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
1
Strategic Management, IESE Business School, Barcelona, Spain;
BES La Salle University, Barcelona, Spain
2
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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]
motion picture industry
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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 focused 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;
Introduction
n addressing the critical question of industry evolution,
three research traditions, industrial organization (Bain,
1968; Porter, 1980; Gort and Klepper, 1982; McGahan,
2004), institutional and evolutionary economics (Nelson
and Winter, 1982; Teece, 1986; Langlois and Robertson,
1995; Jacobides, 2005), and institutional theory (Haveman
and Rao, 1997; Thornton and Ocasio, 1999; Lounsbury, 2007),
have helped us understand antecedents and consequences of
structural changes in industries. Nevertheless, most studies
in these traditions did not specify how the ‘rules and roles’
that shape division of labor in the industry emerge and
change.
The concept of ‘industry architecture’ (Jacobides et al.,
2006) provides a useful conceptual tool to explore the role
of technical and institutional forces in shaping the division
I
of labor in the industry and the related distribution of
value. The process through which firms can achieve an
architectural advantage is a fertile ground for empirical and
theoretical work, given that much existing research has
focused on the consequences of exogenous shocks (for
instance, technical innovation or regulatory change). Such
a focus obscures the mechanisms that guide the emergence
of novel industry structure in the wake of a shock as well
as the role that incumbents’ actions play.
From 1939 until 1965 Lew Wasserman and his company,
Music Corporation of America (MCA), managed to change
the competitive landscape of the motion picture industry
in the United States completely. They exploited technological
and regulatory change and until the 1980s wielded enormous
influence. Here we analyze this fascinating historical case,
Building architectural advantage
Fabrizio Ferraro and Kerem Gurses
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Theoretical background
Economists, sociologists and strategic management scholars
have explored industry evolution from different perspectives, and provided interesting insights on this process. In
economics the Industrial Organization tradition (Bain, 1968;
Porter, 1980) mainly focused on the structural and technical
features of industries as determinants of their participants’
profitability. In this tradition scholars have shown how
exogenous factors such as the number of potential entrants,
the growth rate of incumbent firms, and the ease of imitation
of incumbent firms will influence the structure of the industry
(Gort and Klepper, 1982; Klepper and Graddy, 1990) and
how technological innovation affects industry concentration
(Geroski and Pomroy, 1990). More recently scholars have
developed fully endogenous models of industry evolution
(Klepper, 1996, 2002) but despite the acknowledgement that
firms could and should attempt to influence the structure of
their industries, this research tradition has not explored how
changes in the rules of the game can transform competitive
dynamics in the industry, and lead to the emergence of
entirely new industries. Furthermore, it has not provided
much theoretical insight on how to do so (see Geroski (2003)
and McGahan (2004) for an exception). In the evolutionary
economics tradition (Nelson and Winter, 1982), technological
change can have dramatic impact on the development of
industry structure and provides a necessary causal link in the
co-evolution of firms and industry (Murmann, 2003). Malerba
et al. (2008) suggest that a key factor in explaining changes in
the vertical scope of firms is the process of accumulating
capabilities at the firm and industry levels. Another example
of interactions between firm-level processes and industry-level
dynamics is given by Feldman and Romanelli (2006), who
studied biotechnology regional clusters in the United States
between 1976 and 2002. They showed that the key factor
driving the growth of these clusters was the proportion of
firms founded by former employees of established biotherapeutics firms (breakaway firms). Despite their important
contributions, these studies do not explain how the division
of labor in the industry changes, the consequences of these
changes, and the role that firms play in the process.
In recent years these questions have been the focus of
much empirical and theoretical work, especially focused on
the analysis of vertical scope, which helped us understand
how industry boundaries evolve, and how intermediate
markets emerge. Jacobides (2005) provides a framework for
explaining the nature and drivers of vertical disintegration
in the US mortgage banking industry. This study suggests
that gains from specialization and gains from trade shape
the processes leading to the conditions necessary for market
emergence: coordination simplification, and information
standardization. In a study of the British building industry,
Cacciatori and Jacobides (2005) found that the vertical
division of labor affected the knowledge base of each segment
of the industry, and established the trajectories for capability
development. These studies help us better characterize the
co-evolution of industry boundaries and firm capabilities
(Jacobides and Winter, 2005) and clearly state that industry
participants are actively trying to change the industry:
‘exogenous factors did not shape this value chain, but rather,
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
issue of scope identification, and the question of how novel
rules of the game emerge in an industry was not central to
their efforts.
From a sociological perspective, institutional theory
might help us better understand where industry rules and
roles come from, by shifting our focus towards a new unit
of analysis: organizational fields. It also introduced the
concept of institutional logics (Friedland and Alford, 1991):
the rules of the game that industry players follow and takefor-granted, and the cultural and institutional antecedents
of such rules (Hirsch and Lounsbury, 1997; Thornton and
Ocasio, 1999).
DiMaggio and Powell (1983) define an organizational field
as ‘those organizations that, in the aggregate, constitute a
recognized area of institutional life: key suppliers, resource
and product consumers, regulatory agencies, and other
organizations that produce similar services or products’
(DiMaggio and Powell, 1983: 148). This shift in the unit of
analysis goes beyond the traditional industry boundaries
employed by both economists and population ecologists
(Hannan and Freeman, 1977). The shift also helped
researchers focus on the role of actors so far neglected,
such as regulators (Schneiberg and Soule, 2005); social
movements (Rao, 1998; Lounsbury et al., 2003; King and
Soule, 2007; Sine and Lee, 2009); professions (Marquis
and Lounsbury, 2007); and local communities (Marquis and
Battilana, forthcoming). While most early work in this
literature emphasized the consequences of institutional
changes, but did not provide much opportunity for agency,
this initial bias has been challenged by organizational
theorists. Employing the concept of institutional entrepreneurship (DiMaggio, 1991), some researchers emphasized
the need for a triggering event that leads to change
(Greenwood et al., 2002; Sine and David, 2003). Variously
referred to as ‘shocks’ (Fligstein, 1991) or ‘jolts’ (Meyer,
1982), such unsettling events create disruptive uncertainty
for individual organizations, forcing some to initiate
unconventional experiments upon established practice.
Focusing on a broader set of actors than just competitors
has helped researchers better understand the process of
industry emergence. For instance, in the case of biotechnology, researchers have documented the shifting evolution
of collaborative activities among university, entrepreneurs,
venture capitalists, and government agencies and how these
networks shaped the opportunity structure of the field
(Powell et al., 2005). Kaplan and Murray (forthcoming) trace
the development of biotechnology in human therapeutics
over a 30-year period (1973–2003). They show how it has
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tracking the relations between exogenous environmental
shocks and organizational choices to further our understanding of how architectural advantage emerges.
The article is organized as follows. First, we provide a
short overview of the relevant academic literature on
industry evolution and architecture. Then, after describing
the methods and our data sources, we delve into the rich
historical narrative of the evolving motion picture industry
in the United States and of MCA’s rise to power and industry
dominance. In the last section, we interpret our findings,
outlining the contour of our contribution and discussing its
managerial and policy implications.
Building architectural advantage
Fabrizio Ferraro and Kerem Gurses
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product architecture to focus its activities on the modules
that represent bottlenecks. This choice would result in a
capital advantage, which could be leveraged to drive
competitors’ returns below their cost of capital (Baldwin
and Clark, 2006).
In this context the key insight, which extends and
qualifies the framework developed by Teece (1986), is that
a firm might be better off by nurturing competition in
complementary assets. This policy would facilitate entry in
segments adjacent to the ones they occupy (and protect).
Taken together, these articles provide a solid economic
rationale for the existence of an architectural advantage,
but they do not identify the mechanisms through which
a firm can build one. Also, generalizing beyond the
technology-driven industries studied in this literature, it
is critical to specify what barriers, other than IP protection,
might prevent competitors from imitating this strategy. We
attempt to address the question of emerging architectural
advantage by analyzing a historical case: the rise of Lew
Wasserman and MCA in the Hollywood motion picture
industry.
