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November 22, 2005

The Joys of Creative Destruction

Friedrich von Blowhard writes:

Dear Blowhards--

At breakfast today I read two stories in the L.A. Times business section. The first was a column by Patrick Goldstein, "In a Losing Race with the Zeitgeist," which you can read here. It tells how Hollywood is in a tizzy because the big studio movie business model appears to have hit a reef, started to take on water and is listing badly. The second was a story by James F. Peltz and John O'Dell on G.M., "GM Closures to Hit 12 Plants, 30,000 Jobs", which you can read here.

Both of these stories have some relevance to me, personally. I live in L.A. and actually know people whose livelihood is bound up with the major studios. I used to live in Detroit and grew up eating food paid for with wages earned by my father at Chrysler Corp.

Oddly, however, rather than feeling depressed, I found myself in an unexpectedly up mood. Even with allowances for the human suffering involved, both of these stories strike hopeful notes in my head. Both the large studio movie business and the U.S. automobile business just haven't felt in good health recently. There's no joy in their products, no bounce in their step. They've felt heavy, dragging around far too much old baggage.

At least in my own life, those moments when I explicitly recognize that an aging status quo is unendurable, that things simply have to change, has always served as a prelude to a new and better time...however scary. I hope that this will be true for the American movie industry and the American auto industry as well. Admit it, guys, there is a certain reckless freedom that comes with creative destruction. In fact, embrace it--you've got no choice, anyhow. Best of luck from this small businessman.



P.S. A piece of advice to G.M.'s management: even though you're sitting on billions in cash, I'd go ahead and declare bankrupcy and try to shed some of those legacy pension, healthcare and other costs. Hey, it's got to happen sooner or why not sooner? Remember, the status quo is not sustainable.

posted by Friedrich at November 22, 2005


I'm not sure this is a "good" economic argument, and I have a feeling I will be argued with but...regarding your last comment...there is something just wrong intrinsicly with "shedding legacy pension and healthcare costs" through a court manipulated bankruptcy. And I think its because...the only people who pay the price are the current and retired employees. GM made a commitment to them, whether it was a smart or stupid commitment, which induced them to work there, and stay working there, and build the cars that made the money which allowed the billions in cash and the big net worth to be accummulated, which drove the stock price higher and higher for a lot of years, including the years when these employees were working there. In order to meet the pension and healthcare commitments made to them, nobody is tracking down the stockholders who made big capital gains on this stock in earlier years and requiring that they give it back because the profits reported were phony (because they were underfunding their liability)and therefore there really wasn't that value. Nobody is tracking down the executives who made loads of money during those years and making them (and their heirs) give ALL the salary back, before they cut into someone else's retirement. You first, decision-makers. People act as if this is only a current-day real-time issue, and that the only people who have to "pay the price" for yesterday's folly is the recipients of the stream of cash today. If I were a union negotiator---I'd demand it all in cash compensation today--screw healthcare, screw pensions. Just pay the wages today. I'll guarantee ya---if the unions had required that 30-40 years ago, the price of cars would have been signficantly higher, making a lot of consumers standard of living lower, and execs wouldn't have been paid as much, and the dividend streams would have been far more paltry. Because everybody would have been paying (and receiving) as they went. A LOT of people benefitted from the promise of deferred compensation to the now- and future-retirees, and none of the rest of them are paying any of the load. Its the stupdity of limited liability laws for corporate America, and bankruptcy laws. And the stupidity of legislation which permits executives this big fat do-over with no harm to them. After all, they write checks to political campaigns and belong to the same country clubs as a lot of the stupid execs, and we wouldn't want to upset that apple cart. And the Denocrats ought to be tying themselves to railroad tracks before they let union workers get screwed out of what they were promised, given the largesse granted to them by blue collar workers. And I'm not saying it was smart for GM to make these promises. But they did so as it was in their short-term best interest. And this is a crummy way out---exactly like shipping the poor black kids off to Vietnam.

