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Building architectural advantage in the US

motion picture industry: Lew Wasserman

and the Music Corporation of AmericaFabrizio 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: 34 93 253 64 83;

Fax: 34 93 253 43 43;

E-mail: fferraro@iese.edu

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 interactionsbetween the Studios, constrained by the institutional logic of the industry, the regulatory

framework, and MCAs 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.2009.24Keywords: architectural advantage; industry practices; industry evolution; institutional theory;motion picture industry

Introduction

In 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 (Nelsonand Winter, 1982; Teece, 1986; Langlois and Robertson,1995; Jacobides, 2005), and institutional theory (Havemanand Rao, 1997; Thornton and Ocasio, 1999; Lounsbury, 2007),have helped us understand antecedents and consequences ofstructural changes in industries. Nevertheless, most studiesin these traditions did not specify how the rules and rolesthat shape division of labor in the industry emerge andchange.

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

of labor in the industry and the related distribution ofvalue. The process through which firms can achieve anarchitectural advantage is a fertile ground for empirical andtheoretical work, given that much existing research hasfocused on the consequences of exogenous shocks (forinstance, technical innovation or regulatory change). Sucha focus obscures the mechanisms that guide the emergenceof novel industry structure in the wake of a shock as wellas the role that incumbents actions play.

From 1939 until 1965 Lew Wasserman and his company,Music Corporation of America (MCA), managed to changethe competitive landscape of the motion picture industryin the United States completely. They exploited technologicaland regulatory change and until the 1980s wielded enormous

influence. Here we analyze this fascinating historical case,

European Management Review (2009) 6, 233249& 2009 EURAM Palgrave Macmillan. All rights reserved 1740-4754/09

palgrave-journals.com/emr/


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tracking the relations between exogenous environmentalshocks and organizational choices to further our under-standing of how architectural advantage emerges.

The article is organized as follows. First, we provide ashort overview of the relevant academic literature onindustry evolution and architecture. Then, after describingthe methods and our data sources, we delve into the rich

historical narrative of the evolving motion picture industryin the United States and of MCAs rise to power and industrydominance. In the last section, we interpret our findings,outlining the contour of our contribution and discussing itsmanagerial and policy implications.

Theoretical backgroundEconomists, sociologists and strategic management scholarshave explored industry evolution from different perspec-tives, and provided interesting insights on this process. Ineconomics the Industrial Organization tradition (Bain, 1968;Porter, 1980) mainly focused on the structural and technical

features of industries as determinants of their participantsprofitability. In this tradition scholars have shown howexogenous factors such as the number of potential entrants,the growth rate of incumbent firms, and the ease of imitationof incumbent firms will influence the structure of the industry(Gort and Klepper, 1982; Klepper and Graddy, 1990) andhow technological innovation affects industry concentration(Geroski and Pomroy, 1990). More recently scholars havedeveloped fully endogenous models of industry evolution(Klepper, 1996, 2002) but despite the acknowledgement thatfirms could and should attempt to influence the structure oftheir industries, this research tradition has not explored howchanges in the rules of the game can transform competitivedynamics in the industry, and lead to the emergence of

entirely new industries. Furthermore, it has not providedmuch theoretical insight on how to do so (see Geroski (2003)and McGahan (2004) for an exception). In the evolutionaryeconomics tradition (Nelson and Winter, 1982), technologicalchange can have dramatic impact on the development ofindustry structure and provides a necessary causal link in theco-evolution of firms and industry (Murmann, 2003). Malerbaet al. (2008) suggest that a key factor in explaining changes inthe vertical scope of firms is the process of accumulatingcapabilities at the firm and industry levels. Another exampleof interactions between firm-level processes and industry-leveldynamics is given by Feldman and Romanelli (2006), whostudied biotechnology regional clusters in the United States

between 1976 and 2002. They showed that the key factordriving the growth of these clusters was the proportion offirms founded by former employees of established bio-therapeutics firms (breakaway firms). Despite their importantcontributions, these studies do not explain how the divisionof labor in the industry changes, the consequences of thesechanges, and the role that firms play in the process.

In recent years these questions have been the focus ofmuch empirical and theoretical work, especially focused onthe analysis of vertical scope, which helped us understandhow industry boundaries evolve, and how intermediatemarkets emerge. Jacobides (2005) provides a framework forexplaining the nature and drivers of vertical disintegrationin 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 marketemergence: coordination simplification, and informationstandardization. In a study of the British building industry,Cacciatori and Jacobides (2005) found that the verticaldivision of labor affected the knowledge base of each segmentof the industry, and established the trajectories for capabilitydevelopment. These studies help us better characterize the

co-evolution of industry boundaries and firm capabilities(Jacobides and Winter, 2005) and clearly state that industryparticipants 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 industryparticipants and potential entrants shaped it (Jacobides, 2005:490). Nevertheless, these studies were narrowly focused on theissue of scope identification, and the question of how novelrules of the game emerge in an industry was not central totheir efforts.

From a sociological perspective, institutional theorymight help us better understand where industry rules androles come from, by shifting our focus towards a new unit

of analysis: organizational fields. It also introduced theconcept of institutional logics (Friedland and Alford, 1991):the rules of the game that industry players follow and take-for-granted, and the cultural and institutional antecedentsof such rules (Hirsch and Lounsbury, 1997; Thornton andOcasio, 1999).