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Research methods
Industry evolution and architectural change happen over
long time periods, and to understand these changes, the
researcher should employ historical methods (Pettigrew,
1992). Historical methods are frequently used in strategy
and organization theory research (Kieser, 1989; Rao, 1998;
Hargadon and Douglas, 2001; Cacciatori and Jacobides, 2005)
and widely accepted as a fruitful way to develop theory. Since
this approach lets us examine multiple instances of institutional change over a long period of time, it can provide greater
breadth of knowledge than participant observation or interviews (Rao, 1998: 921). We used secondary data to identify
sequences of actions and events and to examine how the
sequences affect the industry’s architecture.
The American motion picture industry is a good case for
studying industry evolution because (a) the industry has
gone through different architectures over the last century,
and (b) these changes are well documented by historians
of the industry in academic journal publications and books
(Balio, 1976, 1985; Bordwell et al., 1985; Schatz, 1999).
Furthermore, anthropologists (Powdermaker, 1950), economists (Storper, 1989; Chisholm, 1993, 1997), sociologists
(Zuckerman et al., 2003; Sorenson and Waguespack, 2006;
Cattani et al., 2008), and strategy scholars (Enright, 1995;
Miller and Shamsie, 1996; Mezias and Boyle, 2005) have
provided useful insights into the industry’s evolution and
the operations of its productive system.
Historians of the movie industry commonly identify
different stages (Gomery, 1986) precipitated by changes in
the market, regulatory interventions like the 1948 Paramount Decree, or a series of technological innovations like
television, cable TV, VHS, DVD, etc. In this article we are
focusing on two of these exogenous shocks: the Paramount
Decree and the diffusion of television. In addition to
describing these changes in the industry as a whole, we will
focus on the actions of the MCA: a newcomer to Hollywood
in the 1940s that becomes one of the industry’s most
influential firms. In addition to the large wealth of material
available on the history of this industry, recent publication
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evolved toward the current dominant logic after a long
period of struggle between different actors: dedicated
biotech firms, large pharmaceutical firms, courts, congress,
government agencies, universities, and scientists. Grodal
(2007) explored the co-evolution of labels, meaning and
resources in the emergence of the nanotechnology field,
and concluded that entrepreneurs and scientists did not
play a central role in the emerging nanotechnology label.
Instead it was influenced primarily by futurists, government officials, venture capitalists, and IP lawyers. These
macro insights on how industry logics emerge and change
speak more to industrial organization (Klepper, 1996) and
ecological (Hannan et al., 1995) models of industry evolution
than to strategic management’s theories of competitive
advantage (Porter, 1980; Teece, 1986). In the latter perspective, it is critical to go beyond the economics of the
industry, and understand how institutional logic affects the
economics of individual firms.
Steeped in the tradition of evolutionary economics (Nelson
and Winter, 1982), the concept of industry architecture
might help us bridge the economic and institutional
approaches because it considers technological, economic,
and institutional factors. An industry architecture consists
of (1) a template defining how labor is divided (and value
created) in the industry – who does what; and (2) a
template defining value appropriation and division of
surplus – who gets what (Jacobides et al., 2006). A system
of interfaces among firms emerges as these architectures
become stable. These interfaces are ‘technological, institutional, or social artifacts that allow two or more independent entities to divide labor’ (Jacobides et al., 2006: 1203).
When these interfaces change, as happens with technological and regulatory changes, there is opportunity to
renegotiate the architectures. Industry architecture, therefore, both constrains the action of competitors by defining
rules for competition (formal and informal) and roles for
interactions, and provides opportunity for entrepreneurial
players to build a more favorable competitive position.
Jacobides et al. (2006) suggest that firms can benefit from
innovation by ‘managing the industry’s architecture carefully so they become the ‘‘bottlenecks’’ of the industry’
(Jacobides et al., 2006: 1208). While this concept might
prove valuable in explaining not only the mechanisms of
industry evolution, but also the process through which
firms can build an architectural advantage, so far most
work has been focused on how firms can benefit from
technological innovation (Teece, 1986; Baldwin and Clark,
2000; Gawer and Cusumano, 2002; Brusoni and Prencipe,
2006; Gawer and Henderson, 2007; Pisano and Teece, 2007).
The literature on platforms, for instance, has shown that
firms can control entire ecosystems both by owning a core
element of the technological system that defines its
evolution, and by investing in complementary markets as
Intel and Microsoft did in the PC ecosystem. In the case of
Intel, the firm both committed to making money in the
complementary markets it entered, signaling it would not
drive down returns, but also actively gave away intellectual
property to subsidize competitive entry. This latter action
encouraged entrants to contribute to developing and
widening the platform (Gawer and Henderson, 2007). A small
‘footprint’ strategy might be used when products are
modular, and a firm could leverage its knowledge of the
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The movie industry from its birth until the paramount decree
Prior to 1915, the movie industry consisted of a large
number of production companies that, for the most part,
paid royalties to the trust that controlled all the crucial
patents associated with moviemaking: the Motion Picture
Parent Company (MPPC). Simultaneously, there were some
smaller, independent production companies that operated
outside the trust (Mezias and Kuperman, 2000; Jones, 2001;
Mezias and Boyle, 2005). In October 1915, a Federal Court
found MPPC in violation of the Sherman Act, and by 1918
the trust was terminated. In the meanwhile feature-length
films had become more popular than the short (one-reel)
films usually produced by MPPC companies (Mezias and
Boyle, 2005), and movie theaters required steady supply of
these longer films (Izod, 1988). These factors, together with
rising production costs of the conversion to sound, facilitated
the emergence of nation-wide distribution companies and
eventually the integration of production, distribution, and
exhibition. From about 1915 to 1930 the industry was
dominated by a small number of vertically integrated firms
that provided production, distribution, and exhibition: the
Hollywood Studio System (Schatz, 1988). When the great
depression struck, theater attendance decreased by more
than 30%, forcing more than 4000 theaters to shut down
over three years and thus increasing the concentration of
ownership in exhibition. The production and distribution
stages also became increasingly concentrated (Negro and
Sorenson, 2005). The major studios at that time were 20th
Century Fox, Metro-Goldwyn-Meyer, Paramount, RKO, and
Warner Bros and they controlled the majority of the
market. The minors (Universal, Columbia, United Artists)
owned no theater chains. Collectively, the majors controlled
3000 theatres of the 18,000 operating nationwide: 70% of
first-run theatres in cities of more than 100,000 population
and 60% of those in cities of 25,000–100,000 (Stuart, 1982).
The minors and other smaller players, which did not own
theater chains, relied on deals with the majors to have their
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Building architectural advantage in the movie industry
films exhibited. Their budgets (and profit margins) were
lower and they generally borrowed stars from the majors
since they could not afford to keep their own under
contract. During the great depression theaters had started
the practice of showing ‘double features’, charging one
admission price for two movies. This practice was very
successful and quickly became the norm of the industry
until the 1940s. Nevertheless, theaters could not afford to
show two top quality movies together and they needed
cheaper productions. B movies, as these productions were
called, were rented to the exhibitors for a flat fee, unlike
A movies which were rented for a percentage of the boxoffice. Smaller movie producers (and some Minor Studios),
which could not compete on high quality-high cost productions, focused their efforts on these B movies, which
provided low but stable returns.
Before the rise of the studio system, many of the major
stars had their own production companies, but by the 1930s
most stars were salaried employees of the studios, typically
under a 7-year contract. Talent agents marketed actors,
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
7-year contract employment model, rather than securing
their clients the best deals on a project-to-project basis,
agents made money by luring stars to break contracts with
their studios to re-sign them at other studios. They also
re-negotiated salaries at certain review periods of contracts
or following the escalating box-office success of their
clients. Normally, agents were paid only if they found work
for their clients and the payment took the form of a
contractual commission of their clients’ gross earnings
(traditionally 10%). By the early 1930s, four agencies
represented the majority of members in the Motion Picture
Academy (Joyce-Selznick, Collier & Flynn, Edward Small,
and Phil Berg). During the studio era agents primarily
served star actors and key artists like directors and writers.
