costs. Their actions were consistent with the accounts are consistent in stressing his charisma and dominant institutional logic of the industry. Indeed, when negotiating skills, and it is likely that these abilities do Building architectural advantage Fabrizio Ferraro and Kerem Gurses 244 play a role in explaining his achievements. But many Theoretical implications and concluding remarks other successful agents in Hollywood were also charis- Conclusions from an historical case study deserve healthy matic (Selznick, William Morris, Feldman) and still were caution, given the limitation of a single case study design not as successful as MCA in reshaping the industry (they and the multiple interpretations of historical evidence. were still very successful as agents).Furthermore,once But the case of Lew Wasserman and MCA provides at the helm of Universal, Wasserman missed many interesting insights to both extend our understanding of important technological developments, such as the industry evolution and identify the mechanisms that might development of pay TV (HBO). He invested in unsuc- explain whether and how a firm can build an architectural cessful technologies (laser disc) and never really mana- advantage. ged to stabilize Universal’s financial situation, selling it eventually in 1990 to Matsushita. Another account of MCA’ success focuses on how Jules Stein and Lew Wasserman related to politicians and union Contributions and theoretical implications leaders. The connection with Ronald Reagan, for instance, We started from the suggestion that architectural advantage had a clearly important role in obtaining the SAG waiver. stems from becoming the bottleneck of the industry Relationships with the union were also very good, to the (Jacobides et al., 2006) and identified three conditions that extent that in 1962 the unions complained about the enable newcomers to shape industry architecture to their Department of Justice’s antitrust suit against MCA. They advantage after environmental shocks: (1) the newcomer argued that the suit would prevent MCA from making acquires control of potentially mispriced resources that movies in Hollywood, thus reducing their members’ stand to gain from the environmental shock, (2) industry employment opportunities. Note that both these connec- incumbents, constrained by regulatory and institutional tions were developed in the 1940s when Wasserman was logics, react to the shock, and their actions create a space a young agent with few clients (and Ronald Reagan a for newcomers, and (3) novel practices gradually substitute, mediocre actor). Likewise, his relationship with the union complement and rewire the network of industry exchange was developed in those early years and cemented between in ways that strengthen the newcomer’s central role and 1966 and 1974 when Wasserman was the Chairman of the resources. These propositions will require further refinement labor-negotiating arm of the Motion Picture Association and more systematic empirical testing, given the design of our of America (MPAA).7 Given that these relationships were study. But in terms of theoretical development, we contribute developed while Wasserman was rising to power, we should to the theoryCOPY of architectural advantage in two ways. be careful in assigning them too much explanatory power. First, we suggest that the opportunities for entrepreneurial At the same time, Wasserman’s political clout must not action are essentially generated by the incumbents’ attempts have been particularly effective given that MCA was the to cope with environmental jolts (Meyer, 1982) and maintain target of a successful Department of Justice anti-trust the old architecture by disinvesting in assets that might suit. Indeed, it was this defeat that prompted him to lead become valuable in the new architecture. Our contribution the industry in improving their lobbying presence in is consistent with findings of a study on the emergence Washington. It was Wasserman who hired Jack Valenti, of banking and the ‘partnership system’ in Renaissance then Lyndon Johnson’s personal assistant, to lead the Florence (Padgett and McLean, 2006). There members of MPAA effort in the capital. the Florentine elite, attempting to maintain their position Beyond political connections, it is fair to say that of dominance, acted in ways that eventually opened up Lew Wasserman’s structural position in the industry opportunities for fundamental changes in the political, facilitated MCA’s rise in the industry. As we mentioned, economic and social structure of the city. Novel practices packaging was widespread inAUTHOR band-booking and exploded. In the words of the authors: ‘Florentine elites Wasserman therefore merely transferred a practice his invented not because they wanted to, but because they had company was very familiar with. Another advantage to, conservatively to preserve their threatened positions’ MCA leveraged was its presence in New York, with its (Padgett and McLean, 2006: 1473). Like in recent studies existing contacts through their radio business. These of the British construction industry (Cacciatori and networks probably gave them an edge over minor studios Jacobides, 