DiMaggio and Powell (1983) define an organizational fieldas those organizations that, in the aggregate, constitute arecognized area of institutional life: key suppliers, resourceand product consumers, regulatory agencies, and otherorganizations that produce similar services or products(DiMaggio and Powell, 1983: 148). This shift in the unit ofanalysis goes beyond the traditional industry boundariesemployed by both economists and population ecologists

(Hannan and Freeman, 1977). The shift also helpedresearchers focus on the role of actors so far neglected,such as regulators (Schneiberg and Soule, 2005); socialmovements (Rao, 1998; Lounsbury et al., 2003; King andSoule, 2007; Sine and Lee, 2009); professions (Marquisand Lounsbury, 2007); and local communities (Marquis andBattilana, forthcoming). While most early work in thisliterature emphasized the consequences of institutionalchanges, but did not provide much opportunity for agency,this initial bias has been challenged by organizationaltheorists. Employing the concept of institutional entrepre-neurship (DiMaggio, 1991), some researchers emphasizedthe need for a triggering event that leads to change

(Greenwood et al., 2002; Sine and David, 2003). Variouslyreferred to as shocks (Fligstein, 1991) or jolts (Meyer,1982), such unsettling events create disruptive uncertaintyfor individual organizations, forcing some to initiateunconventional experiments upon established practice.

Focusing on a broader set of actors than just competitorshas helped researchers better understand the process ofindustry emergence. For instance, in the case of biotech-nology, researchers have documented the shifting evolutionof collaborative activities among university, entrepreneurs,venture capitalists, and government agencies and how thesenetworks shaped the opportunity structure of the field(Powell et al., 2005). Kaplan and Murray (forthcoming) tracethe development of biotechnology in human therapeutics

over a 30-year period (19732003). They show how it has

Building architectural advantage Fabrizio Ferraro and Kerem Gurses234


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through the 7-year-contract and the block-booking indus-try practices (Figure 1).

During World War II the Studio system experienced aperiod of strong growth in revenues and profitability: com-bined industry profits went up from $20 million in 1939 toover $60 million in 1945. During the war the number ofmovies produced was significantly reduced. Between 1937and 1941, the Big Eight released 1833 feature films, whilebetween 1942 and 1946 they released only 1395. Most of thecuts affected B-movie production, and therefore averageproduction costs started to rise. Between 1942 and 1945, theaverage cost per movie grew from $336,600 to $554,386(Table 1). By 1945, the majors were concentrating almostexclusively on A-class production, while the minors focusedmore 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

and $60 million in 1950. Industry profits also fell from $119million in 1946 to $50 million in 1950 (Table 2).

The Justice Department began an antitrust investigationinto the industrys business practices in 1940; eight com-panies were named as defendants: the five majors andthe three minors. The defendants were charged with anti-competitive dominance of the three major segments of theindustry. Eventually, the Paramount decision in 1948 forcedthe separation of exhibition from production and distribu-tion (Miller and Shamsie, 1996). The court ordered the fivemajors to spin off their theater holdings, and it ordered thespun off circuits to divest one-quarter to one-half of theirtheaters. The prohibition against block booking1 enabledthe Minors (Universal, Columbia, United Artists) to capturea larger share of the production market. Moreover, on theexhibition level, divestiture weakened the buying power ofthe former affiliated circuits and the block-booking banenabled independent exhibitors to gain more control oftheir operations. Since the studios could not control theproduction and exhibition at the same time, they reducedtheir output and dramatically cut back on the number ofstars (Balio, 1985). The combined effect of the Paramount

decree and the decline in attendance (Caves, 2000) ledmajor studios to decrease their production of feature filmsby more than 50%, adjust their cost structure, and concentratemore on distribution and film financing 2 (Christophersonand Storper, 1989).

Lew Wasserman and MCAIn 1936, at the age of 23, Lew Wasserman joined Chicago-based MCA which was a successful band booking agencyat that time. In 1939, Wasserman moved to Los Angeles tohelp Jules Stein, MCAs founder and President, to build MCAsmovie business. MCA started acquiring stars contractsand talent agencies. In only a few years, MCA bought the

contracts of top stars such as Bette Davis, Errol Flynn, Joan

Exhibition(TV Networks)

IntegratedLogic

(1930-1948)

IntegratedLogicin TV

(1952-1978)

Talent Logic(1948-1952)

Exhibition

(Theater)DistributionProductionTalents

DistributionProductionTalents

ProductionExhibition(Theaters)

Talents Distribution

Studios control through institutionalized practice (lock-in) 7 years contract & Block booking

Studios Direct control

MCA

Market

MCAs control through institutionalized practice packaging -

Figure 1 Industry logics in the motion picture and television industry (19301978).

Table 1 Average production costs (in million of dollars), 19201975

Year Averageproduction

costs nominal($ mil)

Averageproduction

costs inflationadjusted

($ mil in 2009)

Increase inproduction

costs inflationadjusted

(in percentage)

1920 0.1 11930 0.4 5.1 4101940 0.4 6.2 221950 1.0 8.9 431955 1.5 12 351960 2.0 14.6 221965 2.5 17.1 171975 3.1 12.4 27

Source: The film daily year book. New York, 1947, p. 53; 1956,pp. 103,105.



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Crawford, and many others. Other higher status agencies,incumbent players such as the Selznicks and WilliamMorris, would not try to buy stars contracts: They felt theydidnt 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 AlanMiller; Associated Artists, Zeppo Marx, and MyronSelznick. In 1945, Wasserman bought Hayward-DeverichAgency, with its excellent list of several hundred perfor-mers, including Greta Garbo, Ginger Rogers, Fred Astaire,and Billy Wilder. With this move MCA became the largestagency in Hollywood. By 1960, it was still the largest talentagency in the business, with double the revenues of WilliamMorris, its nearest competitor.