Less important talents, such as minor actors, craftsmen, art
directors, which would work more on a project basis, found
little to no representation from talent agencies (Kemper,
2007). The Screen Actors Guild (SAG), the main union
representing actors, had long forbidden talent agencies
from directly producing motion pictures, because of the
innate conflict of interest in concurrently being the agent
and the employer, but occasionally SAG would grant them
the permission to produce a movie.
Studios controlled exhibition directly, given their dominant share of movie theaters, and indirectly, by contractually enforcing their conditions to independent theaters.
With the exception of two relatively large theater circuits
(Griffith and Schine), the ownership of independent theaters
was highly fragmented. Given their limited bargaining
power, independent theaters were forced, through the
block-booking practice, to rent movies in bundles, sometimes without being able to see them in advance. Studios
could bundle their best productions, the movies theaters
(and audiences) really wanted, with many lower quality
productions, and could therefore operate at full capacity
(Schatz, 1999). In sum, the Studio System operated
according to an integrated logic, in which the Studios
exerted direct control over production and distribution,
and indirect control over creative talents and exhibition
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of in-depth biographies on MCA’s President, Lew Wasserman,
helped us track the evolution of MCA from the Talent
Agency industry to the Motion Picture Industry. We
employed a qualitative research strategy focusing on
‘activities, choices and events’ over time and identified
who did what and when (Langley, 1999: 692). Hence, we
could develop a timeline of key events in the industry
and map relationships among its players. We analyzed
the data using Miles and Huberman’s (1994) three steps
of data reduction, data displays and interpretation and
verification. The first data display captured Wasserman’s
career history, including work experience before becoming
the CEO and his key relationships with other industry
players. The second data display focused on the histories of
the most relevant industry players, including MCA, their
role in the value chain, and relationships with other
companies. The third data display outlined key industry
events and timelines such as law suits, court decisions, and
key regulatory decisions. We relied on our immersion in
the data and our contextual knowledge to assign meaning
and draw conclusions from the data stream.
Building architectural advantage
Fabrizio Ferraro and Kerem Gurses
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Integrated
Logic
(1930-1948)
Talents
Talent Logic
(1948-1952)
Talents
Integrated
Logic
in TV
(1952-1978)
Talents
Distribution
Production
Production
Production
Exhibition
(Theaters)
Distribution
Exhibition
(Theater)
Distribution
Exhibition
(TV Networks)
Studios’ Direct control
Studios’ control through institutionalized practice (lock-in) – 7 years contract & Block booking
MCA
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MCA’s control through institutionalized practice – packaging Market
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Figure 1 Industry logics in the motion picture and television industry (1930–1978).
Average
production
costs nominal
($ mil)
Average
production
costs inflation
adjusted
($ mil in 2009)
Increase in
production
costs inflation
adjusted
(in percentage)
1920
1930
1940
1950
1955
1960
1965
1975
0.1
0.4
0.4
1.0
1.5
2.0
2.5
3.1
1
5.1
6.2
8.9
12
14.6
17.1
12.4
410
22
43
35
22
17
27
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Year
and $60 million in 1950. Industry profits also fell from $119
million in 1946 to $50 million in 1950 (Table 2).
The Justice Department began an antitrust investigation
into the industry’s business practices in 1940; eight companies were named as defendants: the five majors and
the three minors. The defendants were charged with anticompetitive dominance of the three major segments of the
industry. Eventually, the Paramount decision in 1948 forced
the separation of exhibition from production and distribution (Miller and Shamsie, 1996). The court ordered the five
majors to spin off their theater holdings, and it ordered the
spun off circuits to divest one-quarter to one-half of their
theaters. The prohibition against block booking1 enabled
the Minors (Universal, Columbia, United Artists) to capture
a larger share of the production market. Moreover, on the
exhibition level, divestiture weakened the buying power of
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
their output and dramatically cut back on the number of
stars (Balio, 1985). The combined effect of the Paramount
decree and the decline in attendance (Caves, 2000) led
major studios to decrease their production of feature films
by more than 50%, adjust their cost structure, and concentrate
more on distribution and film financing 2 (Christopherson
and Storper, 1989).
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Table 1 Average production costs (in million of dollars), 1920–1975
Source: The film daily year book. New York, 1947, p. 53; 1956,
pp. 103,105.
through the 7-year-contract and the block-booking industry practices (Figure 1).
During World War II the Studio system experienced a
period of strong growth in revenues and profitability: combined industry profits went up from $20 million in 1939 to
over $60 million in 1945. During the war the number of
movies produced was significantly reduced. Between 1937
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
production costs started to rise. Between 1942 and 1945, the
average cost per movie grew from $336,600 to $554,386
(Table 1). By 1945, the majors were concentrating almost
exclusively on A-class production, while the minors focused
more on B productions. After the war, movie attendance,
which had peaked in 1946, went spiraling down, falling
from $90 million admissions in 1948 to $70 million in 1949
Lew Wasserman and MCA
In 1936, at the age of 23, Lew Wasserman joined Chicagobased MCA which was a successful band booking agency
at that time. In 1939, Wasserman moved to Los Angeles to
help Jules Stein, MCA’s founder and President, to build MCA’s
movie business. MCA started acquiring stars’ contracts
and talent agencies. In only a few years, MCA bought the
contracts of top stars such as Bette Davis, Errol Flynn, Joan
Building architectural advantage
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Table 2 Personal consumption expenditures on motion picture admissions and net income of seven major studios, 1940–1956
Gross receipts
on admissions
($ millions)
Deflated by
admission
price indexa
Average weekly
attendance
(millions of admissions)
As % of
all PCE
Total net income
of 7 major films
($ millions)
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
735
809
1022
1275
1341
1450
1692
1594
1506
1468
1394
1338
1284
1252
1275
1286
1298
1182
1235
1481
1695
1543
1586
1798
1620
1514
1439
1372
1298
1235
1149
1099
1055
1041
80
85
85
85
85
85
90
90
90
70
60
54
51
46
49
46
45
1.02
0.99
1.14
1.27
1.22
1.2
1.15
0.97
0.85
0.81
0.72
0.64
0.59
0.54
0.54
0.51
0.49
22
35
51
60
59
65
119
86
56
45
50
41
20
28
44
46
41
PY
Year
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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).
‘stock’ of talents and their ability to use them efficiently.
As a consequence studios were now more than happy to let
their talents go, opening up an opportunity for agents such
as MCA. The number of actors under contract to major
studios, which had been as high as 804 in 1944, fell first to
474 in 1949, and then to 164 by 1961. Similar declines are
found for directors (99 in 1949 to 24 in 1959), producers
(from 149 to 50), and writers (from 91 to 47). Studios now
had less control over talent, but in their attempt to keep
production costs down, they became more aggressive in
negotiating with them.
This led to another opportunity for MCA. In 1950,
Wasserman negotiated a deal for Jimmy Stewart in the
Universal movie Winchester 73. At that time, Universal
was in financial difficulty and could not afford Stewart’s
normal salary of $250,000. Instead, Stewart got no fixed
salary but did get 50% of the net profits over the life of the
film. The movie was a hit, and Stewart quickly became the
richest actor in Hollywood. Profit-sharing contracts had
been used sporadically before by Charles Feldman of
Famous Artists Agency, but it is only through MCA that
this practice diffused widely and became institutionalized.
It helped MCA attract more Hollywood stars, lured by the
potential of profit sharing, and cemented their relationship
in the long term.
In addition to the diffusion of profit-sharing contracts,
MCA also packaged the script, director, stars, and producer
for several RKO pictures in late 1939 and early 1940. MCA
had no control over the actual production, nor did it have
any financial stake in the finished pictures. But packaging
facilitated the shift in filmmaking authority, especially
the initiation and development of movie projects, away
from the studios and into hands of individual filmmakers
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Crawford, and many others. Other higher status agencies,
incumbent players such as the Selznicks and William
Morris, would not try to buy star’s contracts: ‘They felt they
didn’t need to, they were kings [y] it was beneath them’,
Wasserman said (Bruck, 2004: 73). In the early 1940s,
MCA bought a large number of agencies, including Alan
Miller; Associated Artists, Zeppo Marx, and Myron
Selznick. In 1945, Wasserman bought Hayward-Deverich
Agency, with its excellent list of several hundred performers, including Greta Garbo, Ginger Rogers, Fred Astaire,
and Billy Wilder. With this move MCA became the largest
agency in Hollywood. By 1960, it was still the largest talent
agency in the business, with double the revenues of William
Morris, its nearest competitor.