Posted by: annette on November 23, 2005 10:18 AM


I'm not suggesting that shedding these costs is a desirable end in itself, or that it will be a good thing for G.M.'s 400,000 retirees, but the alternative is to watch G.M. simply go out of business and thus, um, shed those costs another way. (You did notice from the article that G.M. has lost like $4 billion in North America this year, right?) If G.M. declares bankruptcy, that will at least get the U.S. Pension Guarantee involved, I believe, and hopefully our government will insist on some continuing contribution from the revitalized company. My guess is that a bankruptcy, hopefully leading to a revitalized company, is in fact the best hope those retirees have got for their pensions.

Certainly, the obvious incompetence of previous G.M. managers is fairly appalling (Roger Smith certainly should be burned in effigy), but one major sign of that incompetence was the fact that those managers cravenly caved in to the demands of the U.A.W. all those years, and consequently made promises that they couldn't keep. The union has to bear a lot (not all, but a lot) of the blame for this situation. I notice that Toyota, who will soon be taking over from G.M. as the world's largest auto manufacturer, has been careful to locate its American manufacturing plants in the South, beyond the reach of the U.A.W. I'm surprised that the Democrats haven't suggested forcing Toyota to use only UAW labor; it would certainly have slowed down, if not reversed, Toyota's penetration of the American market. Of course, all those American consumers buying Toyota cars would have had to pay more for less reliable vehicles with UAW labor, but at least G.M.'s management could have kept their promises that way.

Posted by: Friedrich von Blowhard on November 23, 2005 12:34 PM

GM is another argument for individual retirement savings.

Posted by: Tatyana on November 23, 2005 01:14 PM

I agree that union negotiators had a lot to do with this, including rather stupidly selling their constituents out for deferred compensation with no legal enforceability of said. Additionally, I really do hope the bankruptcy court looks closely at your presumption that it is better to save GM. I'd really like to see a liquidation vs. reorganization study of that, just to make sure. It would be interesting to know which was pensioners, let alone consumers, make out better---sell the damn pieces off, some of which have great value, vs. actually allowing it to reorganize and be poorly run again. See "airlines." Certainly the carmaking vacuum would be filled quickly by other companies---we do not "need" GM to make cars. They are not "too big" to fail. I don't think one more airline should be permitted to file bankruptcy without requiring Southwest's management team take it over from there.

Posted by: annette on November 23, 2005 01:45 PM

I've heard that the Chinese are on the verge of producing US-importable models that will kill the low end of the market. Think a Kia for 3/4 or 2/3 of the price. Over 100 firms in China are now making cars. GM has very little time to get its act together.

Posted by: Robert Speirs on November 23, 2005 02:00 PM

Friedrich – I also think that the Patrick Goldstein piece was great, and I particularly liked his point about how movie-goers can instant message their friends after seeing a film, warning them about a turkey or confirming a hit film’s quality. I had become used to checking the consensus of reviews that can be found on various Web sites (e.g. yahoo movies), but had not considered the immediacy of text messaging before reading Goldstein’s column. I imagine that this kind of thing could also affect pop music concerts or even the release of music CDs. I also liked how he criticized the marketing of the film “Zathura,” highlighting how movie executives often outsmart themselves with their often silly choice of a film’s release dates. I’m not sure, however, that the studios will learn anything from this since they often seem so convinced that they can manipulate viewer sentiment that they refuse to listen to alternative voices or to learn from their mistakes.

I also liked the GM piece and hope that anyone who links to the article will also check out the related article on Toyota’s continued success in the US (“Toyota in the Driver’s Seat”). Toyota is increasing its share of the auto market using US workers and paying high wages while making cars that the public wants to buy. But even though the GM article links GM’s problems to some of its employee costs, Dan Neil who writes about autos and the auto industry for the Times has blasted GM executives for their lack of creativity and poor past decisions. And the article notes that the UAW had recently “agreed to let GM reduce its cash outlay for current and retired workers' healthcare by $1 billion a year,” so I don’t think one can easily blame the union for the company’s woes. It may be that GM’s problem may not just be legacy pensions and healthcare costs, but a larger failure of GM’s management itself, its culture, its way of thinking, and its way of operating. Also, there are many examples of mature companies which nonetheless continue to prosper and innovate (3M, which most recently brought the world post-it notes, comes immediately to mind).