To explain MCAs ability to grow so quickly and thelimited reaction of competitors, it must be said that the agencybusiness was not very profitable. Because the widespread7-year contract industry practice tied artists to one of thestudios for a very long time, agencies were of limited valueto the talents. More established Hollywood agencies suchas William Morris and Famous Artists Agency did not seeacquisitions as an opportunity. For instance, William Morris,which had a strong position in Hollywood, was focused onother, more profitable businesses, such as talent for radio,vaudeville, clubs, and theater. Only after MCA had shownthat, in post-Paramount decree Hollywood, representingmovie talents could be truly profitable would WilliamMorris start acquiring other agencies (Kemper, 2007).

Why would the studios let agents control the talents thatwere so critical to their business? The combined effect ofthe Paramount decree, decreasing attendance, shrinkingprofits (Table 2), production cuts, and rising production

costs (Table 1) increasingly worried the studios about their

stock of talents and their ability to use them efficiently.As a consequence studios were now more than happy to lettheir talents go, opening up an opportunity for agents suchas MCA. The number of actors under contract to majorstudios, which had been as high as 804 in 1944, fell first to

474 in 1949, and then to 164 by 1961. Similar declines arefound for directors (99 in 1949 to 24 in 1959), producers(from 149 to 50), and writers (from 91 to 47). Studios nowhad less control over talent, but in their attempt to keepproduction costs down, they became more aggressive innegotiating with them.

This led to another opportunity for MCA. In 1950,Wasserman negotiated a deal for Jimmy Stewart in theUniversal movie Winchester 73. At that time, Universalwas in financial difficulty and could not afford Stewartsnormal salary of $250,000. Instead, Stewart got no fixedsalary but did get 50% of the net profits over the life of thefilm. The movie was a hit, and Stewart quickly became therichest actor in Hollywood. Profit-sharing contracts hadbeen used sporadically before by Charles Feldman ofFamous Artists Agency, but it is only through MCA thatthis practice diffused widely and became institutionalized.It helped MCA attract more Hollywood stars, lured by thepotential of profit sharing, and cemented their relationshipin the long term.

In addition to the diffusion of profit-sharing contracts,MCA also packaged the script, director, stars, and producerfor several RKO pictures in late 1939 and early 1940. MCAhad no control over the actual production, nor did it haveany financial stake in the finished pictures. But packagingfacilitated the shift in filmmaking authority, especiallythe initiation and development of movie projects, away

from the studios and into hands of individual filmmakers

Table 2 Personal consumption expenditures on motion picture admissions and net income of seven major studios, 19401956

Year Gross receiptson admissions

($ millions)

Deflated byadmission

price indexa

Average weeklyattendance

(millions of admissions)

As % ofall PCE

Total net incomeof 7 major films

($ millions)

1940 735 1182 80 1.02 221941 809 1235 85 0.99 351942 1022 1481 85 1.14 511943 1275 1695 85 1.27 601944 1341 1543 85 1.22 591945 1450 1586 85 1.2 651946 1692 1798 90 1.15 1191947 1594 1620 90 0.97 861948 1506 1514 90 0.85 561949 1468 1439 70 0.81 451950 1394 1372 60 0.72 501951 1338 1298 54 0.64 411952 1284 1235 51 0.59 201953 1252 1149 46 0.54 281954 1275 1099 49 0.54 44

1955 1286 1055 46 0.51 461956 1298 1041 45 0.49 41

Source: (US Department of Commerce, National Income Supplement to the survey of current business (Washington DC, 1954) and PersonalConsumer Expenditures by type of product, 195256, 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 for19351955 published in the July 1956 number).



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1986). Later that year, rather than denying the concession ofa license, the FCC placed a freeze on TV station licensing,suspending decisions on all pending applications (the freezelasted until 1952). The FCC freeze helped the radio networks(CBS and NBC) secure their grip on the TV market, and by1948, 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 tech-nologies that created theatrical audience experiences thattelevision could not imitate. These investments led to theproduction of films in new widescreen processes as CinemaScope, an increasing shift to color, huge budget costumeepics, and special effects (including 3D) (Stuart, 1982).

Disillusioned by the failure of their efforts to controlthe TV industry, studios became antagonistic towards themedium, and this led to a stubborn rejection to providethem content. Jack Warner stated in the early 1950s: theonly screens which will carry Warner Bros products willbe 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 ownersalso lobbied studios not to supply content to television,because they reasoned that if the audience could see thestars for free in their living rooms, no one would go to themovies. The majors therefore did not release majortheatrical films to television until the 1960s (Hilmes, 1990).

Hence, in the late 1940s, most of the programs for TV wereproduced for live broadcast by New York-based advertisingagencies.3 In 1950, the President of NBC decided to improvethe quality of programming by controlling it, ruling thatadvertisers would be allowed to buy only short segments oftime for their commercials rather than an entire program. Thisdecision became a norm for other networks as well. Whennetworks 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 theirconstraints, opened the door for players that were not yet(directly) involved in movie production, but had access to thekey resource: creative talents.

