The Katzenberg Memo [Part 1]

In January 1991, Jeffrey Katzenberg, then the head of Disney’s motion picture divisions, wrote a memo that ended up being circulated throughout Hollywood. Even though it is 21 years old, it is remarkably relevant to the current movie business. For example, the United States was in a recession as we are today. The movie industry was confronted by numerous financial challenges tied to technological advances and cultural shifts, also as we are today.

Over the next few weeks, I will be posting the entire memo. If you have any interest in screenwriting or working in the film business, you should read it. Why? Because it gives you a wide-open view of how studio executives think. After all, any script you write and circulate in Hollywood doesn’t exist in a vacuum, rather it funnels through a system, one that operates based upon the business principles and practices of studio heads like Katzenberg.

Today is a long post, the entirety of Katzenberg’s introduction, basically providing an historical context to frame his argument. After that, he proposes a series of things under the heading of “A Solution.” I will spin off each of those into daily posts beginning tomorrow. So even though today’s post is a lengthy one, you would be well advised to read it all to understand how Katzenberg perceived the movie marketplace at that time.

The World Is Changing:

Some Thoughts On Our Business

January 11, 1991

The Problem

As we begin the new year, I strongly believe we are entering a period of great danger and even greater uncertainty. Events are unfolding within and without the movie industry that are extremely threatening to our studio.

Some of you might be surprised to read these words. After all, wasn’t Disney number one in 1990? Yes, but our number one status was far from a sign of robust health. Instead, it merely underscored the fact that our studio did the least badly in a year of steady decline for all of Hollywood… a year that was capped off by a disastrous Christmas for nearly everyone. Although we led at the box office in 1990, our bottom line profits in the movie business were the lowest in three years.

Now, added to that, the nation’s economy is acknowledged to be in a recession… a recession that I am convinced will be quite devastating to our industry.

That’s the bad news. Now the good news. No one is better positioned to weather the coming storm than we are. We are the current box office champ. But, more important, our underlying philosophy of moviemaking lends itself especially well to lean times.

As a result, we are not only in the strongest position to succeed during a time of economic adversity, but we have the potential to establish a very high platform from which to launch into the next round of good times, whenever they may come.

Make no mistake about it, ours is a cyclical business and we are once again repeating the cycle. The purpose of this memo is to reaffirm our commitment to our core philosophy, because I am convinced that this is what embodies our key to success in the days ahead.

Interestingly, even if the economic outlook were rosy, I believe we at Disney would still be due for a major self-examination.

Since 1984, we have slowly drifted away from our original vision of how to run our movie business. Once we had a fairly strict and pretty successful strategy, which we referred to as our “Singles and Doubles Philosophy.” At some point, we seemed to have replaced it with a strategy that might best be called the “Yes, But Philosophy”… as in, “Yes, he’s expensive, but it’s a great opportunity for us” or “Yes, that’s a lot to spend on marketing, but we have too much at stake not to” or “Yes, the sequel will require a big budget, but it’s a potential franchise.” There should always be room for exceptions to rules, but of late the exceptions seem to be the rule. Not surprisingly, our control of our own destiny has been eroded.

We are far from unique in this state of affairs… something I take little comfort from.

The current condition of our business is typical enough of American businesses that an entire management theory has been developed to describe it. This theory is formally called the Product Life Cycle. It holds that businesses go through a natural development process that is comprised of four stages: Introduction. Growth. Maturity and Decline.

In 1984, The Walt Disney Studios had already been through the full cycle. We arrived here fresh, energetic and ready to create an entire movie studio from the ground up. We succeeded spectacularly in growing a new business and re-starting the cycle. Now, there are ominous signs of the stagnation of Maturity which leads inexorably to the disaster of Decline.

This is why, even if there were no recession, I hope that I would be feeling as I do and would still be writing this memo. However, because of the severe economic environment we are entering, this review of our way of doing business is now not only timely, but critically essential.

In good times, drift can be tolerable. In bad times, it can prove fatal.

Back in 1984, our initial success at Disney was based on the ability to tell good stories well. Big stars, special effects and name directors were of little importance. Of course, we started this way out of necessity. We had small budgets and not much respect. So we substituted dollars with creativity and big stars with talent we believed in. Success ensued.

With success came bigger budgets and bigger names. We found ourselves attracting the calibre of talent with which “event” movies could be made. And, more and more, we began making them. The result: costs have escalated, profitability has slipped and our level of risk has compounded. The time has come to get back to our roots.

In urging this course, I recognize that we have some serious disadvantages and some extraordinary advantages relative to when we first started out six years ago.