To explain MCA’s ability to grow so quickly and the
limited reaction of competitors, it must be said that the agency
business was not very profitable. Because the widespread
7-year contract industry practice tied artists to one of the
studios for a very long time, agencies were of limited value
to the talents. More established Hollywood agencies such
as William Morris and Famous Artists Agency did not see
acquisitions as an opportunity. For instance, William Morris,
which had a strong position in Hollywood, was focused on
other, more profitable businesses, such as talent for radio,
vaudeville, clubs, and theater. Only after MCA had shown
that, in post-Paramount decree Hollywood, representing
movie talents could be truly profitable would William
Morris start acquiring other agencies (Kemper, 2007).
Why would the studios let agents control the talents that
were so critical to their business? The combined effect of
the Paramount decree, decreasing attendance, shrinking
profits (Table 2), production cuts, and rising production
costs (Table 1) increasingly worried the studios about their
Building architectural advantage
Fabrizio Ferraro and Kerem Gurses
239
regulatory nature, but stems from the development of a
novel form of movie exhibition: television.
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The rise of television
By 1950, 25% of American households owned a television
set, and TV’s penetration had doubled to 50% by 1952. From
1949 to 1953, cinema attendance decreased considerably
and then stabilized at about 40 to 50 million admissions per
week. Television was, in the view of the Studios, the main
cause for this fall. However, motion picture producers
believed that TV had inherent deficiencies as well. First of
all, the smaller television image did not allow the audience
to be as directly involved in the action as a large movie
screen. Furthermore, the budget for television production
was much smaller than the average production costs
for motion pictures ($40,000 vs an average of $1 million;
Table 1). Finally, TV production required a large amount of
writing and acting talent: approximately 11,000 shows per
year during prime evening hours alone compared to 400
pictures per year for the motion picture industry (Stuart,
1982).
Nevertheless, the studios realized television could be a
competitive threat and addressed it in different ways: first
(1) they tried to control TV broadcasting, then (2) they
invested to make the theater experience unique, and finally
(3) they tried to starve TV by not providing them filmed
content (see Table 3 for a summary of the actions taken by
studios in reaction to television).
The largest movie studios (Warner Bros, Twentieth
Century-Fox, and Paramount) initially tried to start
building their own TV networks, but the Federal Communications Commission (FCC) blocked their efforts. As early
as 1945, the FCC chairman Paul A. Porter addressed a
meeting of industry leaders in Hollywood and warned them
that the movie industry should not expect a significant
role in television after the war (Anderson, 1999: 431). There
was also increasing negative public sentiment about movie
studios, as depicted by an article in the February 1949
Consumer Report. It forecasted dire problems for the future
of television should the studios, with their acknowledged
record of monopolistic practices, find a foothold in television.
Fuelled by this public sentiment, the FCC inquired into
Hollywood anti-trust violations and blocked virtually every
television initiative started by the motion picture industry
(Hilmes, 1990). In 1948, Warner Bros had plans to build its
own networks by acquiring existing stations and had asked
the FCC to approve the acquisition of Los Angeles TV Station
KLAC. In interpreting the opportunities offered by the new
technology, studio executives were bound by the traditional
‘integrated logic’. This logic was based on direct control of
distribution and exhibition and studios saw TV through this
lens: an opportunity to get back what the Paramount decree
had taken away. Therefore they ‘were not satisfied merely to
experiment in a medium controlled by the existing radio
networks; they wanted to command the television industry
just as they dominated the movie industry, by controlling
the channels of distribution’ (Anderson, 1999: 423). The
Communications Act of 1934 authorized the FCC to refuse
station licenses to any corporation convicted of monopolistic
practices, and therefore after the Paramount decree, the FCC
was in a position to deny the licenses to the studios (Gomery,
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(Schatz, 1999). Over time other agencies like William Morris
followed suit in the attempt to maintain their market share
of talents and also acquired other smaller agencies. But
MCA was now well established as one of the top agencies in
Hollywood.
Note that what opened the door to profit sharing and
packaging was the need for the studios to reduce their
risk exposure: as Mel Sattler, who negotiated the
Winchester 73 contract on behalf of Universal, put it:
‘Universal accepted the proposal because it permitted the
company to put substantially less at risk by reducing its
immediate production costs’ (cited in Weinstein, 1998).
Both the agencies and the Studios were still operating
under ‘integrated logic’ so agents were not particularly
interested in growing a roster of talents that were not
particularly profitable. Studios were just trying to reduce
their production costs.
Another factor that helped MCA better leverage its
investment in talents was the growth of independent
production (Balio, 1976). This growth was facilitated by
the studios’ decision to focus on distribution and financing,
and leave production to independent production companies, often operating on their own lots. Robins (1993), for
instance, reports that Warner Bros distributed and
financed, from 1946 to 1965, 207 independent and 162
studio productions. The consequences for this explosion
in independent production, together with the increasing
reliance on hits, created a more competitive market for
acquiring top talent. The concentration of talents represented by MCA and the lock-in effect created by the profitsharing agreement that MCA helped diffuse, together with
the rise of independent production, helped MCA consolidate its powerful position in the Hollywood of the 1950s.
Packaging and profit sharing became the building block
of a novel industry architecture in which studios were now
focused on the financing and distribution of pictures.
Independent producers and occasionally talent agencies
were producing pictures, often renting the studios’ facilities, and talent agencies were much more central in the
flow of exchanges, given their control of creative talents.
This architecture is founded on a novel institutional logic
stemming from the centrality of creative talents and
independent production: ‘talent logic’. The emergence of
this new architecture was in response to the exogenous
environmental shock: the Paramount decree and the studios’
lost control of exhibition, as many have already noticed
(Miller and Shamsie, 1996). Nevertheless, this configuration
of actors and activities was not a natural consequence of
these shocks, but rather the emergent outcome of the
interacting players. The introduction of two novel practices
enabled the shifts in roles that players experienced, and
later reinforced these new rules of the game. MCA played a
critical part in this architectural shift by introducing the
novel practices and, given its control of creative talents,
reaped most of the benefits. In this sense, it is fair to say
that MCA reshaped the industry’s architecture to become
the ‘bottleneck’.
One episode in this story of the motion picture industry
might not provide enough evidence on how these mechanisms operate. We will show how the same process can be
observed in another key episode in the history of the
same industry. In this case the exogenous shock is not of
A
Republic
Disney
United Artists
Columbia
Started production in 1949, through its subsidiary Screen
Gems. Became the first studio to lease, not sell its films to TV
in 1955 (Brown, 1995)
Set up a television department not to produce but distribute
telefilms in 1948
Formed United Artists production in 1956
Expanded into TV production in 1953 with ABC with the
famous ‘Disneyland’ TV program (Brown, 1995)
Republic pioneered in production for TV in 1946 (Anderson,
1994) and abandoned feature film production to devote its
facilities entirely to television film in 1958 (Stuart, 1982).
C
Sought to diversify into TV and have greater access to family
audience through its program ‘Disneyland’
Their focus on B movies would benefit them in the TV
industry
To take advantage of the production vacuum in the TV
business (they saw the TV as an alternative to the studio
system) and use TV as a new distribution channel.
Similar rationale as above
PY
O
Leveraged their capabilities in the production of B movies in
the TV industry.
Did not have the capital to pursue diversification like major
studios, therefore concentrated on TV production early to
offset potential losses from movie production business
Similar rationale as above
First tried to control TV, but afterwards became hostile and
wanted to starve television by not providing content.
Tried to compete through theater TV technology like 20th
century Fox
Leveraged their capabilities in the production of B movies in
the TV industry
Tried to develop pay-TV to compete with free TV, first by
trying to sell TV programs as a distinctive cinema product
through theater TV technology, and cinemascope technology
for larger screen projection in movies to lure audience away
from free TV
Witnessed Disney’s success in TV, and wanted to emulate it
Aspired to control TV as an exhibition channel
Rationale
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Leased 725 of its movies to LA TV station KTTV and at the
same time acquired 25% of the station’s stock in 1956
(Brown, 1995).
