Part III universal Studios history, resources and capabilities, strategy



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Part III - Universal Studios history, resources and capabilities, strategy

A first look at Universal Studios’ century of history is enough to understand that this firm has had its ups and downs. Some of the company’s most significant milestones are a litany of takeovers almost more numerous than the number of golden statues brought back from the Oscars ceremonies [JG17]. One hundred years ago Carl Laemmle founded the Yankee Film Company, and eventually becoming the Universal Film Manufacturing Company after he merged his business with a few other production firms [JG18]. During its first years the studio produced all its movies without taking on any debt, with Laemmle closely controlling all expenses. The company focused on inexpensive features that would appeal to a large audience in small towns, punctuated by a few big hits like “The Phantom of the Opera” in 1925.

When Carl Laemmle Jr. succeeded his father in 1928, he began making some strategic decisions for the studio. To start, he began building and buying theatres to better control the distribution of the movies produced by his studio and to match existing theater chains operated by Universal’s main competitors. Second, he invested in technology by upgrading the studios’ sound and color capabilities. Third he identified horror films as a niche market that soon became synonymous with Universal thanks to “Dracula” and “Frankenstein”, both released in 1931 [JG17]. Now that Universal was able to compete against the other main studios Carl Laemmle Jr. was pushing for bigger productions and finally had to ask for a $750,000 production loan from the Standard Capital Corporation in 1935. Although Universal’s “Show Boat” was a big hit, its production ran over budget and Carl Laemmle Jr. was unable to repay the loan, thus forfeiting his stake in the studio founded by his father [JG18]. After a period of great ambition followed by one of financial distress, the new management team cut production budgets, forcing the studio to focus on low-budget movies. The studio’s lack of resources and inconsistent management made it easy prey for entrepreneurs hoping to acquire a piece of Hollywood’s stars and lights.

One of those hopeful entrepreneurs, J. Arthur Rank, came from the UK and organized a four-way merger that eventually resulted in Universal-International Pictures but left Rank on the outside, looking in. A few years later, Rank, then head of Decca Records orchestrated another takeover of the company in 1952 before eventually being acquired by the Music Corporation of America (MCA) in 1962.

MCA was, at first, a talent agency which had diversified to become a television production company [JG18]. Lew Wasserman, CEO of the new structure, contributed greatly to Universal’s early success. He remains famous for negotiating a percentage deal between the studio and actor Jimmy Stewart, ten years prior to the MCA-Universal merger. While the main asset of Universal was its studio facilities in Hollywood, MCA and its new CEO had crucial relationships with famous actors and directors that were then signed with their newly acquired studio. Over the years, budget constraints were relaxed. Investing in production, Universal Pictures was able to produce classic films that remain popular to this day such as “The Sting”, “Out of Africa” and “E.T. the Extra Terrestrial” [JG17]. Yet all movies were not hits and revenues were irregular, even when the firm broadened the market by distributing its films internationally through a venture with Paramount (Cinema International Corporation [JG18]). Meanwhile, MCA had identified the potential of television, which was rapidly penetrating into every US household. MCA already served the national networks’ demand for content, thus MCA’s ownership of the studio allowed the company to produce a greater variety of content which represented a much more diverse revenue stream. With the invention of the made-for-TV movie format, it is believed that MCA delivered up to half of NBC’s prime time shows for several seasons during the early 1970’s [JG18]. After the VHS videocassette appeared, the company created MCA Home Entertainment Group in 1980 to sell videos of previously released movies [JG17].

Feeling that television was the future of the industry and ambitious to distribute shows through more broadcast and cable networks, MCA management decided to look for a rich partner. The Japanese Matsushita Electric Industrial Company had the cash interest to strike a deal. At the time Matsushita’s CEO Akio Tanii was pushing the company toward a more global strategy [JG19]. His rationale was that Matsushita’s “hardware” of cameras, videocassettes and recorders complemented MCA’s “software” of music, movies and TV programs forming “two wheels of the same car” [JG20]. There is also a cultural issue of pride since Matsushita’s main competitor, Sony, although only half Matsushita’s size, had already acquired CBS Records and Columbia Pictures in the USA. In hindsight, the synergies to be found between the manufacturing of electronic consumer goods in Japan and the production of video content in Hollywood was tenuous at best. Further complications arose due to very different internal cultures. Matsushita relied on long-term business plans while MCA needed to be responsive to any change in consumer tastes. When the Japanese economy entered recession, Tanii’s strategy shifted from international expansion to cutting costs everywhere. When he was replaced, Matsushita’s new CEO decided to sell 80% of its stake in MCA to the family-owned, Canadian liquor company Joseph Seagram Ltd [JG19].