Our biggest disadvantage is that, unlike 1984, when times were relatively normal, a tidal wave is now hitting Hollywood… a tidal wave of runaway costs and mindless competition.

But this fact plays into our biggest advantage — you. We have a proven team that has come through time and time again. Others will scramble for higher and higher ground, spending feverishly to keep their noses above water. We, on the other hand, have the internal talent, creativity and absolute ability to control our own destiny. With this strength, we can plunge in and successfully find our way no matter how strong the current. What I am asking is difficult and challenging. But it is clear that we couldn’t have in place a more remarkable group of able and experienced individuals to pull it off.

Ironically, your outstanding abilities are also responsible for one of our disadvantages — namely, our success. In 1984, when Disney was last and unprofitable, the worst that could happen was that we would remain last. Now we are Number One. Our shareholders, Wall Street and the public expect us to be a leader. Such expectations can be inhibiting. We can’t let them be. Instead, we must lay out our goals with as clear a vision as when we were unconstrained by success.

In returning to an emphasis on creative story development, there will be risk of failure, as one project or even a series of projects misses the mark. Intelligently approached, risk is a necessary component to success in the movie business. It is impossible to create new and original — and therefore appealing — new works without taking on the chance that you’ll fall flat on your face. Remember that before “Pretty Woman,” we had five misses in a row.

But, if a return to our roots will entail the risk of acceptable failure… if we remain on our present course, there will be the certainty of calamitous failure, as we will inevitably come to produce our own “Havana” or “Two Jakes” or “Air America” or “Another 48 HRS” or “Bonfire of the Vanities”… and then have to dig ourselves out from under the rubble.

I know that my negative outlook for our industry will be challenged by many Wall Street analysts. These pundits will argue that the film industry is recession resistant or even recession proof because, when there is fear and uncertainty in the real world, people seek escape and entertainment in their local movie theaters.

Right argument, wrong conclusion.

When there is fear and uncertainty, the people have craved bargain entertainment. During previous downturns, the best escapist entertainment value was at the movie theaters. But no longer.

The notion of the film industry being recession proof began during The Great Depression. People wanted to escape and the movies offered it cheap — 10 cents a ticket, or the cost of a loaf of bread. Today, a ticket to the movies costs the equivalent of six or seven loaves of bread. What’s more, a family of four requires $20-$30 to get in to see a movie. Add popcorn, parking, etc. and the total reaches $35-$40 or even more.

On the other hand, that same family can go to the local video store and rent a videotape for a mere $2.00… 50 cents each — less than the cost of a loaf of bread.

So, when times get tough I have no doubt that people will still want to escape to the movies, but they’ll want it for the historic cost of a loaf of bread.

This may be a reason to re-think our approach to home video. Perhaps we should consider charging $200 for a rental title. This would force stores to charge $5 for a popular title, but $5 — one loaf per person — would still be an excellent entertainment bargain.

Such strategizing among our divisions, divorced from pre-conceived notions, is the kind of thinking we will need to cope with the recession.

As big a factor as the recession is, I believe we would be making a grave mistake to blame our industry’s woes on the national downturn. Just as the seeds of a sick economy were growing before Iraq’s invasion, the seeds of a sick movie business were growing before the recession.

And the seeds were planted by the “blockbuster mentality” that has gripped our industry. Because of this homerun thinking, every studio has increasingly been out to have the biggest weekend opening and the biggest first week gross and the earliest $100 million total.

It used to be that there was a reliable criterion for a film’s success — whether or not it had “legs.” Studios would toy with different strategies for opening a film, all with the goal of helping it develop “legs” through positive word of mouth. Now the term “legs” has all but disappeared from the Hollywood vocabulary. Thanks to the dictates of the blockbuster mentality, the shelf life of many movies has come to be somewhat shorter than a supermarket tomato.

With such a make-or-break emphasis on the first weekend’s numbers, studios have been cranking out highly promoted, big budget films. The logic is that this kind of film is the surest bet for attracting a big turnout for the picture’s opening weekend.

The result has been a paradox. In an effort to make “risk-free” movies, Hollywood has been willing to put tens of millions of dollars on the line with each major release.

Unfortunately, our industry has travelled this road before. During the late 1950s and into the ’60s, studios spent larger and larger amounts to produce historical epic films. This trend climaxed with the 1963 release of “Cleopatra,” a film that cost $44 million at the time — a staggering $186 million in 1990 dollars. These bloated “event” films and the red ink they left in their wake marked the beginning of the decline of many major studios and the rise of independent film production. Now that we have gone full circle and many of the independents have gone under while the majors are experiencing a resurgence, it would be ironic if we failed to learn from the not-so-distant past and instead blindly go about repeating the mistakes of our mogul predecessors.