Became the first studio to produce for TV in 1944.
Abandoned feature film production to devote its facilities
entirely to television film in 1957 (Stuart, 1982)
Applied to buy TV stations, but its initial efforts to control
TV was blocked by FCC
Invested in Theater TV technology with RCA in 1947
U
Invested in TV technology very early (Du Mont laboratories
in 1938)
Launched an experimental station in 1943 (Anderson, 1994)
Developed color theater TV technology ‘Eidophor’ in 1949
(Hilmes, 1990) and cinemascope technology in 1953
Actions
1946
1953
1956
1949
1947
1955
1944
1955
1955
1952
Year started
TV production
Building architectural advantage
Minors and other studios
Universal
Started TV production quite early in 1947
Warner
RKO
MGM
20th century
fox
Major studios
Paramount
Studio
Table 3 Movie studios’ reaction to the emergence of television
240
Fabrizio Ferraro and Kerem Gurses
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operated a small studio acquired from Universal. Initially,
MCA started to bundle its stars with mediocre performers.
NBC and other networks, which needed content and could
not count on much cooperation from the Studios, were
happy to buy the whole package. In the end, MCA started
developing complete packages (script plus talent) and
shopped them to network television. Instead of earning the
traditional 10% commission on the earnings of their clients,
MCA would receive a packaging fee of 10% of the entire
production budget. Packaging for television helped MCA
leverage its roster of talents in much more profitable ways,
because they could now package stars with less well-known
actors and created more work opportunities for a larger
number of talents. By 1959, MCA’s annual gross income had
grown to $58 million: $9 million from commissions, $3 million
from studio rentals, and $46 million from television production and distribution (Anderson, 1994).
Minor studios had also entered television production in the
late 1940s, trying to leverage their experience in producing B
movies. But given their lack of control over creative talent,
they were not able to compete effectively with MCA (Table 4).
Furthermore, MCA could leverage its experience in dealing
with radio broadcasters and their office in New York. Among
the other talent agencies, the only competitor who could
rely on similar contacts and experience was William Morris,
which indeed, followed MCA’s lead to start packaging
products for television.
MCA was now de facto more a production company than
a talent agency, and therefore the 1961 acquisition of Decca
Records and its subsidiary, Universal Pictures (one of the
three minor studios), only sanctioned the fact that MCA
was now a Hollywood Studio. By this time, TV production
was much more profitable for MCA than the talent agency
business and therefore, when faced with an injunction from
the Justice department in 1962 to divest Decca Records and
Universal Pictures, Wasserman negotiated a deal to keep
both and accepted dissolving the talent agency (Gomery,
1998). When Wasserman dissolved the agency business and
maintained the Production and Distribution business of
Universal Pictures and Revue Production, many questioned
how he would deal with the soaring production expenses. In
June 1963, MCA agreed with NBC to produce a full season
of 2-h feature films for weekly screening on NBC during the
1964–1965 season. This made-for-TV movie strategy proved
highly successful. In October 1965, MCA and NBC made a
$60 million film deal. The deal included 60 Universal films
for network screening at about half a million dollars each:
40 for screening on the network’s owned and operated
stations at about a hundred thousand dollars each; an
uncertain number of made-for-TV feature films for an
estimated subtotal of 15 million dollars. The steady flow of
TV production stemming from contracts like the one with
NBC made it possible for Wasserman to organize Universal
Picture productions in ways much closer to the traditional
Hollywood Studio System he had helped bring down. Given
the small budgets of the typical TV production, the top
talents were out of reach. However, Universal built a list of
young, affordable talents and started to loan them out to
other studios, as Wasserman’s antecedents had done at the
apex of the studio system (Schumach, 1961). Through the
1970s, the power of Universal Television was prevalent all
over Hollywood. No other TV producer came close to MCA.
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1986). Later that year, rather than denying the concession of
a license, the FCC placed a ‘freeze’ on TV station licensing,
suspending decisions on all pending applications (the freeze
lasted until 1952). The FCC freeze helped the radio networks
(CBS and NBC) secure their grip on the TV market, and by
1948, CBS was the number one player in the television market,
followed by NBC and more distantly ABC.
The major studios also invested in products and technologies that created theatrical audience experiences that
television could not imitate. These investments led to the
production of films in new widescreen processes as Cinema
Scope, an increasing shift to color, huge budget costume
epics, and special effects (including 3D) (Stuart, 1982).
Disillusioned by the failure of their efforts to control
the TV industry, studios became antagonistic towards the
medium, and this led to a stubborn rejection to provide
them content. Jack Warner stated in the early 1950s: ‘the
only screens which will carry Warner Bros products will
be the screens of motion picture theaters the world over’
(Anderson, 1994: 45). He even went further to refuse to
show a TV set in any of his motion pictures. Theater owners
also lobbied studios not to supply content to television,
because they reasoned that if the audience could see the
stars for free in their living rooms, no one would go to the
movies. The majors therefore did not release major
theatrical films to television until the 1960s (Hilmes, 1990).
Hence, in the late 1940s, most of the programs for TV were
produced for live broadcast by New York-based advertising
agencies.3 In 1950, the President of NBC decided to improve
the quality of programming by controlling it, ruling that
advertisers would be allowed to buy only short segments of
time for their commercials rather than an entire program. This
decision became a norm for other networks as well. When
networks decided to keep the advertisers away from producing
for TV, they created a vacuum in the TV production business.
Once again, note how the incumbents’ actions, and their
constraints, opened the door for players that were not yet
(directly) involved in movie production, but had access to the
key resource: creative talents.
From packaging to TV production
MCA had already packaged the script, director, stars, and
producer for several RKO pictures. Wasserman had seen
this practice being employed in band booking by the
founder of MCA, Jules Stein, and adopted the same practice
in movies. Having a tight grip on the talent, MCA could
now package movies and content for TV networks. In 1952,
The SAG granted a blanket waiver to MCA that would
permit the talent agency to take on TV production. When
in 1961 SAG eventually terminated the MCA waiver, it
explained to its members that the waiver had been granted
to ‘encourage the growth of the TV film industry and the
employment opportunities of motion picture actors. At
that time, in spite of the enormous economic impact of
television on the theatrical box office, a large segment
of the industry was determined to resist the new
medium. Under the terms of the waiver, TV production
increased substantially and our purpose was fully achieved’ 4
(Schumach, 1961).
Wasserman launched MCA into TV production through
a newly formed subsidiary, Revue Productions, which
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Table 4 Reaction of different industry players to the emergence of television
Actions
Rationale
Studios
Tried to control TV by buying radio stations
and applying for TV station licenses.
Invested in alternative technologies (theater
TV, 3D, Cinerama, etc.)
Minors started to produce for TV early
Most Majors started producing for TV only
after 1952.
Did not release major theatrical films to
television until the 1960s.
Perceived the TV first as an extension of
the studio system and then as a formidable
competitor once it was obvious that they
could not control TV. Sought to differentiate
from TV by investing in alternative
technologies. Since TV initially demanded
cheaper programs which they were not
well positioned to produce after the 1940s
(due to high fixed overheads, massive
administrative offices etc.), TV production
came late(Stuart, 1982)
Independent producers
Produced extensively for TV during 1940s
and 1950s
Perceived TV as an opportunity to exploit
their capability to produce cheap movies,
which TV required
Other talent agencies
(William Morris)
Since most did not have a strong roster of
talent in the beginning they were not very
active in TV.
Of the larger talent agencies, William Morris
due to its experience in radio was actively
packaging for TV (Balio, 1985)
Used their extensive experience with radio
and movies and contacts with advertising
agencies to move into TV business
Federal communications
commission
Took actions to prevent major studios from
having a stronghold in TV business (such as
TV station freezes)(Hilmes, 1990)
Radio broadcasters
Dominated TV broadcasting.
Entered long-term deals to source filmed
content with independent producers and
MCA.
