notion. There is no getting around the fact that Walt’ s insider dealings with Disney were problematic.
Finally, as if the valuation and corporate governance concerns were not enough, there was no particular reason to believe Disney’ s main business of filmmaking was a good one. The United States movie industry was in decline when Buffett made Disney an 8.5 % position in his partnership, and no one was immune from the realities of Hollywood economics and its inherent volatility.
Tinseltown
The motion picture industry has three key branches: production, distribution and exhibition. The production process includes acquiring the story rights, developing a script, casting, filming and editing. These steps culminate in the creation of the negative film. Distributors sell, market and deliver the film to the theaters. Finally, the exhibitor displays the movie to the audience and collects the admission fees from theatergoers.
The cumulative collections are known as the box office receipts. The exhibitor remits an amount to the distributors, known as the film rental. The film rental, usually negotiated as a percentage,
Publicity photograph of Walt Disney in his office, October 23, 1956.
typically amounted to about a third of the box office receipts. After deducting its fees, the distributor remits the remainder to the producer.
Distribution was the kingpin of the industry. Distributors were in charge of manufacturing the negative and sending the film to the theater; they benefited from risk-bearing economies of scale and network effects. The larger firms aggregated risk and could afford to have a flop at the box office because of the high volume of films distributed, while a miss could cripple a smaller firm. Further, producers wanted their creations to be shown as far and wide as possible, so they wanted to work with the biggest distributors. Exhibitors would want to limit the number of distributors they worked with; it would be too cumbersome to speak with more than a handful of players.
The Golden Age of Hollywood began in the late 1920s, when eight major studios dominated all aspects of the business. These studios were known as the Big Five and Little Three. The Big Five— which included MGM, Warner Bros., 20th Century Fox, RKO and Paramount— were completely vertically integrated; they produced films, handled distribution and owned movie theaters. On the other hand, the Little Three— Universal, Columbia and United Artists— did not own theaters. In fact, United Artists merely distributed movies and did not produce them. The other two produced and distributed movies. While the Little Three lacked the vertical integration of the Big Five, they
Logo of Walt Disney Studio, 1928.
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