“It reminds me of the circumstances attendant upon the death of Van Jansen, in Utrecht, in the year ’34. Do you remember the case, Gregson?”
“No, sir.”
“Read it up – you really should. There is nothing new under the sun.”
– A Study in Scarlet, Arthur Conan Doyle
Those who try to apply analysis to make predictions about an industry would do well to heed the advice of Sherlock Holmes, who himself took inspiration from Ecclesiastes. The study of the past, while it cannot of course predict the future, can allow one to pick cogent questions to guide an analysis.
In discussing the gaming industry, in the context of recent analyses, a number of trends have come under scrutiny. Despite a recent wealth of triple-A titles, there is still an undercurrent of customer dissatisfaction with what is perceived as a lack of imagination in game story lines, as well as a slow-down in platform innovation, both of which are exhibited in the constant crop of sudoku clones and cash-grab shovelware making up the bulk of today’s selection. This, combined with the stresses of a slow-down in the national economy, has ignited some debate among analysts as to whether the gaming industry will continue to grow, and whether the “mass” segment or the “class” segment will drive this growth. Some have argued that because gaming produces entertainment that is much longer-lasting than, for example, eating out or going to an amusement park, it should survive any economic belt-tightening much better than other competitors for customers’ dollars.
Some of these arguments sounded rather familiar. As a history buff, and in particular a student of financial history, one is led to ponder whether the experience of the motion picture industry in the late 1920s and early 1930s could possibly contain lessons for the gaming industry for the next few years.
As with the gaming industry, which has evolved from the Ataris and Intellivisions of the early 1980s to the Wii and Xbox of 2008, the motion picture industry between the era of 1903’s “The Great Train Robbery” and 1927’s “The Jazz Singer” was the source of continual innovation both in methods of presentation (film loops in nickelodeons to multi-reel epics in palatial movie houses) and content (Edwin Porter to D.W. Griffith to Ernst Lubitsch). There was much to attract moviegoers in terms of novelty and new sensations. In particular, the period 1926-1929 saw two major innovations: the introduction of two rival “talkie” processes (Warner Bros.’ sound-on-disc Vitaphone, and Fox Film Corporation’s sound-on-film Movietone), and the full-fledged introduction of two-strip Technicolor to feature films. Fox was also experimenting with a wide-screen format, Grandeur, two decades before Cinerama and similar technologies.
During this time, there was also an evolution in the marketplace, in terms of the companies that would dominate the industry. By the late 1920s, five companies had emerged as the leading firms, in part because of vertical integration in the production, distribution and exhibition of motion pictures (as well as the ownership of ancillary enterprises, such as music publishing firms). Metro-Goldwyn-Mayer, Paramount, Warner Bros., Fox Film Corporation and Radio-Keith-Orpheum spent vast sums of money to either acquire production facilities (Warner Bros.’ main lot today was acquired via the purchase of First National in 1929-1930), or to acquire theatre chains (Paramount-Publix, for example — in the case of MGM, it was a theatre chain, Loew’s, that owned the production company). Enterprises such as Universal or Columbia were viewed as “minor” studios, because they did not own theatre chains. Some firms were even eyeing emerging rival technologies; Paramount was an early investor in the Columbia Broadcasting System, purchasing a half-interest in the fledgling radio network in June, 1929 through the exchange of 58,823 shares of common stock worth about $3.8 million. RCA, the owner of the NBC radio networks, was a major stockholder in RKO.
As Richard Barrios notes in his book A Song in the Dark: The Birth of Musical Film, Hollywood invested very heavily in content, attempting to lock up sources of material, or even create it from scratch. Warner Bros., for example, backed the Broadway production of Cole Porter’s “Fifty Million Frenchmen” on Broadway in 1929, with the intent to produce the film version shortly afterward. As noted above, the film companies also bought music publishers in order to capture additional profits from the sales of records and sheet music associated with musical films (for example, Warner Bros. buying the venerable Witmark firm, and MGM purchasing Robbins).
Barrios describes the breakneck pace of production in the late 1920s, in which the demand for Technicolor productions meant that the special cameras would have to be messengered from studio to studio day and night, and the painstaking, exacting work of producing the complicated color prints competed with the jackhammers and rivet-guns putting together the expansion of Technicolor’s production facilities. Technical innovations created difficulties that had to be overcome. For example, in the Marx Brothers film adaptation of “The Cocoanuts,” it is noticeable that the papers characters read from seem limp and wet; this is literally true, since the crackle of dry paper would have overcome the primitive sound systems of the era, a point later spoofed in “Singin’ in the Rain.” Theatre owners were confronted with the need to adapt to incompatible sound systems, either the complicated synchronized disc-and-film setup of Vitaphone, or the expensive sound reproduction system required by Movietone.
Where the system showed the most strain, Barrios notes, is in writing. The period 1929 and 1930 saw a blitz of similar “backstage” stories and musical revues that eventually began to irritate audiences, judging from the complaints found in movie magazines of the era.
The backlash against all these stresses had begun to build in the fall of 1929, even as the studios, especially Warner Bros., Fox and Paramount, invested heavily and took on increasing amounts of debt. In September, 1929, there was even an announcement that Paramount and Warner Bros. would merge in a stock-for-stock transaction, creating a behemoth (”Paramount-Vitaphone”) that would dominate motion picture exhibition and production, and sparking rival merger plans between Fox and MGM. The stage was thus set for problems that began to accumulate when the stock market crashed in October, 1929, an event that in popular usage marks the beginning of the Great Depression.