As an aside I note that I have worked for two non-union companies that were once leaders in their fields and that went through painful downsizings in order to reduce costs. However, the managements that played defense, trying to protect profits and market share, utterly lacked creativity, and could neither come up with new products nor improve their current product mix. The last company I worked for tried to customize its products based on the demands of their “most important” (but not always best paying) customers even though this meant that they totally misjudged new markets and new trends and alienated potential customers because the product redesigns were too idiosyncratic. Both companies also deliberately ran off many of their best employees, who were also some with the highest salaries, the most tenure, and the largest potential future pension costs. One company is near death despite having been sold to another corporation, and the other is languishing, having recently located to another state to save more money, only to find that it cannot find new employees with the same level of expertise as previously.

I understand your optimism, and in the long run perhaps capital and creativity will be freed up, but there are people whose lives have never recovered from successive company downsizings, and entire cities which have never recovered from the loss of jobs in their community. People cannot instantaneously regroup, relocate, and rebuild their lives. Has anyone ever researched in detail the extent to which an economic recovery displaces workers or the proportion of new workers vs old workers or the relative distributions of incomes following large-scale layoffs and recoveries?

Posted by: Alec on November 23, 2005 02:41 PM

I liked the Patrick Goldstein article too -- thanks for the link. Here's a semi-similar piece by Anne Thompson, which supplies additional info and quotes. Interesting, if semi-dismaying, to see that not only are the boring ol' movies tanking, so are the more adventurous ones. Usually what happens in eras like this is that creators take some chances, audiences find a few new things that they like, and the industry gets the message and roars on. This time around, people just seem to be losing interest in movies period. Amazing. Looking forward to what's next!

Posted by: Michael Blowhard on November 23, 2005 04:07 PM

And another interesting snapshot of how movies get made (or got made, in this case): Edward Jay Epstein on a German tax shelter that's being closed down. Interesting because Hwood learned how to take mucho advantage of it, though its purpose was to serve local production. Great passage:

"New Line Cinema, for example, covered almost the entire cost of its Lord of the Rings trilogy by combining German tax shelters with New Zealand subsidies and preselling the film in a few foreign markets."

Posted by: Michael Blowhard on November 23, 2005 04:49 PM

Michael –

Thanks for the link to the excellent Anne Thompson piece which, nonetheless, I think tries to cover the studios asses a bit. Except for the OK “In Her Shoes,” the other films she mentioned were either supremely unoriginal or had odd casting and writing problems. “North Country” was like “Norma Rae Meets Erin Brockovich at the Ya Ya Sisterhood,” Shane Black was reworking the pointlessly self-referential riffs of his earlier “Last Action Hero” in “Kiss Kiss …” and “The Weather Man” was like a weak echo of a Charlie Kaufman film.

It was also interesting that Thompson’s myopia echoes that of the studios. I know a lot of people who talk about movies they want to see right away and movies that they will wait to see as DVDs. I don’t know exactly how people decide what film is only DVD-worthy, but I don’t think that these decisions correspond to the tent-pole, non-tent pole, indie categories that Thompson writes about. But she is right that it appears to be very tough to market films that don’t have a high profile or big star power behind them.

Patrick Goldstein also does a regular piece early in the year in which he surveys a group of teens on the upcoming films that they want to see, based on movie trailers. Apart from some old-reliables (Star Wars or Harry Potter), it is refreshing to see that the preferences of this prime-target demographic often contradict what the studios think that they should want to see. For example, just because some new actress like Kirsten Dunst is hot does not necessarily mean that an audience wants to see her in everything.