2005) and mortgage banking in the United and independent producers in the race to produce for TV. States (Jacobides, 2005), the motion picture industry novel But all the large talent agencies, and especially William architecture emerges from the purposive actions of a Morris and Famous Artists Agency, already operated in variety of players (studios, talents, exhibitors, radio and TV New York and in the radio business, so these ties were broadcasters, unions, professional associations, govern- hardly unique to MCA. ment regulators). Our contribution extends their findings In sum, both Wasserman’s charisma and his social by suggesting that the dominant logic of the industry, in network and structural position played an important our case the ‘integrated logic’ dominant in the 1940s, complementary role in enabling the changes we described. together with other regulatory and institutional arrange- Given the single case design of this study, it is impossible ments, limited the industry players’ range of options and for us to systematically explore the relationship between created opportunities for nimble players who are not these complementary factors. Nevertheless, it seems reason- constrained by the same logic. Furthermore, we specifically able to assume that neither Wasserman’s skills nor his suggest that the actions of the incumbents might accelerate social networks could have been a sufficient condition for the change in architecture by selling assets that the the changes in the rules and role of the motion picture newcomers might leverage more efficiently in the novel industry and the rise of MCA. architecture they are building. Building architectural advantage Fabrizio Ferraro and Kerem Gurses 245

Secondly, this article sheds light on the critical role organizational fields might create opportunities to invent played by industry practices in facilitating new patterns creative industry practices and reconfigure architecture. In of collaboration (and competition) across economic actors. the case of MCA, for instance, packaging originated in the Designing, championing, and institutionalizing innovative band-booking business, in which the company had operated industry practices, we suggest, is the path to creating for years. What appears as an invention in Hollywood is architectural advantage. Through these new rules, new essentially the adaptation of a template originating in another entrants in a specific segment of an industry can stimulate industry. Not only practices travel across industries, but also competition in its adjacent segments and consolidate their the presence of multiple logics within the same industry control over critical resources.8 This control can be creates more opportunities for architectural change. From its achieved not only through technological design choices, beginnings the motion picture industry has always oscillated as the literature on modularity (Baldwin and Clark, 2000; between an ‘integrated logic’, exemplified by the vertically Brusoni and Prencipe, 2006; Fixson and Park, 2008) and integrated studio system where hierarchy is the key coordina- platforms (Gawer and Henderson, 2007; Tee and Gawer, tion mechanism; and a ‘talent logic’, in which different 2009) has shown, but also from more mundane contractual activities are coordinated through contractual agreements. In reconfigurations of the industry’s exchanges. For instance, the latter, agents play a more central role. With the securitization in the US mortgage market was made introduction of profit sharing and packaging, MCA revived possible by a series of interconnected administrative and recombined an institutional chemistry that was already in innovations (optional delivery schemes, standardization the industry’s DNA (Schneiberg, 2007). Eventually when of loan characteristics, creditworthiness scores, etc.) that motion picture industry and TV broadcasting became more simplified coordination and standardized information. integrated, studios went back to a more integrated architecture. These practices enabled the emergence of a novel archi- This structural characteristic of the motion picture industry is tecture in the mortgage industry (Jacobides, 2005). Our consistent with the observation of institutional theorists that contribution is consistent with these findings, but also ‘multiple logics can create diversity in practice by enabling suggests that the architecture enabled by the novel practices variety in cognitive orientation and contestation over which might shift profitability across segments and across industries, practices are appropriate. As a result, such multiplicity can and thus create the basis for an architectural advantage. create enormous ambiguity, leading to logic blending, the The practice of packaging helped MCA leverage its ability creation of new logics, and the continued emergence of new as a knowledge integrator (Brusoni et al., 2001; Di Biaggio, practice variants’ (Lounsbury, 2008: 354). At the same time, we 2009) but given our research design we could not analy- suggest,COPY this ambiguity creates entrepreneurial opportunities tically separate the industry practice from the organiza- that can be leveraged to build an