From packaging to TV productionMCA had already packaged the script, director, stars, andproducer for several RKO pictures. Wasserman had seenthis practice being employed in band booking by thefounder of MCA, Jules Stein, and adopted the same practicein 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 wouldpermit the talent agency to take on TV production. Whenin 1961 SAG eventually terminated the MCA waiver, itexplained to its members that the waiver had been grantedto encourage the growth of the TV film industry and theemployment opportunities of motion picture actors. Atthat time, in spite of the enormous economic impact oftelevision on the theatrical box office, a large segmentof the industry was determined to resist the newmedium. Under the terms of the waiver, TV productionincreased substantially and our purpose was fully achieved 4

(Schumach, 1961).Wasserman launched MCA into TV production through

a newly formed subsidiary, Revue Productions, which

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 couldnot count on much cooperation from the Studios, werehappy to buy the whole package. In the end, MCA starteddeveloping complete packages (script plus talent) andshopped 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 entireproduction budget. Packaging for television helped MCAleverage its roster of talents in much more profitable ways,because they could now package stars with less well-knownactors and created more work opportunities for a largernumber of talents. By 1959, MCAs annual gross income hadgrown to $58 million: $9 million from commissions, $3 millionfrom studio rentals, and $46 million from television produc-tion and distribution (Anderson, 1994).

Minor studios had also entered television production in thelate 1940s, trying to leverage their experience in producing Bmovies. 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 dealingwith radio broadcasters and their office in New York. Amongthe other talent agencies, the only competitor who couldrely on similar contacts and experience was William Morris,which indeed, followed MCAs lead to start packagingproducts for television.

MCA was nowde facto more a production company thana talent agency, and therefore the 1961 acquisition of DeccaRecords and its subsidiary, Universal Pictures (one of thethree minor studios), only sanctioned the fact that MCAwas now a Hollywood Studio. By this time, TV productionwas much more profitable for MCA than the talent agencybusiness and therefore, when faced with an injunction from

the Justice department in 1962 to divest Decca Records andUniversal Pictures, Wasserman negotiated a deal to keepboth and accepted dissolving the talent agency (Gomery,1998). When Wasserman dissolved the agency business andmaintained the Production and Distribution business ofUniversal Pictures and Revue Production, many questionedhow he would deal with the soaring production expenses. InJune 1963, MCA agreed with NBC to produce a full seasonof 2-h feature films for weekly screening on NBC during the19641965 season. This made-for-TV movie strategy provedhighly successful. In October 1965, MCA and NBC made a$60 million film deal. The deal included 60 Universal filmsfor network screening at about half a million dollars each:

40 for screening on the networks owned and operatedstations at about a hundred thousand dollars each; anuncertain number of made-for-TV feature films for anestimated subtotal of 15 million dollars. The steady flow ofTV production stemming from contracts like the one withNBC made it possible for Wasserman to organize UniversalPicture productions in ways much closer to the traditionalHollywood Studio System he had helped bring down. Giventhe small budgets of the typical TV production, the toptalents were out of reach. However, Universal built a list ofyoung, affordable talents and started to loan them out toother studios, as Wassermans antecedents had done at theapex of the studio system (Schumach, 1961). Through the1970s, the power of Universal Television was prevalent all

over Hollywood. No other TV producer came close to MCA.



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In the fall of 1976, Norman Lear, MCAs closest competitor,provided 4 h of shows a week on prime-time networkprogramming, and MCA provided 14. As of 1978, MCA wasstill far ahead of all other major studios in networkprogramming as shown in Table 5.

This episode in the evolution of the industry reinforcesour interpretation of the changes that led MCA to acquire

a dominant position in Hollywood after the Paramountdecree. Once again industry players were coping with anenvironmental shock (Tables 3 and 4), and their actionsshaped the emergence of a novel industry architecture, inwhich long-term contracts with TV broadcasters generatedenough stability to bring back the vertically integratedstructure of the studio system in the production, distribu-tion, and exhibition of TV shows (Figure 1). Incumbentsconstraints and actions, which were reasonable given thelogic in which they operated, the investment they hadmade, and the uncertainty surrounding the emerging TVbusiness, created a vacuum that MCA and minor studiosexploited.

Two industry practices were critical in the process.

Packaging was the stepping-stone MCA and other agencies

later on used to enter TV production. Independent producersand minor studios interested in producing for TV and TVbroadcasters looking for sources of content alternative toadvertising agencies all welcomed packaging as a source oftalents.5 MCA-NBC long-term contracts broke the industryfree from the uncertainty of the box-office and created theconditions for reconstructing a vertically integrated archi-tecture. In both cases MCA pioneered the use of thesepractices and the industry architecture that emerged helped

consolidate their strong position in the industry.

Table 4 Reaction of different industry players to the emergence of television

Actor Actions Rationale

Studios Tried to control TV by buying radio stationsand applying for TV station licenses.Invested in alternative technologies (theaterTV, 3D, Cinerama, etc.)Minors started to produce for TV earlyMost Majors started producing for TV onlyafter 1952.Did not release major theatrical films totelevision until the 1960s.

Perceived the TV first as an extension ofthe studio system and then as a formidablecompetitor once it was obvious that theycould not control TV. Sought to differentiatefrom TV by investing in alternativetechnologies. Since TV initially demandedcheaper programs which they were notwell positioned to produce after the 1940s(due to high fixed overheads, massiveadministrative offices etc.), TV productioncame late(Stuart, 1982)

Independent producers Produced extensively for TV during 1940sand 1950s

Perceived TV as an opportunity to exploittheir capability to produce cheap movies,which TV required

Other talent agencies(William Morris)

Since most did not have a strong roster oftalent in the beginning they were not very

active in TV.Of the larger talent agencies, William Morrisdue to its experience in radio was activelypackaging for TV (Balio, 1985)

Used their extensive experience with radioand movies and contacts with advertising

agencies to move into TV business

Federal communicationscommission

Took actions to prevent major studios fromhaving a stronghold in TV business (such asTV station freezes)(Hilmes, 1990)

Took protective actions in favor of TVnetworks against major studios due to thenegative public sentiment about major studiosmonopolistic actions after Paramount decree

Radio broadcasters Dominated TV broadcasting.Entered long-term deals to source filmedcontent with independent producers andMCA.