I’m also reminded of how the major studios rejected “My Big Fat Greek Wedding” and how, despite that film’s success, some studio executives and film critics still derided the audience for that film as being dull, too old and not edgy or hip enough. Predictably, there was a lot of joy over the failure of the TV spin-off of the film, as though this somehow validated those who earlier had rejected the film.

Posted by: Alec on November 23, 2005 05:16 PM

I made the same connection with goldstein's story and the GM cutbacks. The studios and GM are both corporate slow-moving behemoths which are having trouble adapting to changing times. And both are in the business of creating and marketing something with artistic, technological and design elements that will appeal to the consumer. I had a friend who worked for GM until his division was sold. He went from barely showing up at the office, he had so many vacations and holidays, to learning what it was like to hustle to keep his job--with far fewer days off and a smaller benefits package. GM has created a fat work culture that will be hard to turn back. A friend of mine also worked as a car designer for BMW and had to leave because he lacked an environment where he could be creative--the corporate bureaucracy sapped everything. He now happily works at a smaller design firm. As for Hollywood, the studios must adapt; they are slowly changing to the new VOD demands that consumers are making. But the big studio motion picture bureaucracies are vested in keeping their lavish salaries, perks and lifestyles. It'll be bosses like Viacom's Tom Freston who impose economic change from above.

Posted by: anne thompson on November 23, 2005 05:24 PM

As for Alec's comments, there's a difference between what the studios make and what they market. There has to be a better way to make more sophisticated movies for adults—which are so difficult to market—on a smaller scale. The studio indie divisions are more capable of conceiving, executing and marketing these movies than the big studios are. I was imagining what North Country, In Her Shoes, Elizabethtown and The Weatherman would have been like if they had been made as indie films. There is a high likelihood that they would have turned out to be better films worthy of better reviews and more efficiently marketed to the people who might want to see them. Tentpoles are what the studios do best; they aren't equipped to market more challenging fare. Adult dramas like Boys Don't Cry and hip youth movies like Napoleon Dynamite and Garden State are handled best by studio indie divisions like Fox Searchlight. The studios have forgotten how to handle economies of scale.

Posted by: anne thompson on November 23, 2005 05:35 PM

The unions used monopolistic trade practices in selling labor to the car makers. In the end, as could have been predicted by any half-competent economist, those practices have seriously damaged the industry that the unions were preying upon. In addition, the members of those unions are losing out on some of their extorted gains.

Too damn bad.

Posted by: Doug Sundseth on November 23, 2005 11:15 PM

How come everybody's opposed to income transfer when it hurts them, and not otherwise? Convincing the union workers to defer compensation in order to boost GM's profits and stock price in the short run in prior years, allowing the investor class to realize big gains, at the expense of ever paying the deferred compensation, is 100% income transfer to GM investors from the worker bees. How come everybody decries the unfairness of the tax code--transferring income from wealthier to less so---but thinks its A-OK to transfer the union's income to the investor class? I guess the tax code is "too damn bad" too. (And BTW--I'm as hurt by the tax code as many, and I've never belonged to a union). I'm just observing the intrinsic hypocricy. "Creative dstruction" is not a treat that the current GM management gets to induldge themselves in. I00% of their management team should be out, out, out, and not one dime of their options or retirement should ever be paid until everybody else gets all of theirs. Msybe Toyota's management should reap the benefits of creative destruction.

Posted by: annette on November 25, 2005 10:22 AM

"I also think that the Patrick Goldstein piece was great, and I particularly liked his point about how movie-goers can instant message their friends after seeing a film, warning them about a turkey or confirming a hit film’s quality."

I don't think this is true. If so, there would be large drops from Friday to Saturday to Sunday opening weekend, but there aren't. Certaily, word of mouth plays a part in movie success, but I think it happens more gradually than that. If one Friday night had the ability to kill a film via word of mouth the effect would be obvious.

Posted by: lindenen on November 25, 2005 05:41 PM

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