architectural advantage. tional capability. Future research should explore how Industries characterized by more homogeneity in logics might industry practices complement firm capabilities in the provide less opportunity for architectural change, because process of developing architectural advantage. More novel practices creating new patterns of exchange might be broadly, our study did not elaborate on the role of more difficult to diffuse and institutionalize. capabilities in shaping the evolution of the competitive trajectories (Cacciatori and Jacobides, 2005; Jacobides and Winter, 2005; Camuffo and Zirpoli, 2009) and future Practical implications for strategy and policy research should explore this important relationship. Given the many limitations of this study, it might be In addition to contributing to the development of a premature to extend our findings to their prescriptive theory of architectural advantage, our findings might implications. But a few insights from this work might help inform future studies in two distinct research areas. Our managers operating in industries with unstable, contested findings on the role of industry practicesAUTHOR complements the architectures and entrepreneurial firms trying to enter studies of innovative business models in emerging indus- them. tries (Casadesus-Masanell and Ricart, 2007; Zott and Amit, Incumbent firms should carefully consider their moves 2007) and their role in redrawing industry boundaries in adapting to technological and regulatory change. As in (Santos and Eisenhardt, 2005, 2009). At the same time our the case of the 1950s movie industry, their action aimed at findings would suggest that business model innovation is damage reduction might actually accommodate the new only a necessary, but not sufficient, condition to trigger entrants and lead the industry towards a novel architecture. an architectural change. The acquisition of mispriced Their profitability might suffer. This might be, for example, resources by newcomers and the incumbents’ (in)action the case in the music industry in the digital download era. are also critical for newcomers to enter the industry, redraw Trying to prevent the diffusion of the novel technology in its boundaries, and achieve an architectural advantage. order to maintain their industry architecture, music labels Our findings are also consistent with the insights of the might have created the space for the growth of Apple in the literature on institutional entrepreneurship (Garud et al., related digital music retailing activity. Apple tried to build 2002; Greenwood et al., 2002; Hwang and Powell, 2005; an architectural advantage in the emerging digital music Munir and Phillips, 2005) and we suggest that developing retailing business by (1) leveraging its dominant market an architectural advantage depends, among other things, on share in the mp3 players market, (2) facilitating consumers’ the ability to reshape the institutional fabric of a field. switch to the new purchasing habit by developing a user- Future research should explore how the multiplicity of friendly web purchase experience (Itunes), and (3) breaking logics, practices, and roles in an industry provides away from the CD format (unbundling). Given the market opportunities for individual actors to develop an economic share I-tunes currently enjoys in this market (70%), the advantage. For instance, the overlap between different labels are now trying to foster competition in the digital Building architectural advantage Fabrizio Ferraro and Kerem Gurses 246 music retailing market by supporting the entry of to corporate strategists and policy-makers. Developing potentially competitive players (i.e. Amazon.com). and testing a rigorous theory of architectural advantage is Entrepreneurial firms who try to develop an architectural no easy feat, and our attempt to explore how firms can advantage in an emerging industry could leverage our develop it still cautious, yet a first step in the direction of findings by asking themselves whether incumbents’ reactions understanding a novel form of competitive advantage. to environmental shocks is creating investment opportunities for them. For instance, the digital revolution in the newspaper industry is pushing leading newspapers towards outsourcing Acknowledgements the production of content, and is therefore ‘liberating’ many This article benefited greatly from the helpful suggestions creative talents who are now increasingly working as free- provided by Johanna Mair, Joan Enric Ricart, Silviya Svejenova, Sidney Winter, and by participants at the 2008 Sumantra Ghoshal lancers. Could these resources that newspapers are letting go Conference at London Business School, the 2008 Academy of be more profitably leveraged by entrepreneurial players Management Annual Meeting in Anaheim, and the 2008 Strategic under a new industry architecture? Management Society Conference in Cologne for helpful sugges- Venture capitalists trying to identify investment oppor- tions. We thank Michael Jacobides, Andrea Prencipe and Stefano tunities might leverage our contribution on the role of the Brusoni, guest editors for EMR, for the thorough guidance in overlap between