I was recently told a wonderful story about a professional sports franchise in a low-tax state that distributes to its recruitment candidates a pamphlet describing in the most vulgar terms — X number of Rolexes, Y number of Bentleys — how much farther a $10 million contract goes there than in New York, California, or New Jersey. (Because it is unbelievably crass, it seems to me likely to be true.) Therein may be found an important lesson for new Los Angeles mayor Eric Garcetti, who is climbing the walls over the decline of Hollywood.
Mr. Garcetti is the sort of politician who must fill admirers of California—and there is so very much to admire — with a deep sense of hopelessness; he is an L.A. political lifer who is the son of another L.A. political lifer, whose closest encounter with a real job seems to have been a visiting instructorship at the University of Southern California, which is to say he has Mitt Romney’s hereditary insularity and Barack Obama’s curriculum vitae. He has declared a state of emergency over the abandonment of Los Angeles by the film and television industry and proposes to bolster Hollywood’s position with additional financial incentives and — this will surprise nobody — the appointment of a film-and-television czar.
Mr. Garcetti is not the first California politician to be kept up nights by the decline of Hollywood. In 1970, Variety reports, Governor Ronald Reagan hosted a seminar titled “Is Hollywood Through as the Film Capital of the World?” As Variety puts it:
Back then, the industry was coming off a decade of retrenchment following the breakdown of the studio system and revolution in the production process, as corporations sold off backlots, and the realism of the new Hollywood demanded more location shooting not necessarily tied to the Los Angeles region.
But California didn’t lose its dominance. By the late 1990s, however, Canada’s incentives coupled with its favorable exchange rate lured not only feature film shoots but also TV movies and primetime series. The past decade saw a race among states to compete for production dollars and, despite budgets that have often left incentives to the whims of lawmakers, the givebacks have become a regular part of studios’ budget calculations.
Variety gets it slightly wrong here. California did begin to lose its dominance, a process that is continuing, and the most important factor is not the tax incentives offered by the Canadians and others — though those are important — but the original factor that worried Governor Reagan all those years ago: the breakdown of the studio system. The unraveling is simply taking a long time, as these things do.
At the height of the studio system, Hollywood was in essence a collection of factories: Fox Film Corporation, Paramount, RKO, Warner Bros., et al. owned large collections of physical infrastructure in and around Los Angeles and worked with technicians, actors, and creative personnel, who were in large part long-term employees under contract (Mr. Reagan had been an employee of Warner Bros. before being ordered into military service), and, on top of that, they also owned or controlled distributors and chains of movie theaters themselves. They were the cultural equivalent of U.S. Steel: mighty corporate monoliths positioned to stand forever on the commanding heights of industry — just so long as nothing changed. As U.S. Steel and the movie studios found out, things always change. The decline of the studio system is one of the great dramas of American business; it is, in fact, positively cinematic, featuring courtroom drama (antitrust actions against the studios), fascinating characters (Howard Hughes plays an important role), and the picturesque, elegiac setting of an empire in its last days.
What Mr. Garcetti does not quite appreciate is this: We are all RKO Radio Pictures now.
The days of the tightly integrated corporation are largely behind us. Rather than the corporate juggernauts of the 19th and 20th centuries, 21st-century enterprises more closely resemble ad hoc associations of people and capital working on ever-shorter timelines toward ever-more-specific goals. Of the corporations on the Fortune 500 in 1955, fewer than 70 remain today. In the 1960s, the average lifespan of a Fortune 500 company was 75 years, whereas today it is only 15 years, and that number is declining. As I have argued here at NRO and in my most recent book, the idea of the corporation — of the business enterprise as a concrete and permanent thing — is increasingly inadequate to communicate the reality of how business works. This is frustrating for many workers, who crave personal economic stability, and very frustrating for politicians, whose schemes require stable long-term revenue streams. Los Angeles and New York City, our two great national intersections of wealth and creativity, are predictably ahead of the curve on that front. Which is why Los Angeles and New York City, our two great accretions of municipal incompetence, are in trouble.
Thirty years ago, if you were in movies you pretty much had to have an office in Los Angeles, and if you were in money you had to have an office in New York. But even then, that thinking was based on a defunct model of how those businesses operate. If your model is investing in studios or firms — building factories — then it pays to be where the infrastructure is. If your model is investing in specific projects — investing in deals — then not only do you not have to be in New York or Los Angeles, but it might make a great deal of financial sense to be somewhere else. The financing of films is a head-clutchingly complex business that is in many ways similar to structured finance. It is no surprise that filmmakers and hedge funds have discovered one another.
Successful movie investments can bring very large returns in the short term and a decades-long revenue stream after that as films work their way through various post-theater media and profits from merchandising are realized. But those returns can look significantly less attractive if you work out of a high-tax, high-cost jurisdiction such as California. Like professional athletes — or writers, or game designers, or technology entrepreneurs — filmmakers may realize only one or two big paydays over the course of their careers. Most aspirants never even see one. So those extra California costs aren’t just 5 percent or 7 percent of this year’s income but, in effect, a cut of your lifetime earnings, or a cut of the lifetime earnings of a film or project. If you are going to get most of your lifetime earnings in one paycheck, you’re a lot better off getting that check in Austin than in San Jose or Brooklyn.