Exhibitors
Lobbied studios not to produce for TV
Took protective actions in favor of TV
networks against major studios due to the
negative public sentiment about major studios’
monopolistic actions after Paramount decree
Tried to avoid advertisers agencies’ live
productions, reasoning that it is less risky
and more profitable (due to multiple
circulation) to have recorded production
(such as movies and series) rather than
live TV
Feared losing business to TV
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Actor
In the fall of 1976, Norman Lear, MCA’s closest competitor,
provided 4 h of shows a week on prime-time network
programming, and MCA provided 14. As of 1978, MCA was
still far ahead of all other major studios in network
programming as shown in Table 5.
This episode in the evolution of the industry reinforces
our interpretation of the changes that led MCA to acquire
a dominant position in Hollywood after the Paramount
decree. Once again industry players were coping with an
environmental shock (Tables 3 and 4), and their actions
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
structure of the studio system in the production, distribution, and exhibition of TV shows (Figure 1). Incumbents’
constraints and actions, which were reasonable given the
logic in which they operated, the investment they had
made, and the uncertainty surrounding the emerging TV
business, created a vacuum that MCA and minor studios
exploited.
Two industry practices were critical in the process.
Packaging was the stepping-stone MCA and other agencies
Table 5 Supplier market share of major movie studios in network television
series, fall 1978
Studio
Universal
20th Century Fox
Paramount
Warner Bros
Columbia
Market share (%)
18.6
4.9
3.9
3.9
2
Source: Variety, 14 September 1977, p. 34.
later on used to enter TV production. Independent producers
and minor studios interested in producing for TV and TV
broadcasters looking for sources of content alternative to
advertising agencies all welcomed packaging as a source of
talents.5 MCA-NBC long-term contracts broke the industry
free from the uncertainty of the box-office and created the
conditions for reconstructing a vertically integrated architecture. In both cases MCA pioneered the use of these
practices and the industry architecture that emerged helped
consolidate their strong position in the industry.
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Fabrizio Ferraro and Kerem Gurses
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TV production started to take off, it did not take most
studios too many years to follow (by 1955 all the majors
were also producing for TV; Table 5), but by then MCA
had secured long-term contracts with TV networks. The
integrated logic shaped the way in which studios reacted to
the emerging technology (Tripsas, 2009). Note that once
Wasserman had rebuilt the integrated logic in the movie
industry, he also fell prey to the same constraint and
ignored or could not prevent the rise of Creative Artists
Agency (CAA). This company, founded by former William
Morris agents in 1975, aggressively recruited a large number
of talents, brought the packaging practice back from
television to the production of movies, and became the
third largest agency in the industry and a dominant force
in Hollywood in the 1980s. Despite the fact that Wasserman
had pioneered the use of packaging to leverage his position
as an agent, once at the helm of a major integrated studio
(Universal) he could not stop the growth of CAA (Bruck,
2004).
Strategists often invoke constraints to competitors’ actions
to explain the existence of a sustainable competitive advantage
(Ghemawat, 1991, 1993). For instance, even though many
competitors understood Dell’s business model, they found
it very hard to imitate without disrupting their existing
operations, their asset investments and their channel relationships (Rivkin and Porter, 1999).6 Nevertheless in this case the
trade-off did not stem only from the economics of the
incumbents’ strategies, but also from the set of institutional
constraints in which the incumbents operated. As critical as
incumbents’ actions are in creating opportunities to reshape
industry architecture, they would not by themselves have been
enough to trigger a change in industry architecture with an
architectural advantage for MCA.
Introducing novel industry practices (Lounsbury and
Leblebici, 2004) such as packaging, profit-sharing, and
long-term contracts was the other essential step in
developing an architectural advantage for MCA. It
reconfigured the web of transactions among the key
players in ways that strengthened its position. These
practices not only helped MCA lower the studios’
bargaining power, but also helped consolidate its control
on one asset that became much more valuable in the
Post-Studios era ushered in by the Paramount decree.
Here it is critical to stress that both profit-sharing and
packaging helped created a more modular industry
architecture which benefited players with investments
in relationships, rather than production assets. Miller
and Shamsie (1996) interpreted this shift from propertybased resources to knowledge-based resources through a
resource-based lens (Barney, 1991). They argued that
the former are more critical in stable times, while the
latter mattered more in times of uncertainty. Our case
study is consistent with their findings, but illuminates
the mechanisms that lead to architectural shifts and how
one firm managed to benefit from it.
Our interpretation of the historical evidence is far from
being uncontroversial, and it is important to specifically
address other factors that we believe are complementary
to our analysis. The first factor we need to consider is the
role of Wasserman’s individual characteristics. Historical
accounts are consistent in stressing his charisma and
negotiating skills, and it is likely that these abilities do
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Interpretation and discussion
The industry architecture perspective (Jacobides et al., 2006),
which builds on the insights of the modularity (Baldwin
and Clark, 2000) and technological platforms (Gawer and
Henderson, 2007) literature, suggests that architectural
advantage stems from the ability to control a critical
activity in the value chain to become the ‘bottleneck’ of the
industry. Obviously, this investment ex-post appears logical
and essential to the new architecture, but ex-ante is based
on the acquisition of assets that will appreciate if the new
architecture actually develops (Jacobides and Winter,
2007). Jacobides et al. (2006) suggest that if (1) a particular
asset stands to gain from innovation, (2) the asset is in
short supply, and (3) there is a possibility to invest while
they are still cheap, then it is profitable to pursue the
innovation and buy the assets that will appreciate. They
also argue that ‘an innovator [y] may try to achieve
architectural advantage by stimulating ferocious competition in the complementary assets rather than in their own
segments’ (Jacobides et al., 2006: 1214).
Our case study provides an example of how a newcomer
to the motion picture industry, the MCA, could reshape
the industry architecture by (1) investing early in creative
talents, before their value soared, (2) introducing novel
industry practices (profit sharing, packaging, long-term
TV deals) that increased the value of their investment, and
(3) facilitating the growth of independent production. By
themselves, these actions would not have been enough to
secure an architectural advantage. Another essential factor
in the emergence of this advantage, as we emphasized in the
case study, were the actions (or inactions) of incumbents,
channeled or constrained by regulatory and institutional
rules.
There is wide consensus in the literature that incumbents
struggle in adapting to technological (Henderson and Clark,
1990; Christensen and Bower, 1996; Christensen, 1997) and
regulatory change (Smith and Grimm, 1987), and that this
resistance to adaptation might be partly explained by the
existing institutional logic (Thornton and Ocasio, 1999) and
the cognitive frame employed to interpret technological
changes (Tripsas and Gavetti, 2000; Kaplan and Tripsas,
2008; Tripsas, 2009). In the MCA case the decisions taken
by incumbents, because of regulatory and institutional constraints, created an opportunity for entrepreneurial actors
to experiment with novel practices and influenced the
industry architecture in their favor.
The integrated logic that permeated the Studio System of
the 1930s, together with the limitation created by the
Paramount decree and the FCC actions, shaped the actions
of the incumbents to open up opportunities for novel players
such as MCA. Other agencies, such as William Morris, were
more focused on other (more profitable) segments of the
business and were not particularly interested in controlling
Hollywood talent, given the widespread use of 7-year
contracts in the pre-Paramount decree era. The Studios
were not incompetent, but they were dealing with the rise
of television following a strategic template based on an
integrated logic. They tried to control TV exhibition
directly, invested in technologies that would make it harder
for television to compete, and shifted production to Europe
to reduce costs. Their actions were consistent with the
dominant institutional logic of the industry. Indeed, when
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Theoretical implications and concluding remarks
Conclusions from an historical case study deserve healthy
caution, given the limitation of a single case study design
and the multiple interpretations of historical evidence.
But the case of Lew Wasserman and MCA provides
interesting insights to both extend our understanding of
industry evolution and identify the mechanisms that might
explain whether and how a firm can build an architectural
advantage.