organizational fields, and focus their shaping the article, and four anonymous reviewers for their efforts in industries where more logics intersect, because insightful comments and suggestions. Kathleen Jackson provided we would expect more innovative industry practices to excellent editorial assistance. We also gratefully acknowledge emerge and therefore, ceteris paribus, more opportunities generous funding from the Spanish Government Research Grant ´ to reconfigure the industry and develop an architectural (Ministerio de Educacion y Ciencia – SEJ2006-11833), the Public- Private Sector Research Center (SP-SP), and the Center for advantage. Globalization and Strategy at IESE Business School. In terms of policy implications we might note that antitrust regulators, both in Europe and the United States, are increasingly showing signs of dissatisfaction with the Notes traditional categories of market power and industry 1 The primary legal objection to block-booking was that it dominance, and might be interested in understanding ‘extends monopoly power and adds to the monopoly of a single how dominant positions based on architectural advantage copyrighted picture that of another copyrighted picture’ might limit competition in other segments or in adjacent (Kenney and Klein, 1983: 497). Since 1940, the studios had industries. Our contribution, by specifying the conditions alreadyCOPY started to rely less on block-booking. After signing a that lead to the development of architectural advantage consent decree to settle another Justice Department investiga- could help regulators identify specific actions that might tion on the practice, but only with the Paramount Decree, the lead companies to develop this advantage and stifle practice was eventually banned. competition in the industry. For instance, antitrust 2 Film financing had been at the core of the studios’ activity since authorities in the United States are obsessively monitoring the emergence of the Studio System. With rising production Google’s market share in the search-advertising market costs and increasing box-office uncertainty, financing had (around 75% in 2009) because their position in the search become more difficult and studios could effectively leverage space might enable them to illegally promote their video their size in this activity by spreading their risk over a large properties (YouTube) or their web services such as online number of productions. Given the scope limitation of this word processors and spreadsheets (Google Docs). Follow- paper, we will not discuss financing in detail, and focus on ing our framework we might instead focus our attention on production, distribution, and exhibition. the book-scanning initiative (Google Books), which might 3 Advertising agencies already dominated the production of radio eventually become the bottleneck ofAUTHOR the entire publishing programs, designed according to the needs of large advertisers industry. such as Procter and Gamble, Texaco, or Chrysler. They translated this model to television production but the networks were increasingly unhappy about their inability to control production Concluding remarks and scheduling and started exploring alternative sources of In conclusion, despite its limitations, we believe our study television production (Hilmes, 1990). has illustrated the potential research on industry evolution 4 The Screen Actors Guild (SAG) had long forbidden talent holds for disciplinary cross-fertilization. Bridging socio- agencies from producing motion pictures, because of the innate logically rooted institutional theory with economics-based conflict of interest in concurrently being the agent and the insights from the industry architecture perspective might employer. Other agencies, such as Famous Artists Agency, had benefit both camps. Institutional theorists could benefit been granted waiver for occasional pictures (Balio, 1985), but no from considering in detail the economic implications of the other agency had received a blanket waiver. Ronald Reagan, practices they have studied so effectively and also the who was one of Wasserman’s clients and a personal friend, was implications of institutional changes for individual firms (a President of SAG at the time, and many historical accounts of core concern for strategists). Strategists could better this SAG decision stress the important role this friendship. integrate the role of institutional logics in their theories 5 The fact that they needed the talents and packaging providing of architectural advantage and consider how these logics a solution to this problem does not mean that MCA, like any affect competitive dynamics. other agency, would not take advantage of controlling talent, The idea that corporations can achieve a competitive and leverage this monopolistic position through hefty commis- advantage by influencing the design of the industries in sions, which producers and broadcasters were not happy to pay. which they operate is fascinating and of obvious relevance In any case, it is a fact that packaging helped broadcasters solve Building architectural advantage Fabrizio Ferraro and Kerem Gurses 247

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