Hollywood - Agglomeration Economy

The motion picture industry is one of the most prominent creative industry in the world. This practice of industry has been present for more than a century, and the United States as one of the major key players in the industry is still dominating the industry. Hollywood as the most famous place and center for the entertainment industry in the world, has its own deep history that influenced to the world of movies. With its glamorous lifestyle and night clubs, motion picture industry studios house their center of production in and around the area. However, there are reasons why entertainment industries choose Hollywood as their homebase. This essay then will examine reasons and development processes of Hollywood from the urban economic perspective. First, the history of Hollywood will be recounted by examining reasons why motion picture industries settle and develop their business in Los Angeles. Second, effects of the Hollywood that presence in that area will be explained in terms of employment and urbanisation. Third, complementary industries will be analysed on how it helped Hollywood’s major industry to expand their business and the effect on the local labor market. Fourth, benefits of localisation industries will be discussed in terms of how Hollywood utilise it to expand their networks internationally. Last, future challenges for Hollywood will be considered as there is a tendency for existing industries to leave the area due to some reasons.


The motion picture industry in the United States started with the invention of Kinetograph and Kinetoscope by Thomas Alfa Edison in 1888. He then founded Edison Studios in New Jersey and New York which built apparatus for filming and also produced films. This became the beginning of the development of motion picture industry. However, due to harsh weather condition and patent restrictions from Edison’s company (Scott, 2005), small motion picture businesses tried to look for other places that could better support their business.


In 1907, a small Chicago motion picture company produced a film in the Hollywood area. At that time, Hollywood was originally a small empty neighbourhood in the northern part of Los Angeles, South California. Nevertheless, words began to spread as companies that happened to take a shot there found it attractive to move to Hollywood, due to better weather and diverse landscape condition which could support their motion picture making process (Scott, 2005). There are several other factors that influenced the decision to move from New York to Hollywood. First of all, the labor market condition in Los Angeles which adopted the open-shop system is believed to attract motion picture producers to move in (Sklar, 1975). Secondly, the discovery of Los Angeles’ oil reservoir in the early 1900s made the economy in Los Angeles attractive for businesses and thus increased the wealth of the city. This oil boom triggered the development of economic infrastructure in California, including Hollywood (Taylor, 2014). Thirdly, facilities that support film-related activities, such as theatres and post-production studios were rapidly growing in the Los Angeles CBD. Since Hollywood is located close to the Los Angeles CBD, moving the production companies to Hollywood ensures the ease of transportation and production (Frank, 2012). Fourth, even though Hollywood is close to the Los Angeles CBD, the price of land is still relatively cheaper than the surrounding areas and much lands are still undeveloped. This high availability of vacant land lots created opportunity for studios to expand and recreate the movie set, which is less costly than the same amount of land in New York (Wasko, 2003). Lastly, it was speculated that one of the reasons was due to how close Hollywood’s location was to Mexico. Hence, when a Patent Company’s right was violated, producers could easily make their escape to Mexico (Scott, 2005). The decision for the shift to Hollywood for early motion picture companies proved to be fruitful.



Locations of motion picture production companies in Los Angeles, 1915. Source: Scott, 2005.

The rapid growing of Hollywood on its early days was also supported by the fact that the US market for movies increased rapidly between 1905 and 1914 (Ross, 2001). This promising new creative industry obviously captivated new entrepreneurs to enter the market and start their own studio. In effect, some neighbourhood around it also benefits from the rise of movie industry, such as Culver City (see Figure 1), which in the early 1920s it tried to copy Hollywood industrial pattern and invited companies to open up their studios there (Frank, 2012). As Hollywood became the new mecca for the motion picture industry, it was also in effect influenced the demand for labor working for studios. In 1915, more than 15,000 people were working in studios and in turn contributed positively to the growing economy of Los Angeles (Ross, 2001). Also, with the emergence of the “big five” studios (Twentieth Century Fox, MGM, Paramount, RKO, and Warner Brothers) in the following years, the demand for manual labor and creative labor such as directors, actors, writers, and producers hence increase dramatically. Accordingly, this become an incentives for domestic migrants to move to Los Angeles, and in turn, the city’s population was increasing from 319,000 in 1910 to 1.3 million in 1930 (Ross, 2001). From this evidence, it can be said, in the case of agglomerated industry, that existing labor market is not necessarily always the main driver for industries prior to their entrance to a particular geographical location when expanding their business. The industry itself can be subsequently the cause of mass urbanisation.


Hollywood is a complete set of motion picture industry which all the elements needed in the industry is fulfilled in this region, from the artists, agencies, studios, directors, producers, manual labors, post-productions, and distributors. In the early days, as the Fordism mass production spirit was emerged, this spirit also applies in the motion picture production industry (Scott, 2005). The trend is evident by studios having their own workers working full-time in a regular wage basis. This includes actors that they mostly worked in a long-term contract with the studios. However, in the post-war Hollywood era, full time worker appeared to be inefficient as the industry production flow became irregular and the production uncertainty due to market reason (Scott, 2005). Consequently, labors were became more into freelance and project-based jobs instead of a fixed working system (Skilton, 2008).