Seagram CEO Edgar Bronfman Jr. took the proceeds of the company’s recent DuPont divestiture [JG21] and immediately began looking to invest in the media industry, believing that the potential for growth was much higher than chemicals. He acquired MCA in 1995 followed by Polygram NV, pooled all music assets under Universal Music Group and once again began looking for a new partner to join in the newly formed venture. On the other side of the Atlantic, Bronfman found another kindred spirit sharing his faith in and aspirations for media. Jean-Marie Messier became CEO of the French utility conglomerate Compagnie Generale des Eaux in 1996 and he was trying to turn the newly renamed Vivendi into a large media group through ventures and acquisitions [JG22]. He first created a telecom subsidiary, Cegetel, to enter the market previously controlled by the state-owned monopoly, France Telecom. In 1999 the group merged with Havas publishing to become Vivendi and began a long series of publishing and software acquisitions. Vivendi stepped into the TV business when it acquired a majority share of Canal + stock. Vivendi was also partnering with Vodafone to develop mobile content distribution software Vizzavi [JG22]. On January 10th, 2000, AOL announced it was acquiring Time Warner and thus giving birth to the first global fully integrated media company with an estimated $30 billion in annual revenues [JG23]. With the NASDAQ at its peak in February 2000 [JG24] the ‘Internet bubble’ was luring Bronfman and Messier. In an expensive deal Vivendi took over Seagram and Canal +, sold its own utility company and Seagram’s liquor businesses, becoming Vivendi Universal (VU), the second largest global communications group with activities in all facets of media [JG22]. As Jean-Marie Messier, CEO of the new entity put it, the goal of this giant corporation was “to make the Internet swing” [JG25]. His ambitions were based on the credible assumption that an integrated media company would create more value if it was able to deliver multiple formats of content through diverse communication channels. VU’s strategy soon proved to be overly optimistic. Strategy notwithstanding, there are other reasons for the failure of VU. First and foremost, the portfolio of assets exhibited few, if any synergies. The acquisition premium paid for French pay-television Canal+ could not be justified given the relatively small customer base of only 14 million customers. Second, VU’s investment in mobile distribution relied heavily on the presence of a capable network. Mobile phone providers failed to adopt the GPRS standard sufficiently early leaving VU unable to deliver content through its telecommunications subsidiary. Finally Messier had very little experience with the media industry and was often in conflict with his subsidiary management teams. Despite the abysmal corporate performance, Universal Studios, itself, had nothing to be ashamed of, maintaining its third place position in the industry. Moreover it gained a new international dimension as joint projects were undertaken with StudioCanal. The latter distributed some Universal movies in France while the former successfully distributed French titles such as “The Brotherhood of the Wolves” in the US. They also coproduced some movies such as “Love Actually” [JG18]. While the basis for Universal’s international expertise may have been due to the fact that the firm was the first major to open a studio abroad, (Germany, 1932) [JG18], it is more plausible that being a part of Vivendi’s portfolio helped Universal acquire a knowledge of foreign markets and the capability to partner with foreign studios to produce movies in local languages. After significant value destruction in other portions of the portfolio, Segram and Vivendi decided to capitalize on Universal’s brand strength, by foregoing the MCA moniker for Universal while simultaneously renaming Polygram records as Universal Music Group.

In 2002 Vivendi made what is arguably one of its best decisions in recent history by identifying General Electric as their most appropriate partner. Vivendi did not get rid of its Universal division, but instead kept control of all music activities and traded its stake in Universal Studios and Television group for cash and a 20% stake in the newly created NBC Universal [JG26]. NBC was both the most prominent and the most profitable television group in the US, yet NBC had no movie production operations. By combining the two groups GE and Vivendi estimated that they created synergistic value in two ways. First they realized $100 million of extra revenue per year due to mutually beneficial promotion activities. Second they identified $350 million in annual cost reductions through common advertising, sales, procurement, programming, IT and other overhead [JG27]. With a market capitalization of $13 billion, NBC Universal would compete with other giant media groups such as Viacom, AOL Time Warner, Disney or Fox but would, per GE mandate, be the most profitable, with 20% operating margins.

This goal has been attained, as the latest ‘performance summary’ demonstrates. For the last quarter of 2008, NBC Universal profits were above 19.50% on $4.430 billion in revenue [JG28].

