New Hollywood’s Last Stand

The legend goes that while on break from filming Star Wars, a beleaguered George Lucas visited his friend Steven Spielberg in Alabama, where the latter was filming Close Encounters of the Third Kind. This was Spielberg’s follow-up to Jaws, a film often referred to as the first blockbuster.

Lucas might have been intimidated by the fact that his friend’s original $2.7 million dollar budget had ballooned to almost $20 million dollars, and at the time reportedly had the largest indoor set ever built. George’s silly space opera, by contrast, had a budget of only $11 million and felt doomed to fail.

Whether it was a vote of confidence in his friend or a shrewd business play, Lucas told Spielberg that he’d trade him a percentage of the profit of Star Wars for the same percentage in Spielberg’s Close Encounters. The two agreed, and the rest is history.

Both films were massive successes, but Spielberg clearly came out ahead in that arrangement. Close Encounters was the more serious of the two and seemed to tap into the cynicism and paranoia of the ’70s while still looking forward to the future with optimism. But Lucas did something entirely new: he established a model for the future of film production by creating a bankable franchise that could be used for almost infinite revenue streams of toys, video games, theme park rides, and television specials.

While Close Encounters didn’t have the cultural or box-office impact of Star Wars, it also left its mark on the film industry. When Spielberg originally pitched Close Encounters, its scope and budget were modest. But hot off the success of Jaws, he expanded it until David Begelman, the president of Columbia Pictures’ Motion Pictures Division, was forced to leverage his position in the company to protect the project from Columbia executives who abhorred the idea of bloated budgets and wanted to find production partners who might share the financial burden at the cost of the future profits.

Despite Close Encounters recouping its production budget in the second week of wide release (eventually making $300 million at the box office), Begelman was forced to resign from Columbia Pictures within a year. The culmination of a series of power struggles within Columbia that matched those in the industry at large, his resignation signaled the end of New Hollywood and the beginning of the Blockbuster era.

This tale of two films is emblematic of a major turn in the way that film studios were financed. Throughout the ’70s, the struggling studio system attempted to retain its identity as a series of cultural monoliths. But eventually, the studios found themselves in an environment of hostile takeovers, corporate mergers, and capitulation to risk-averse investment bankers who would squelch the remaining countercultural energy from the seventies. And the investors liked the Star Wars model much better than the Close Encounters one.

Investors regard each film they buy and sell as a commodity, no different than a microwave. Like any modern corporation, studios today are highly attentive to the redundancies and inefficiencies inherent to Hollywood and seek in every instance to excise them to cut costs. The result is higher profits but also more predictable entertainment.

The new way of doing things is better for investors — but it comes at the expense of making films that are able to surprise audiences.

The Dirty Golden Age

The rise of film investors became impossible to ignore in the late ’70s, but it actually had roots much earlier, in the post–World War II boom.

In 1948, the Supreme Court broke up the Big Five studios that were vertically integrated, forcing them to give up their theaters in order to abide by the ruling that the current scheme of distribution and exhibition violated antitrust law. Coupled with the suburbanization of America, which saw people going to theaters less and watching television at home more, this effectively killed the Hollywood studio system of the time.

On the one hand, breaking up the Big Five was good for competition among smaller studios. But on the other hand, when the studios owned their films from financing to the box office, there were fewer ways for investment banks or outside capital to influence them. Following the break-up, investment bankers seized the opportunity.

Columbia was able to stave them off for a few more decades only because it had acquired a television subsidiary that allowed it offset its losses in film without having to cede power to investors. If a slate of films did poorly, Columbia could just license some films out to television, and it would maintain a profit for that year.

Other studios weren’t so fortunate. In 1956, Charlie Allen and Serge Semenenko took control of the struggling Warner Brothers. Charlie Allen was the founder of Allen & Company, a New York investment bank, while Serge Semenenko was an important figure in the background of Hollywood’s financialization. Born in Russia in 1903, Semenenko’s family fled to the United States after the Bolshevik Revolution. Semenenko would go to Harvard and work as a banker tasked with reorganizing the finances of companies like the Hearst Corporation and Hilton Hotels, foreshadowing the fate of the film industry.

Finance continued to encroach on Hollywood into the ’60s. In 1966, the Banque de Paris et des Pays-Bas S.A. (Paribas) attempted a hostile takeover of Columbia. It was thwarted by the Federal Communications Commission, but the result of the maneuver was that a pharmaceutical tycoon took control of Columbia — aided by Serge Semenenko. In 1967, Allen & Company — through its associate Alan Hirschfield — arranged the sale of Warner Brothers to Seven Arts, creating Warner Brothers–Seven Arts. Both Allen & Company and Seven Arts had shady dealings in tax shelters in the Bahamas with associates of Meyer Lansky, a figure who was never too far from mob influence.