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Contributions and theoretical implications
We started from the suggestion that architectural advantage
stems from becoming the bottleneck of the industry
(Jacobides et al., 2006) and identified three conditions that
enable newcomers to shape industry architecture to their
advantage after environmental shocks: (1) the newcomer
acquires control of potentially mispriced resources that
stand to gain from the environmental shock, (2) industry
incumbents, constrained by regulatory and institutional
logics, react to the shock, and their actions create a space
for newcomers, and (3) novel practices gradually substitute,
complement and rewire the network of industry exchange
in ways that strengthen the newcomer’s central role and
resources. These propositions will require further refinement
and more systematic empirical testing, given the design of our
study. But in terms of theoretical development, we contribute
to the theory of architectural advantage in two ways.
First, we suggest that the opportunities for entrepreneurial
action are essentially generated by the incumbents’ attempts
to cope with environmental jolts (Meyer, 1982) and maintain
the old architecture by disinvesting in assets that might
become valuable in the new architecture. Our contribution
is consistent with findings of a study on the emergence
of banking and the ‘partnership system’ in Renaissance
Florence (Padgett and McLean, 2006). There members of
the Florentine elite, attempting to maintain their position
of dominance, acted in ways that eventually opened up
opportunities for fundamental changes in the political,
economic and social structure of the city. Novel practices
exploded. In the words of the authors: ‘Florentine elites
invented not because they wanted to, but because they had
to, conservatively to preserve their threatened positions’
(Padgett and McLean, 2006: 1473). Like in recent studies
of the British construction industry (Cacciatori and
Jacobides, 2005) and mortgage banking in the United
States (Jacobides, 2005), the motion picture industry novel
architecture emerges from the purposive actions of a
variety of players (studios, talents, exhibitors, radio and TV
broadcasters, unions, professional associations, government regulators). Our contribution extends their findings
by suggesting that the dominant logic of the industry, in
our case the ‘integrated logic’ dominant in the 1940s,
together with other regulatory and institutional arrangements, limited the industry players’ range of options and
created opportunities for nimble players who are not
constrained by the same logic. Furthermore, we specifically
suggest that the actions of the incumbents might accelerate
the change in architecture by selling assets that the
newcomers might leverage more efficiently in the novel
architecture they are building.
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play a role in explaining his achievements. But many
other successful agents in Hollywood were also charismatic (Selznick, William Morris, Feldman) and still were
not as successful as MCA in reshaping the industry (they
were still very successful as agents). Furthermore, once
at the helm of Universal, Wasserman missed many
important technological developments, such as the
development of pay TV (HBO). He invested in unsuccessful technologies (laser disc) and never really managed 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
leaders. The connection with Ronald Reagan, for instance,
had a clearly important role in obtaining the SAG waiver.
Relationships with the union were also very good, to the
extent that in 1962 the unions complained about the
Department of Justice’s antitrust suit against MCA. They
argued that the suit would prevent MCA from making
movies in Hollywood, thus reducing their members’
employment opportunities. Note that both these connections were developed in the 1940s when Wasserman was
a young agent with few clients (and Ronald Reagan a
mediocre actor). Likewise, his relationship with the union
was developed in those early years and cemented between
1966 and 1974 when Wasserman was the Chairman of the
labor-negotiating arm of the Motion Picture Association
of America (MPAA).7 Given that these relationships were
developed while Wasserman was rising to power, we should
be careful in assigning them too much explanatory power.
At the same time, Wasserman’s political clout must not
have been particularly effective given that MCA was the
target of a successful Department of Justice anti-trust
suit. Indeed, it was this defeat that prompted him to lead
the industry in improving their lobbying presence in
Washington. It was Wasserman who hired Jack Valenti,
then Lyndon Johnson’s personal assistant, to lead the
MPAA effort in the capital.
Beyond political connections, it is fair to say that
Lew Wasserman’s structural position in the industry
facilitated MCA’s rise in the industry. As we mentioned,
packaging was widespread in band-booking and
Wasserman therefore merely transferred a practice his
company was very familiar with. Another advantage
MCA leveraged was its presence in New York, with its
existing contacts through their radio business. These
networks probably gave them an edge over minor studios
and independent producers in the race to produce for TV.
But all the large talent agencies, and especially William
Morris and Famous Artists Agency, already operated in
New York and in the radio business, so these ties were
hardly unique to MCA.
In sum, both Wasserman’s charisma and his social
network and structural position played an important
complementary role in enabling the changes we described.
Given the single case design of this study, it is impossible
for us to systematically explore the relationship between
these complementary factors. Nevertheless, it seems reasonable to assume that neither Wasserman’s skills nor his
social networks could have been a sufficient condition for
the changes in the rules and role of the motion picture
industry and the rise of MCA.
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Fabrizio Ferraro and Kerem Gurses
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organizational fields might create opportunities to invent
creative industry practices and reconfigure architecture. In
the case of MCA, for instance, packaging originated in the
band-booking business, in which the company had operated
for years. What appears as an invention in Hollywood is
essentially the adaptation of a template originating in another
industry. Not only practices travel across industries, but also
the presence of multiple logics within the same industry
creates more opportunities for architectural change. From its
beginnings the motion picture industry has always oscillated
between an ‘integrated logic’, exemplified by the vertically
integrated studio system where hierarchy is the key coordination mechanism; and a ‘talent logic’, in which different
activities are coordinated through contractual agreements. In
the latter, agents play a more central role. With the
introduction of profit sharing and packaging, MCA revived
and recombined an institutional chemistry that was already in
the industry’s DNA (Schneiberg, 2007). Eventually when
motion picture industry and TV broadcasting became more
integrated, studios went back to a more integrated architecture.
This structural characteristic of the motion picture industry is
consistent with the observation of institutional theorists that
‘multiple logics can create diversity in practice by enabling
variety in cognitive orientation and contestation over which
practices are appropriate. As a result, such multiplicity can
create enormous ambiguity, leading to logic blending, the
creation of new logics, and the continued emergence of new
practice variants’ (Lounsbury, 2008: 354). At the same time, we
suggest, this ambiguity creates entrepreneurial opportunities
that can be leveraged to build an architectural advantage.
Industries characterized by more homogeneity in logics might
provide less opportunity for architectural change, because
novel practices creating new patterns of exchange might be
more difficult to diffuse and institutionalize.
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Secondly, this article sheds light on the critical role
played by industry practices in facilitating new patterns
of collaboration (and competition) across economic actors.
Designing, championing, and institutionalizing innovative
industry practices, we suggest, is the path to creating
architectural advantage. Through these new rules, new
entrants in a specific segment of an industry can stimulate
competition in its adjacent segments and consolidate their
control over critical resources.8 This control can be
achieved not only through technological design choices,
as the literature on modularity (Baldwin and Clark, 2000;
Brusoni and Prencipe, 2006; Fixson and Park, 2008) and
platforms (Gawer and Henderson, 2007; Tee and Gawer,
2009) has shown, but also from more mundane contractual
reconfigurations of the industry’s exchanges. For instance,
securitization in the US mortgage market was made
possible by a series of interconnected administrative
innovations (optional delivery schemes, standardization
of loan characteristics, creditworthiness scores, etc.) that
simplified coordination and standardized information.
These practices enabled the emergence of a novel architecture in the mortgage industry (Jacobides, 2005). Our
contribution is consistent with these findings, but also
suggests that the architecture enabled by the novel practices
might shift profitability across segments and across industries,
and thus create the basis for an architectural advantage.
The practice of packaging helped MCA leverage its ability
as a knowledge integrator (Brusoni et al., 2001; Di Biaggio,
2009) but given our research design we could not analytically separate the industry practice from the organizational capability. Future research should explore how
industry practices complement firm capabilities in the
process of developing architectural advantage. More
broadly, our study did not elaborate on the role of
capabilities in shaping the evolution of the competitive
trajectories (Cacciatori and Jacobides, 2005; Jacobides and
Winter, 2005; Camuffo and Zirpoli, 2009) and future
research should explore this important relationship.
In addition to contributing to the development of a
theory of architectural advantage, our findings might
inform future studies in two distinct research areas. Our
findings on the role of industry practices complements the
studies of innovative business models in emerging industries (Casadesus-Masanell and Ricart, 2007; Zott and Amit,
2007) and their role in redrawing industry boundaries
(Santos and Eisenhardt, 2005, 2009). At the same time our
findings would suggest that business model innovation is
only a necessary, but not sufficient, condition to trigger
an architectural change. The acquisition of mispriced
resources by newcomers and the incumbents’ (in)action
are also critical for newcomers to enter the industry, redraw
its boundaries, and achieve an architectural advantage.