Locations of agents, casting directors, and managers in Los Angeles, 2002. Source: Scott, 2005.

The shifting nature in jobs hence increases the needs for job intermediaries such as agents, casting directors, and talent managers (Scott, 2005). As seen in Figure 2, the intermediary offices were scattered around the production studios. The emergent of agencies in Hollywood has helped directors and producers find talents for decades and thus reduce their time cost of looking for talents (Wasko, 2003). In conclusion, the business strategy of agglomerated firms has power to influence how the local labor market works.


As big players in Hollywood already enjoy economies of scale due to their large production resources, they have the majority of power in controlling the motion picture industry market, locally and internationally. To expand their international film distribution and strengthen their position, the “Big Six” oligopoly (Disney, Paramount, Sony, Twentieth Century Fox, Universal, and Warner Bros.) joined and cooperate to create a close relationship with the Motion Picture Association of America (MPAA), which benefits them in dealing with international distributors (Gomery, 2004). However, this international distribution activity itself is actually supported by the government with the release of Webb-Pomerence Act that allows accompanies to collaborate in foreign market (Wasko, 2003). In addition, Motion Picture Association that represents US film internationally also helped producers in setting price levels, terms of trade, and other kind of agreements globally. Accordingly, the system that Hollywood and government created actually contributes positively to the foreign distribution networks that increases companies’ revenue from foreign market (Miskell, 2016). Moreover, policies deregulation and the opening of international markets in 1980 also contributed to this concentrated growth (Wasko, 2003). Thus, it can be seen that the support from the government to the US motion picture industry do open up the opportunity for them to globally expand. In contrast, it is also can be argued that the power of large-dominant agglomerated firms is the one who actually influenced politicians to create policies that would suit their favour.

Despite the benefits of localisation industry that Hollywood has, the attractiveness that Hollywood offers impresses and excites other cities to actually adapt the same strategy as Hollywood, even inviting existing industries to move their studio to their city. The challenge for Hollywood is: could it keep the motion picture industry production in? This question arises because of some reasons. First, the labor cost in Hollywod is relatively high compared to other alternative locations (Scott and Pope, 2007). Second, some cities such as Vancouver offer a better fiscal advantage rather than Hollywood. Distance-wise, Vancouver and Hollywood is rationally reachable by only two hours fly, which actor or director can work on both locations on the same day. Moreover, Vancouver also offer a diverse range of landscape features that is similar to what Hollywood offers (Scott and Pope, 2007). One of the drawbacks is probably the weather condition in Vancouver which is quite harsh compared to Los Angeles. Third, Vancouver had prepared to provide suitable qualified labor force in the film industry as the unions actively provide and negotiate in favour of the local film industry (Murphy, 1997). The labor force is very important for this creative industry to work. Therefore, there were actually attempts to decentralised the production of motion picture industry from Hollywood due to regulation and wage issue that businesses is prone to that issue due to their nature to maximise profit.


As almost a half-million people were working in the US motion picture industry, this production runaway is undoubtedly a threat for the future US employment and local movie production (Wasko, 2003) (Elmer and Gasher, 2005). To protect local jobs and the prestige of Hollywood industry, the Californian government rolled out a tax credit program as an incentive to keep companies from moving their production out from Hollywood. This program was said to be successful as it kept most of the industries from moving out and at the same time increased the economic output of the labor and government income (Xu, 2016). Respectively, the local government incentives and economic stimulus is needed to protect their local businesses and prevent negative externalities from unemployment that arises from the production runaway trend.

Historically, there were reasons on why industries move their business from New York to Hollywood. One of the most famous reasons is due to stable weather and diverse landscape condition. This could be the reason as at that time, motion picture industry still relying on in-situ shooting and really dependable on the weather. It is contrary to the current movie production that relying more on special effects and post-production editing, which most of the shooting process could be inside the studio. Over time, industries shifted their production studios to Hollywood and it triggers the need for specialised and creative worker. The agglomeration of this particular industry drive the way Los Angeles see itself and ultimately influence the demographic and background of the residents that coming in. Moreover, this specialised-unique branding of Hollywood attracts a huge number of tourists that also improve the economy of Los Angeles.


Hollywood is a unique and interesting example of creative industry agglomeration. One the one hand, it serves as the home for the new type of entertainment industry during that time. Even though motion picture industry is something that relatively new in the early 1900s, the market for it is surprisingly was very attractive and Hollywood hit a big success maximising that momentum. Most importantly, industries that are part of the Hollywood community benefit a lot from the shared production and labor, as collusion is somehow possible for some companies to work for their own benefit. On the other hand, Hollywood brings a lot of improvements to the Los Angeles area and become world’s precedent for the entertainment industry.





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