During this period, several other major studios were also bought up and controlled by conglomerates. Warner Brothers–Seven Arts was eventually purchased by a conglomerate so diversified that its business encompassed parking lots and funeral parlors.

In 1973, Allen & Company came to take over Columbia, making Alan Hirschfield CEO and David Begelman head of the Motion Pictures Division. The bankers had taken control of Columbia, but they lacked the ability to exert total control over film production, because they still needed the studio to be overseen by someone, in this case Begelman, with good creative instincts.

Between 1973 and the premiere of Close Encounters of the Third Kind in 1977, David Begelman was credited with moving the Motion Picture Division into a period of success with films like Tommy, Shampoo, and Funny Lady. But Hirschfield and Begelman clashed — a conflict that would serve as the first salvo in the war between Hollywood and Wall Street within the studio system.

Whether a greenlit film can become a hit is an art, not a science. It requires more than a bit of luck and intuition. This instinct is anathema to functionaries used to reducing inefficiencies at major corporations. A Harvard business grad, Hirschfeld had a more risk-averse approach to filmmaking, wanting to invest sensible amounts of money in films and future diverse revenue streams that would guarantee returns.

Begelman had the opposite sensibility. A former talent agent for stars like Judy Garland and Barbra Streisand, he was used to spotting and cultivating the it factor, where it was something indescribable but universal. In some sense, the clash between these two figures represents the identity crisis Hollywood has faced ever since.

With this conflict escalating in the background, New Hollywood was at its peak. That wasn’t a coincidence. The mystique of New Hollywood is in many ways a product of circumstance, enabled by a unique confluence: ambitious studio heads were still allowed to experiment with singular projects, and they could do it with bankers’ money.

An executive’s ability to predict hits was still a sort of mystical quality that not everyone possessed, and there wasn’t yet an alternative. It was difficult to know what would win out when films like Taxi Driver, Rocky, and Jaws were all hits, so soothsayers like Begelman were given a wide berth and plenty of money to play with.

That money was not exactly clean. For example, Hirschfield was a vocal proponent of the use of tax shelters, stating that they kept Columbia from bankruptcy. It’s said that films like Shampoo, Taxi Driver, and One Flew Over the Cuckoo’s Nest were funded using these tax shelters. In other words, giving artists easy access to large amounts of dirty money resulted in some very good films.

(While Hirschfield embraced one kind of dirty money, he admonished David Begelman’s embezzlement of checks, which was the ultimate excuse for the latter’s dismissal from Columbia. The double standard reveals a great deal about the values and priorities of investors: as long as it doesn’t impede investment of capital, there is no funding source too indecent.)

New Hollywood represented a changing of the guard, which brought ambitious directors and studio heads into a fragile alliance with big money for a short period — before big money won out. The fact that this period coincided with massive social upheaval and a shattered cinematic monoculture after World War II galvanized a golden age of American film.

But now that they’d been let inside, the big conglomerates realized how inefficient Hollywood was. While people like David Begelman were good for the motion picture divisions of studios, they presented a conflict for corporate investment. Over time, investors have developed more efficient means of judging what will be a hit, which diminished their reliance on studio heads like Begelman.

The entrenchment of multinational conglomerate control of film does not necessarily mark a divergence from the incentive structures of the studio systems — studios have always existed to make money. The real inflection point was when the studios’ funding and distribution came under the total control of investment capital, which was then able to exercise complete authority over what and how movies were made.

Blockbusters and Beyond

As the years pressed on, the conglomerates that had effectively seized control of the studios began to use the same methods of predictive analysis and market research that they’d use with any other sector of their business.

This had the effect of flattening the contours of acceptable subject matter and production style. While beloved, the proliferation of blockbuster franchises meant that studios were chasing films, genres, and intellectual property that had already been proven. The industry’s ability to innovate diminished not just alongside the rise of pure entertainment blockbusters, but because of it.

Films had become theme park rides. Their goal was increasingly to appeal to as large and diverse an audience as possible, across demographic and generational lines. Family entertainment took up more of the available screens at the theater, and the returns were satisfying, which gave studios more data suggesting that’s what people really wanted to watch. This feedback loop created a situation where large-budget films became more and more consequential to the success of a studio, and thus would need to become even more broad in their appeal — inviting not just to differently aged members of the same family, but to people who live in completely different countries and cultures around the world.