Our findings are also consistent with the insights of the
literature on institutional entrepreneurship (Garud et al.,
2002; Greenwood et al., 2002; Hwang and Powell, 2005;
Munir and Phillips, 2005) and we suggest that developing
an architectural advantage depends, among other things, on
the ability to reshape the institutional fabric of a field.
Future research should explore how the multiplicity of
logics, practices, and roles in an industry provides
opportunities for individual actors to develop an economic
advantage. For instance, the overlap between different
Practical implications for strategy and policy
Given the many limitations of this study, it might be
premature to extend our findings to their prescriptive
implications. But a few insights from this work might help
managers operating in industries with unstable, contested
architectures and entrepreneurial firms trying to enter
them.
Incumbent firms should carefully consider their moves
in adapting to technological and regulatory change. As in
the case of the 1950s movie industry, their action aimed at
damage reduction might actually accommodate the new
entrants and lead the industry towards a novel architecture.
Their profitability might suffer. This might be, for example,
the case in the music industry in the digital download era.
Trying to prevent the diffusion of the novel technology in
order to maintain their industry architecture, music labels
might have created the space for the growth of Apple in the
related digital music retailing activity. Apple tried to build
an architectural advantage in the emerging digital music
retailing business by (1) leveraging its dominant market
share in the mp3 players market, (2) facilitating consumers’
switch to the new purchasing habit by developing a userfriendly web purchase experience (Itunes), and (3) breaking
away from the CD format (unbundling). Given the market
share I-tunes currently enjoys in this market (70%), the
labels are now trying to foster competition in the digital
Building architectural advantage
Fabrizio Ferraro and Kerem Gurses
246
to corporate strategists and policy-makers. Developing
and testing a rigorous theory of architectural advantage is
no easy feat, and our attempt to explore how firms can
develop it still cautious, yet a first step in the direction of
understanding a novel form of competitive advantage.
Acknowledgements
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Notes
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Concluding remarks
In conclusion, despite its limitations, we believe our study
has illustrated the potential research on industry evolution
holds for disciplinary cross-fertilization. Bridging sociologically rooted institutional theory with economics-based
insights from the industry architecture perspective might
benefit both camps. Institutional theorists could benefit
from considering in detail the economic implications of the
practices they have studied so effectively and also the
implications of institutional changes for individual firms (a
core concern for strategists). Strategists could better
integrate the role of institutional logics in their theories
of architectural advantage and consider how these logics
affect competitive dynamics.
The idea that corporations can achieve a competitive
advantage by influencing the design of the industries in
which they operate is fascinating and of obvious relevance
PY
This article benefited greatly from the helpful suggestions
provided by Johanna Mair, Joan Enric Ricart, Silviya Svejenova,
Sidney Winter, and by participants at the 2008 Sumantra Ghoshal
Conference at London Business School, the 2008 Academy of
Management Annual Meeting in Anaheim, and the 2008 Strategic
Management Society Conference in Cologne for helpful suggestions. We thank Michael Jacobides, Andrea Prencipe and Stefano
Brusoni, guest editors for EMR, for the thorough guidance in
shaping the article, and four anonymous reviewers for their
insightful comments and suggestions. Kathleen Jackson provided
excellent editorial assistance. We also gratefully acknowledge
generous funding from the Spanish Government Research Grant
(Ministerio de Educación y Ciencia – SEJ2006-11833), the PublicPrivate Sector Research Center (SP-SP), and the Center for
Globalization and Strategy at IESE Business School.
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1 The primary legal objection to block-booking was that it
‘extends monopoly power and adds to the monopoly of a single
copyrighted picture that of another copyrighted picture’
(Kenney and Klein, 1983: 497). Since 1940, the studios had
already started to rely less on block-booking. After signing a
consent decree to settle another Justice Department investigation on the practice, but only with the Paramount Decree, the
practice was eventually banned.
2 Film financing had been at the core of the studios’ activity since
the emergence of the Studio System. With rising production
costs and increasing box-office uncertainty, financing had
become more difficult and studios could effectively leverage
their size in this activity by spreading their risk over a large
number of productions. Given the scope limitation of this
paper, we will not discuss financing in detail, and focus on
production, distribution, and exhibition.
3 Advertising agencies already dominated the production of radio
programs, designed according to the needs of large advertisers
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
and scheduling and started exploring alternative sources of
television production (Hilmes, 1990).
4 The Screen Actors Guild (SAG) had long forbidden talent
agencies from producing motion pictures, because of the innate
conflict of interest in concurrently being the agent and the
employer. Other agencies, such as Famous Artists Agency, had
been granted waiver for occasional pictures (Balio, 1985), but no
other agency had received a blanket waiver. Ronald Reagan,
who was one of Wasserman’s clients and a personal friend, was
President of SAG at the time, and many historical accounts of
this SAG decision stress the important role this friendship.
5 The fact that they needed the talents and packaging providing
a solution to this problem does not mean that MCA, like any
other agency, would not take advantage of controlling talent,
and leverage this monopolistic position through hefty commissions, which producers and broadcasters were not happy to pay.
In any case, it is a fact that packaging helped broadcasters solve
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music retailing market by supporting the entry of
potentially competitive players (i.e. Amazon.com).
Entrepreneurial firms who try to develop an architectural
advantage in an emerging industry could leverage our
findings by asking themselves whether incumbents’ reactions
to environmental shocks is creating investment opportunities
for them. For instance, the digital revolution in the newspaper
industry is pushing leading newspapers towards outsourcing
the production of content, and is therefore ‘liberating’ many
creative talents who are now increasingly working as freelancers. Could these resources that newspapers are letting go
be more profitably leveraged by entrepreneurial players
under a new industry architecture?
Venture capitalists trying to identify investment opportunities might leverage our contribution on the role of the
overlap between organizational fields, and focus their
efforts in industries where more logics intersect, because
we would expect more innovative industry practices to
emerge and therefore, ceteris paribus, more opportunities
to reconfigure the industry and develop an architectural
advantage.
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
traditional categories of market power and industry
dominance, and might be interested in understanding
how dominant positions based on architectural advantage
might limit competition in other segments or in adjacent
industries. Our contribution, by specifying the conditions
that lead to the development of architectural advantage
could help regulators identify specific actions that might
lead companies to develop this advantage and stifle
competition in the industry. For instance, antitrust
authorities in the United States are obsessively monitoring
Google’s market share in the search-advertising market
(around 75% in 2009) because their position in the search
space might enable them to illegally promote their video
properties (YouTube) or their web services such as online
word processors and spreadsheets (Google Docs). Following our framework we might instead focus our attention on
the book-scanning initiative (Google Books), which might
eventually become the bottleneck of the entire publishing
industry.
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a problem and facilitated the transition of filmed content from
Hollywood to TV.
6 Another interesting similarity between MCA’s disruptive
strategy and Dell’s, was their reliance on a ‘lighter-than-air’
balance sheet. In a 1962 interview with the New York Post, Lew
Wasserman commented: ‘To us the most important thing is
manpower because that’s all we really have here. We have no
inventory, and our assets, we put them under our hats and night
and go home’ (Gelman and Aronowitz, 1962). This is in stark
contrast with the tradition brick-and-mortar studio system. The
inability to react to the threat might also be based on the relative
rigidity of the asset base of the Studios.
7 One version of the union connection story, very popular in the
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Korshak was never indicted for any crime, but even if his mob
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providing his services to most studios already. MCA was not
his only client, nor Wasserman his only friend in Hollywood
(Thomas Jr, 1996).
8 Jacobides and Tae (2009) provide exploratory quantitative
evidence on how conditions within an industry segment affect
relative profitability across segments, and show that the
presence of a firm with superior idiosyncratic capabilities
increases the relative profitability of the entire segment. Our
findings are consistent with this evidence. MCA acquired a
dominant position in its segment of the industry (talent
agencies), but also made the segment itself more profitable for
all the talent agencies, relatively to other players in the industry
(producers, distributors, exhibitors).
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