To gain insight into how Universal fits into its parent company’s overall strategy, it is imperative to identify the resources available. The NBC Universal television network, Universal’s most prevalent content channel, is broadcast to an estimated 99% of homes in the U.S., and derives its strength from the combination of NBC’s stong national identity with the local programming of the independently owned affiliates [Source 2]. The network itself, comprised of NBC Local Media, Telemundo and NBC Entertainment, develops multi-lingual local and national content that has garnered more Emmy awards than any other network in history. To Universal Studios, this network represents a high yield distribution channel for its catalog of successful feature-length films.

The most immersive of Universal’s business segments is its Parks and Resorts. Here Universal’s most successful franchise’s are constantly on display in various forms of distribution. With stateside properties in California and Florida, and international offerings in Japan, Dubai and Singapore, Universal’s Parks and Resorts support the parent company’s multi-channel, international push to leverage and promote its entertainment offerings.

As Universal became a part of NBCU, it gained access to a huge internal market, able to sell its library of titles to broadcast and cable stations of the group. Yet, there still remained a gap in NBC Universal’s coverage of the entertainment market, CEO Jeff Zucker has identified and pushed the studio to diversify into new digital platforms, as illustrated by his statement in GE’s 2008 annual report: “The distribution system is evolving. We know we will be in the business of projecting images onto screens. But where will those screens be? We have to drive content through a lot of different mediums.” [JG29].

An emerging and increasingly important business segment is NBC Universal Digital Media (UDM). Charged with setting the company’s digital media strategy through content and distribution efforts, this segment is actively engaged in developing the business model that will harness emerging technologies. UDM is focused on development of:


  1. The digital distribution business model through the Peacock Equity Fund, a VC collaboration with GE Commercial Finance;

  2. Digital infrastructures such as on-demand, interactive TV, broadband, wireless and Internet Protocol Television (IPTV);

  3. Digital Content Development through Hulu.com, an online video service offering content from Universal, Fox, Sony Pictures, Warner Brothers, NBA and the NHL [Source 3].

Of particular note is the emergence of Hulu, a modular alliance between Universal and News Corp., built on the recognition that developing the standard for internet content distribution is not possible without a large number of allies who all share in the spoils.

A sizable portion of the content, theatrical and non-theatrical, available through NBC Universal’s other channels is developed by Universal Pictures. The studio’s business strategy, in typical GE fashion, focuses on diversification, international expansion, utilization of distribution channels and risk management through the effective use of its numerous production agreements, Home Entertainment Group and Focus Features niche studio [Source 4].

Surprisingly the only key resource brought in by Seagram when it took over MCA in 1995 is one that fits perfectly GE’s overall strategy: Universal Studios’ president and COO Ronald Meyer [JG30]. GE’s famous “Imagination at work” slogan reflects how Jack Welch turned it from a bureaucratic structure to a place where everyone’s inputs are encouraged and valued. If Ronald Meyer is still managing the studios operations after 14 years, it must have something to do with the fact that he has always considered the people to be Universal’s most valuable resource. This man, who left school at 15 without any diploma, has been successful because he knows how to manage people and talent, while still recognizing his shortcomings. He has no grasp of how to develop a business plan and has plainly admitted that he surrounds himself with MBA graduates who can interpret financial data for him. When it comes to making decisions, where he excels is identifying new trends and maintaining good relationships with all partners. His philosophy is to “[be] honest, and to treat everyone the way you want to be treated. Care about people.” [JG31].

Strategy

In a competitive environment, characterized by a small number of strong, well-positioned firms, it is imperative for Universal to focus on the unique combination of resources and capabilities that can confer a sustainable competitive advantage. To gain insight into how Universal is positioning itself in today’s diverse world of multi-media entertainment, one need only look at their stated goal: “development, production and marketing of entertainment, news and information to a global audience” [Source 1].



A number of assumptions can be inferred from the above statement. First and foremost is that parent NBC Universal will continue to seek a strategy that is both vertically integrated through every stage of content development, production and distribution as well as horizontally integrated across established and emerging content distribution channels, such as film, television, resort destination and internet. Secondly, is the implication that this vertical and horizontal integration strategy will not be limited to the United States, but will be pursued on a global scale.

Universal’s strategy to develop, produce and market entertainment, news and information to a global audience is dependent upon effective integration of the resources and capabilities that reside in its Television Network, Digital Media, Film and Theme Park business segments. The emergence of a global, digital distribution channel comprising film, television and information uniquely positions Hulu.com to profitably harness the future of global content delivery for parent Universal.

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