One of the immediate effects of the Crash was to slash the prices of the securities of the film companies on the stock exchanges; it also greatly inhibited their ability to raise fresh capital through the sale of additional stock and debt. Four of the five major studios, in 1931, would have stock prices that were less than 10% of their 1929 highs. With the growing and additional stresses on banks, the other main source of money for film production and distribution dried up. Warner Bros., which had relied on short-term debt to fuel expansion, saw its ratings cut by Moody’s to “Caa,” just a few notches above default level.
While the major film companies were still completing expensive acquisitions in early 1930, consumers had begun to react to external market conditions, and the glut of similar offerings from the studios, Barrios notes, began to be a major drag. Given the long lead time from production to exhibition, it was very possible for a studio to have a vast quantity of product in the pipeline that would perform poorly once it was eventually released. Warner Bros., in particular, was victimized by a series of self-inflicted box office disasters in 1930 and 1931; some of the few successes it had came about because of radical surgery (for example, cutting all but one of the songs from 1930’s “The Life of the Party“).
It was thought that filmgoing, being relatively inexpensive, might do better in the constrained economic conditions, but the emerging technology of radio proved to be a formidable competitor, with consumers staying home and listening to the likes of Eddie Cantor and Ed Wynn. Even mini-golf, the subject of a short-lived craze in the early 1930s, was seen to compete successfully for consumers’ dollars, to the extent that some movie houses were converted into mini-golf courses. There were a number of successful films during this era; notably, Eddie Cantor’s polished musicals for Sam Goldwyn did very well, as well as Joe E. Brown’s brash comedies for Warner Bros.
In general, the year 1931 saw the collapse of the fortunes of Hollywood, with 1932 and 1933 seeing the first wave of bankruptcies. In the case of Fox Film Corporation, a complex corporate structure and over-expansion, combined with boardroom chaos and the distraction of an anti-trust suit related to the MGM merger, caused that firm to go bankrupt, with founder William Fox losing his ownership of the studio. (It would eventually merge with the smaller 20th Century Productions to become 20thCentury Fox.) Paramount-Publix, likewise, went into bankruptcy, shedding a number of assets, including its half-interest in CBS. RKO and Warner Bros., while avoiding bankruptcy, both suffered painful retrenchments. Only Loew’s-MGM came through the early years of the Great Depression more or less intact.
What questions do we have to ask to see whether current economic stresses could affect the gaming companies in the same way that the Great Depression affected Hollywood? These can be grouped as follows:
1. Are the gaming companies spending aggressively on mergers or other acquisitions?
The acquisition of movie houses, music publishing companies, broadcasting and new technology, combined with short-term debt to finance these acquisitions, proved fatal or near-fatal to the major Hollywood studios. Interactive entertainment moguls are currently engaged in a worryingly similar practice. Even a newcomer to the games industry can point to the ongoing EA/Take-Two buyout attempt, but it’s merely the most prominent example of an overall trend. Activision/Vivendi is still working towards completion, and rumors are constantly swirling about Ubisoft and who they’re buying/selling to. As for acquisitions, look no further than the constant licensing war being fought by Activision and MTV Games over music rights for Guitar Hero and Rock Band, which is about as reminiscent of ancillary sales from musical films as can be. The concern, ultimately, is whether these corporate distractions could impact the ability of the gaming industry to put out a quality product.
2. Are there any technological innovations that could spark consumer interest, or could they prove to be applied clumsily?
Consumers were lured into theatres, initially, by Technicolor, but quality control problems caused by both rushed production and films that did not make good use of it eventually turned them away. The wide-screen Grandeur process was never used effectively, and was quickly abandoned by Fox. Gamers are always hungry for new technology, and the Wii is still hailed as this generation’s “innovator” with regards to luring new audiences through unconventional mechanics and exciting new possibilities. Of course, the question of the Wii’s staying power and status as a “fad” seems to have been answered at this point, but with plenty of mediocre cash-in games still appearing on the hot console, will consumers get fed up? How much shovelware can the Wii handle before gamers start looking elsewhere? As for quality control, well, I think we know how that worked out.
3. What is the competition for the customers’ dollars?
Hollywood, in the early 1930s, began its long love-hate relationship with radio, which weakened its hold on the mass market for entertainment. Combined with the other stresses of the era, this would be a significant factor in Hollywood’s problems. Is there a large-scale competitor, like radio, in the works? This is the hardest question to answer — perhaps even impossible. Gaming may well be on top of the pile when it comes to America’s entertainment dollar, but nobody can say that there isn’t a new competitor waiting in the wings. If we knew about a form of entertainment strong enough to dethrone gaming, we’d have invested in it already. Television and movies are obviously still present, though games and other media have larger and larger areas of overlap, as opposed to radio and cinema’s more direct competition. What’s important to realize, in the end, is that if a new and exciting diversion does come along, the game industry’s current confidence and overextension could leave it especially vulnerable to an upstart competitor.
Do all of these factors spell another video game crash as we experienced in 1983? Unlikely. But any number of modern-day game studios, particularly those facing financial hardship, would do well to learn from history’s most painful lessons before relying solely on the industry’s current strength to see them through.
This article was co-written with Eric Costello, an employee with the Merrill Lynch Managed Solutions Group in Jersey City, and an amateur film historian and self-professed aficionado of 1930s and 1940s popular culture.
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September 18th, 2008 at 8:24 pm
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