Tried to avoid advertisers agencies liveproductions, reasoning that it is less riskyand more profitable (due to multiplecirculation) to have recorded production(such as movies and series) rather thanlive TV

Exhibitors Lobbied studios not to produce for TV Feared losing business to TV

Table 5 Supplier market share of major movie studios in network televisionseries, fall 1978

Studio Market share (%)

Universal 18.620th Century Fox 4.9Paramount 3.9Warner Bros 3.9Columbia 2

Source: Variety, 14 September 1977, p. 34.



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Interpretation and discussionThe industry architecture perspective (Jacobides et al., 2006),which builds on the insights of the modularity (Baldwinand Clark, 2000) and technological platforms (Gawer andHenderson, 2007) literature, suggests that architecturaladvantage stems from the ability to control a criticalactivity in the value chain to become the bottleneck of the

industry. Obviously, this investment ex-postappears logicaland essential to the new architecture, but ex-ante is basedon the acquisition of assets that will appreciate if the newarchitecture actually develops (Jacobides and Winter,2007). Jacobides et al. (2006) suggest that if (1) a particularasset stands to gain from innovation, (2) the asset is inshort supply, and (3) there is a possibility to invest whilethey are still cheap, then it is profitable to pursue theinnovation and buy the assets that will appreciate. Theyalso argue that an innovator [y] may try to achievearchitectural advantage by stimulating ferocious competi-tion in the complementary assets rather than in their ownsegments (Jacobides et al., 2006: 1214).

Our case study provides an example of how a newcomerto the motion picture industry, the MCA, could reshapethe industry architecture by (1) investing early in creativetalents, before their value soared, (2) introducing novelindustry practices (profit sharing, packaging, long-termTV deals) that increased the value of their investment, and(3) facilitating the growth of independent production. Bythemselves, these actions would not have been enough tosecure an architectural advantage. Another essential factorin the emergence of this advantage, as we emphasized in thecase study, were the actions (or inactions) of incumbents,channeled or constrained by regulatory and institutionalrules.

There is wide consensus in the literature that incumbents

struggle in adapting to technological (Henderson and Clark,1990; Christensen and Bower, 1996; Christensen, 1997) andregulatory change (Smith and Grimm, 1987), and that thisresistance to adaptation might be partly explained by theexisting institutional logic (Thornton and Ocasio, 1999) andthe cognitive frame employed to interpret technologicalchanges (Tripsas and Gavetti, 2000; Kaplan and Tripsas,2008; Tripsas, 2009). In the MCA case the decisions takenby incumbents, because of regulatory and institutional con-straints, created an opportunity for entrepreneurial actorsto experiment with novel practices and influenced theindustry architecture in their favor.

The integrated logic that permeated the Studio System of

the 1930s, together with the limitation created by theParamount decree and the FCC actions, shaped the actionsof the incumbents to open up opportunities for novel playerssuch as MCA. Other agencies, such as William Morris, weremore focused on other (more profitable) segments of thebusiness and were not particularly interested in controllingHollywood talent, given the widespread use of 7-yearcontracts in the pre-Paramount decree era. The Studioswere not incompetent, but they were dealing with the riseof television following a strategic template based on anintegrated logic. They tried to control TV exhibitiondirectly, invested in technologies that would make it harderfor television to compete, and shifted production to Europeto reduce costs. Their actions were consistent with the

dominant institutional logic of the industry. Indeed, when

TV production started to take off, it did not take moststudios too many years to follow (by 1955 all the majorswere also producing for TV; Table 5), but by then MCAhad secured long-term contracts with TV networks. Theintegrated logic shaped the way in which studios reacted tothe emerging technology (Tripsas, 2009). Note that onceWasserman had rebuilt the integrated logic in the movie

industry, he also fell prey to the same constraint andignored or could not prevent the rise of Creative ArtistsAgency (CAA). This company, founded by former WilliamMorris agents in 1975, aggressively recruited a large numberof talents, brought the packaging practice back fromtelevision to the production of movies, and became thethird largest agency in the industry and a dominant forcein Hollywood in the 1980s. Despite the fact that Wassermanhad pioneered the use of packaging to leverage his positionas 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 manycompetitors understood Dells business model, they foundit very hard to imitate without disrupting their existingoperations, their asset investments and their channel relation-ships (Rivkin and Porter, 1999).6 Nevertheless in this case thetrade-off did not stem only from the economics of theincumbents strategies, but also from the set of institutionalconstraints in which the incumbents operated. As critical asincumbents actions are in creating opportunities to reshapeindustry architecture, they would not by themselves have beenenough to trigger a change in industry architecture with anarchitectural advantage for MCA.

Introducing novel industry practices (Lounsbury and

Leblebici, 2004) such as packaging, profit-sharing, andlong-term contracts was the other essential step indeveloping an architectural advantage for MCA. Itreconfigured the web of transactions among the keyplayers in ways that strengthened its position. Thesepractices not only helped MCA lower the studiosbargaining power, but also helped consolidate its controlon one asset that became much more valuable in thePost-Studios era ushered in by the Paramount decree.Here it is critical to stress that both profit-sharing andpackaging helped created a more modular industryarchitecture which benefited players with investmentsin relationships, rather than production assets. Miller

and Shamsie (1996) interpreted this shift from property-based resources to knowledge-based resources through aresource-based lens (Barney, 1991). They argued thatthe former are more critical in stable times, while thelatter mattered more in times of uncertainty. Our casestudy is consistent with their findings, but illuminatesthe mechanisms that lead to architectural shifts and howone firm managed to benefit from it.