Several more changes occurred in the ’90s that accelerated the general trend toward mass-produced cinema. Films were increasingly funded with a combination of presales and tax credits. Tax credits are an agreement with a territory to refund the taxes owed in that state if certain labor quotas are met. Presales are when a production will put together a pitch with the top talent attached, the script, and any other pertinent details and sell it to distributors for the right to release a film for a specific period.

By presenting a unique set of controls on a film’s casting and production, the presale system has noticeable effects on cinema. In order to take films to market to presell them, especially overseas, it takes talented bundlers. These bundlers attach talent to projects by selecting who is and is not attractive in certain markets based on identity or superficial reasons like height or perceived masculinity, all with the knowledge that it’s most advantageous to get an agreement with a well-known actor.

As a result, character actors who thrive on their ability to take roles without being stars are losing jobs to leading actors. If you’ve ever wondered why actors increasingly look the same, or why the film industry isn’t really producing any more Steve Buscemis — or why actors like Jared Leto and Christian Bale are so frequently altering their appearance to look less handsome — this is an important reason why.

For a while, this combination of presales and tax credits was usually enough to cover the budget of a film. But foreign presales became less lucrative due to the dwindling number of domestic distributors who would be willing to show smaller, riskier films — so, in turn, fewer territories were willing to agree to distribute films that wouldn’t receive a much-needed jump start in US markets. Equity financing from hedge funds or wealthy individuals expanded to make up the difference. Because hedge funds and equity firms are risk averse, a new strategy called slate financing also emerged, allowing them to spread out their risk by investing in groups of films rather than just one.

As these financial tools have become more commonplace, their impact has been evident in the production, casting, aesthetic, and narrative structure of film. As with product placement in the ’80s and ’90s, filmmakers have had to make artistic concessions in accordance with their funding. Another consequence is that there has been a widening gap between the most expensive tentpoles and the lower-budget films, leaving risky middle-budget films with uncertain popular appeal to fend for themselves. Meanwhile, ultra-low-budget films have more commonly become a vehicle to generate passive income for investors who focus on volume over quality in order to spread out and minimize risk.

New media streaming platforms are a culmination of techniques for risk management in the industry. Among other things, they represent a radical break with previous measures of success. If a Warner Brothers movie bombs, everyone knows it, whereas streamers care more about subscriber retention than box-office returns. Thus, the streaming platforms are awash in a constant churn of content, seeking to entice and retain viewers with novelty.

Netflix is well-known for canceling television shows within two to three seasons, with observable effects. A television show that might have taken five or six seasons on a network needs to be accelerated in its plot if it hopes to finish the arc, leading to a new writing style that is often rushed, condensed, and constrained.

Meanwhile, perhaps most shockingly, by collecting data on its users’ habits, streaming services can also give creators detailed notes about the attractiveness of certain themes, plots, and structures. In other words, streaming services can use their analytics to tell writers and directors what will keep audiences hooked. Cary Fukunaga said about his Netflix show Maniac:

So they can look at something you’re writing and say, “We know based on our data that if you do this, we will lose this many viewers.” So it’s a different kind of note-giving. It’s not like, “Let’s discuss this and maybe I’m gonna win.” The algorithm’s argument is gonna win at the end of the day. So the question is do we want to make a creative decision at the risk of losing people.

This dynamic has inverted the relationship between audience and creator, and portends an ominous future. While big-budget studio movies trend in the direction of superficial universality, streaming platforms are leaning into hyper-specific content targeted at sub-demographics. As streaming platforms develop more sophisticated means of identifying more niche genres based on user data, viewers are siloed into smaller and smaller pools of viewership. Films and television will lose their originality and staying power as streaming platforms tailor-make what they assume viewers want rather than showing them something they wouldn’t expect.

Accelerated by the pandemic, streaming platforms are a rising medium for film viewership, including premieres. This has given an even smaller group of corporate interests the ability to shape and control how people experience and discuss film. At the expense of convenience, film exhibition and analysis is increasingly in the hands of those who are most to blame for its declining quality, which in turn only generates more viewer data — a recursive loop of risk reduction and control.

From the 1980s to today, the film industry has had to contend with financial constraints and innovations that have had an undeniable effect on the quality of films produced. Through market research and data analytics, it has been able to more easily manage the inherent risk of the industry at the cost of the films themselves.

The lessons learned from the golden era of New Hollywood are frustrating because the conditions that created that world are gone. To reference Scorsese one last time, “We can’t depend on the movie business, such as it is, to take care of cinema.”