Our interpretation of the historical evidence is far frombeing uncontroversial, and it is important to specificallyaddress other factors that we believe are complementaryto our analysis. The first factor we need to consider is therole of Wassermans individual characteristics. Historicalaccounts are consistent in stressing his charisma and

negotiating skills, and it is likely that these abilities do



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play a role in explaining his achievements. But manyother successful agents in Hollywood were also charis-matic (Selznick, William Morris, Feldman) and still werenot as successful as MCA in reshaping the industry (theywere still very successful as agents). Furthermore, onceat the helm of Universal, Wasserman missed manyimportant technological developments, such as the

development of pay TV (HBO). He invested in unsuc-cessful technologies (laser disc) and never really mana-ged to stabilize Universals financial situation, selling iteventually in 1990 to Matsushita.

Another account of MCA success focuses on how JulesStein and Lew Wasserman related to politicians and unionleaders. 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 theextent that in 1962 the unions complained about theDepartment of Justices antitrust suit against MCA. Theyargued that the suit would prevent MCA from makingmovies in Hollywood, thus reducing their members

employment opportunities. Note that both these connec-tions were developed in the 1940s when Wasserman wasa young agent with few clients (and Ronald Reagan amediocre actor). Likewise, his relationship with the unionwas developed in those early years and cemented between1966 and 1974 when Wasserman was the Chairman of thelabor-negotiating arm of the Motion Picture Associationof America (MPAA).7 Given that these relationships weredeveloped while Wasserman was rising to power, we shouldbe careful in assigning them too much explanatory power.At the same time, Wassermans political clout must nothave been particularly effective given that MCA was thetarget of a successful Department of Justice anti-trustsuit. Indeed, it was this defeat that prompted him to lead

the industry in improving their lobbying presence inWashington. It was Wasserman who hired Jack Valenti,then Lyndon Johnsons personal assistant, to lead theMPAA effort in the capital.

Beyond political connections, it is fair to say thatLew Wassermans structural position in the industryfacilitated MCAs rise in the industry. As we mentioned,packaging was widespread in band-booking andWasserman therefore merely transferred a practice hiscompany was very familiar with. Another advantageMCA leveraged was its presence in New York, with itsexisting contacts through their radio business. Thesenetworks 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 WilliamMorris and Famous Artists Agency, already operated inNew York and in the radio business, so these ties werehardly unique to MCA.

In sum, both Wassermans charisma and his socialnetwork and structural position played an importantcomplementary role in enabling the changes we described.Given the single case design of this study, it is impossiblefor us to systematically explore the relationship betweenthese complementary factors. Nevertheless, it seems reason-able to assume that neither Wassermans skills nor hissocial networks could have been a sufficient condition forthe changes in the rules and role of the motion picture

industry and the rise of MCA.

Theoretical implications and concluding remarksConclusions from an historical case study deserve healthycaution, given the limitation of a single case study designand the multiple interpretations of historical evidence.But the case of Lew Wasserman and MCA providesinteresting insights to both extend our understanding ofindustry evolution and identify the mechanisms that mightexplain whether and how a firm can build an architecturaladvantage.

Contributions and theoretical implicationsWe started from the suggestion that architectural advantagestems from becoming the bottleneck of the industry(Jacobides et al., 2006) and identified three conditions thatenable newcomers to shape industry architecture to theiradvantage after environmental shocks: (1) the newcomeracquires control of potentially mispriced resources thatstand to gain from the environmental shock, (2) industry

incumbents, constrained by regulatory and institutionallogics, react to the shock, and their actions create a spacefor newcomers, and (3) novel practices gradually substitute,complement and rewire the network of industry exchangein ways that strengthen the newcomers central role andresources. These propositions will require further refinementand more systematic empirical testing, given the design of ourstudy. But in terms of theoretical development, we contributeto the theory of architectural advantage in two ways.

First, we suggest that the opportunities for entrepreneurialaction are essentially generated by the incumbents attemptsto cope with environmental jolts (Meyer, 1982) and maintainthe old architecture by disinvesting in assets that mightbecome valuable in the new architecture. Our contribution

is consistent with findings of a study on the emergenceof banking and the partnership system in RenaissanceFlorence (Padgett and McLean, 2006). There members ofthe Florentine elite, attempting to maintain their positionof dominance, acted in ways that eventually opened upopportunities for fundamental changes in the political,economic and social structure of the city. Novel practicesexploded. In the words of the authors: Florentine elitesinvented not because they wanted to, but because they hadto, conservatively to preserve their threatened positions(Padgett and McLean, 2006: 1473). Like in recent studiesof the British construction industry (Cacciatori andJacobides, 2005) and mortgage banking in the United

States (Jacobides, 2005), the motion picture industry novelarchitecture emerges from the purposive actions of avariety of players (studios, talents, exhibitors, radio and TVbroadcasters, unions, professional associations, govern-ment regulators). Our contribution extends their findingsby suggesting that the dominant logic of the industry, inour case the integrated logic dominant in the 1940s,together with other regulatory and institutional arrange-ments, limited the industry players range of options andcreated opportunities for nimble players who are notconstrained by the same logic. Furthermore, we specificallysuggest that the actions of the incumbents might acceleratethe change in architecture by selling assets that thenewcomers might leverage more efficiently in the novel

architecture they are building.



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Secondly, this article sheds light on the critical roleplayed by industry practices in facilitating new patternsof collaboration (and competition) across economic actors.Designing, championing, and institutionalizing innovativeindustry practices, we suggest, is the path to creatingarchitectural advantage. Through these new rules, newentrants in a specific segment of an industry can stimulate

competition in its adjacent segments and consolidate theircontrol over critical resources.8 This control can beachieved not only through technological design choices,as the literature on modularity (Baldwin and Clark, 2000;Brusoni and Prencipe, 2006; Fixson and Park, 2008) andplatforms (Gawer and Henderson, 2007; Tee and Gawer,2009) has shown, but also from more mundane contractualreconfigurations of the industrys exchanges. For instance,securitization in the US mortgage market was madepossible by a series of interconnected administrativeinnovations (optional delivery schemes, standardizationof loan characteristics, creditworthiness scores, etc.) thatsimplified coordination and standardized information.

These practices enabled the emergence of a novel archi-tecture in the mortgage industry (Jacobides, 2005). Ourcontribution is consistent with these findings, but alsosuggests that the architecture enabled by the novel practicesmight shift profitability across segments and across industries,and thus create the basis for an architectural advantage.The practice of packaging helped MCA leverage its abilityas a knowledge integrator (Brusoni et al., 2001; Di Biaggio,2009) but given our research design we could not analy-tically separate the industry practice from the organiza-tional capability. Future research should explore howindustry practices complement firm capabilities in theprocess of developing architectural advantage. Morebroadly, our study did not elaborate on the role of

capabilities in shaping the evolution of the competitivetrajectories (Cacciatori and Jacobides, 2005; Jacobides andWinter, 2005; Camuffo and Zirpoli, 2009) and futureresearch should explore this important relationship.

In addition to contributing to the development of atheory of architectural advantage, our findings mightinform future studies in two distinct research areas. Ourfindings on the role of industry practices complements thestudies of innovative business models in emerging indus-tries (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 ourfindings would suggest that business model innovation is

only a necessary, but not sufficient, condition to triggeran architectural change. The acquisition of mispricedresources by newcomers and the incumbents (in)actionare also critical for newcomers to enter the industry, redrawits boundaries, and achieve an architectural advantage.

Our findings are also consistent with the insights of theliterature on institutional entrepreneurship (Garud et al.,2002; Greenwood et al., 2002; Hwang and Powell, 2005;Munir and Phillips, 2005) and we suggest that developingan architectural advantage depends, among other things, onthe ability to reshape the institutional fabric of a field.Future research should explore how the multiplicity oflogics, practices, and roles in an industry providesopportunities for individual actors to develop an economic

advantage. For instance, the overlap between different

organizational fields might create opportunities to inventcreative industry practices and reconfigure architecture. Inthe case of MCA, for instance, packaging originated in theband-booking business, in which the company had operatedfor years. What appears as an invention in Hollywood isessentially the adaptation of a template originating in anotherindustry. Not only practices travel across industries, but also

the presence of multiple logics within the same industrycreates more opportunities for architectural change. From itsbeginnings the motion picture industry has always oscillatedbetween an integrated logic, exemplified by the verticallyintegrated studio system where hierarchy is the key coordina-tion mechanism; and a talent logic, in which differentactivities are coordinated through contractual agreements. Inthe latter, agents play a more central role. With theintroduction of profit sharing and packaging, MCA revivedand recombined an institutional chemistry that was already inthe industrys DNA (Schneiberg, 2007). Eventually whenmotion picture industry and TV broadcasting became moreintegrated, studios went back to a more integrated architecture.

This structural characteristic of the motion picture industry isconsistent with the observation of institutional theorists thatmultiple logics can create diversity in practice by enablingvariety in cognitive orientation and contestation over whichpractices are appropriate. As a result, such multiplicity cancreate enormous ambiguity, leading to logic blending, thecreation of new logics, and the continued emergence of newpractice variants (Lounsbury, 2008: 354). At the same time, wesuggest, this ambiguity creates entrepreneurial opportunitiesthat can be leveraged to build an architectural advantage.Industries characterized by more homogeneity in logics mightprovide less opportunity for architectural change, becausenovel practices creating new patterns of exchange might bemore difficult to diffuse and institutionalize.

Practical implications for strategy and policyGiven the many limitations of this study, it might bepremature to extend our findings to their prescriptiveimplications. But a few insights from this work might helpmanagers operating in industries with unstable, contestedarchitectures and entrepreneurial firms trying to enterthem.

Incumbent firms should carefully consider their movesin adapting to technological and regulatory change. As inthe case of the 1950s movie industry, their action aimed atdamage 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 inorder to maintain their industry architecture, music labelsmight have created the space for the growth of Apple in therelated digital music retailing activity. Apple tried to buildan architectural advantage in the emerging digital musicretailing business by (1) leveraging its dominant marketshare in the mp3 players market, (2) facilitating consumersswitch to the new purchasing habit by developing a user-friendly web purchase experience (Itunes), and (3) breakingaway from the CD format (unbundling). Given the marketshare I-tunes currently enjoys in this market (70%), the

labels are now trying to foster competition in the digital



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music retailing market by supporting the entry ofpotentially competitive players (i.e. Amazon.com).

Entrepreneurial firms who try to develop an architecturaladvantage in an emerging industry could leverage ourfindings by asking themselves whether incumbents reactionsto environmental shocks is creating investment opportunitiesfor them. For instance, the digital revolution in the newspaper

industry is pushing leading newspapers towards outsourcingthe production of content, and is therefore liberating manycreative talents who are now increasingly working as free-lancers. Could these resources that newspapers are letting gobe more profitably leveraged by entrepreneurial playersunder a new industry architecture?

Venture capitalists trying to identify investment oppor-tunities might leverage our contribution on the role of theoverlap between organizational fields, and focus theirefforts in industries where more logics intersect, becausewe would expect more innovative industry practices toemerge and therefore, ceteris paribus, more opportunitiesto reconfigure the industry and develop an architectural

advantage.In terms of policy implications we might note thatantitrust regulators, both in Europe and the United States,are increasingly showing signs of dissatisfaction with thetraditional categories of market power and industrydominance, and might be interested in understandinghow dominant positions based on architectural advantagemight limit competition in other segments or in adjacentindustries. Our contribution, by specifying the conditionsthat lead to the development of architectural advantagecould help regulators identify specific actions that mightlead companies to develop this advantage and stiflecompetition in the industry. For instance, antitrustauthorities in the United States are obsessively monitoring

Googles market share in the search-advertising market(around 75% in 2009) because their position in the searchspace might enable them to illegally promote their videoproperties (YouTube) or their web services such as onlineword processors and spreadsheets (Google Docs). Follow-ing our framework we might instead focus our attention onthe book-scanning initiative (Google Books), which mighteventually become the bottleneck of the entire publishingindustry.

Concluding remarksIn conclusion, despite its limitations, we believe our study

has illustrated the potential research on industry evolutionholds for disciplinary cross-fertilization. Bridging socio-logically rooted institutional theory with economics-basedinsights from the industry architecture perspective mightbenefit both camps. Institutional theorists could benefitfrom considering in detail the economic implications of thepractices they have studied so effectively and also theimplications of institutional changes for individual firms (acore concern for strategists). Strategists could betterintegrate the role of institutional logics in their theoriesof architectural advantage and consider how these logicsaffect competitive dynamics.

The idea that corporations can achieve a competitiveadvantage by influencing the design of the industries in

which they operate is fascinating and of obvious relevance

to corporate strategists and policy-makers. Developingand testing a rigorous theory of architectural advantage isno easy feat, and our attempt to explore how firms candevelop it still cautious, yet a first step in the direction ofunderstanding a novel form of competitive advantage.

AcknowledgementsThis article benefited greatly from the helpful suggestionsprovided by Johanna Mair, Joan Enric Ricart, Silviya Svejenova,Sidney Winter, and by participants at the 2008 Sumantra GhoshalConference at London Business School, the 2008 Academy ofManagement Annual Meeting in Anaheim, and the 2008 StrategicManagement Society Conference in Cologne for helpful sugges-tions. We thank Michael Jacobides, Andrea Prencipe and StefanoBrusoni, guest editors for EMR, for the thorough guidance inshaping the article, and four anonymous reviewers for theirinsightful comments and suggestions. Kathleen Jackson providedexcellent editorial assistance. We also gratefully acknowledgegenerous funding from the Spanish Government Research Grant(Ministerio de Educacion y Ciencia SEJ2006-11833), the Public-Private Sector Research Center (SP-SP), and the Center for

Globalization and Strategy at IESE Business School.

Notes

1 The primary legal objection to block-booking was that itextends 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 hadalready started to rely less on block-booking. After signing a

consent decree to settle another Justice Department investiga-tion on the practice, but only with the Paramount Decree, thepractice was eventually banned.

2 Film financing had been at the core of the studios activity sincethe emergence of the Studio System. With rising production

costs and increasing box-office uncertainty, financing hadbecome more difficult and studios could effectively leveragetheir size in this activity by spreading their risk over a largenumber of productions. Given the scope limitation of thispaper, we will not discuss financing in detail, and focus onproduction, distribution, and exhibition.

3 Advertising agencies already dominated the production of radioprograms, designed according to the needs of large advertiserssuch as Procter and Gamble, Texaco, or Chrysler. They translatedthis model to television production but the networks wereincreasingly unhappy about their inability to control productionand scheduling and started exploring alternative sources oftelevision production (Hilmes, 1990).

4 The Screen Actors Guild (SAG) had long forbidden talentagencies from producing motion pictures, because of the innateconflict of interest in concurrently being the agent and theemployer. Other agencies, such as Famous Artists Agency, hadbeen granted waiver for occasional pictures (Balio, 1985), but noother agency had received a blanket waiver. Ronald Reagan,who was one of Wassermans clients and a personal friend, wasPresident of SAG at the time, and many historical accounts ofthis SAG decision stress the important role this friendship.

5 The fact that they needed the talents and packaging providinga 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 commis-sions, 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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a problem and facilitated the transition of filmed content fromHollywood to TV.

6 Another interesting similarity between MCAs disruptivestrategy and Dells, was their reliance on a lighter-than-airbalance sheet. In a 1962 interview with the New York Post, LewWasserman commented: To us the most important thing ismanpower because thats all we really have here. We have no

inventory, and our assets, we put them under our hats and nightand go home (Gelman and Aronowitz, 1962). This is in starkcontrast with the tradition brick-and-mortar studio system. Theinability to react to the threat might also be based on the relativerigidity of the asset base of the Studios.

7 One version of the union connection story, very popular in themedia, focuses on Lew Wassermans friendship with SidneyKorshak, a labor lawyer often considered the mobs man inHollywood and a very influential fixer in labor negotiations.Korshak was never indicted for any crime, but even if his mobconnections were true, it is well established that he wasproviding his services to most studios already. MCA was nothis 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 affectrelative profitability across segments, and show that thepresence of a firm with superior idiosyncratic capabilities

increases the relative profitability of the entire segment. Ourfindings are consistent with this evidence. MCA acquired adominant position in its segment of the industry (talentagencies), 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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