Here at Disney, our biggest effort to compete in blockbuster terms, “Dick Tracy,” is a case in point as to how the box office mentality is affecting the moviegoing experience. “Dick Tracy” was in the works for nearly ten years. But by the time it was ready for release, we were upon the summer of 1990 and we knew that its success would be for the most part judged by its opening weekend box office performance. So, we did everything that we could in order to get the film the audience and recognition we felt it deserved, including the unheard of notion of “clothing” our opening night audience.

The result was a film that did very well, a film we were rightly proud of, a film that was critically acclaimed… and a film that is still being savagely disparaged as “having failed to achieve Batman-like success at the box office.”

This is not a healthy situation. If every major studio release must aspire to repeat the 1989 success of “Batman,” then we will undoubtedly soon see the 1990’s equivalent of “Cleopatra,” a film that was made in the hope of repeating the 1959 success of “Ben Hur.”

Not surprisingly, this box office mania is fostering a frenzy among actors, writers, directors and their agents as they try to claim their share of the big budget pie. If a leading star who received $6 million for his last film reads that another star is getting $10 million for a picture, he immediately calls his agent insisting on nothing less than $12 million for his next movie.

It seems that, like lemmings, we are all racing faster and faster into the sea, each of us trying to outrun and outspend and out-earn the other in a mad sprint toward the mirage of making the next blockbuster.

In this atmosphere of near hysteria, I feel that we at Disney have been seriously distracted from doing what we do best. It is a tribute to our abilities that, even as we have strayed, we have continued to be successful. But it is instructive to re-visit the film that anchored our success in 1990. “Pretty Woman” is in fact the kind of modest, story-driven movie we tended to make in our salad days.

The extraordinary popularity of such films as “Pretty Woman,” “Ghost” and “Home Alone” teaches the real lesson of 1990: Despite all the hype and promotional noise, in the end the public will search out the movies it wants to see. And these films, more often than not, will be primarily based on two basic elements — a good story, well executed. Not stars, not special effects, not casts of thousands, not mega-budgets, not hype.

So, as we begin 1991, let’s really look at those weekly box office figures and hear what the numbers are saying… what I believe they are telling us is to stop concentrating so much on what happens in that little room where the tickets are sold and instead concentrate on what happens in the big room where the lights dim and the magic is supposed to happen.

Magic is the key. Regardless of the recession, people will still leave their VCR’s to go to the movie theater… if they are convinced that the experience that awaits them there will be magical enough.

We are lucky. We get to manufacture magic and, in so doing, produce a product that makes a difference.

Most other jobs exist to create products that are purely functional. While any profession can have its rewards, the range of impact in producing shoes or cars or toothpaste is limited. Our product has no function other than to entertain. Its only limits are set by our imaginations.

In a way, there is something quite noble about what we do. Our potential impact can not be minimized and should never be trivialized. At the same time that America has lost its dominance of the world’s economy, it has become a pre-eminent force in the world’s culture. And this is largely because of what we do. People around the world may no longer drive in American cars, build with American steel or listen to American radios. But they go see American films. They share our hopes and dreams and values when they experience the joy of a “Pretty Woman,” the enchantment of a “Little Mermaid” or the inspiration of a “Dead Poets Society.”

Across America and around the world, our customers expect us to offer them two hour journeys away from the mundane of day-to-day life to new worlds of experience. For the price of admission, they want to be transported to places and people they would otherwise never know. If the trip we provide is wondrous enough, then the $7 price for a ticket to ride will still be an exceptional bargain indeed.

Especially during these economic hard times, we must not fool with the public’s expectations… we must deliver on them.

I have written this memo in the hope of offering a blueprint for a business that can deliver on the public’s expectations with some consistency. A business that can weather the economic storms because it is governed by a sensible strategy designed to foster fiscal success… and, in the end, create magic.

A Solution

Because the world has changed, we need to get back to basics. For this reason, there will not be any revolutionary new ideas presented in the following pages. Rather, what I want to offer is a restatement of our underlying philosophy, adapted to today’s changing times.

In writing this, I take some comfort in knowing that I am preaching to the already converted. After all, together we’ve built Hollywood’s number one studio largely by adhering to the concepts I’ll be expounding here. But, with greater and greater success have come greater and greater temptations to stray from our guiding principles.

This memo is intended to be a working document, a reference guide to help us more effectively resist temptation so that this studio can not only survive, but thrive, in the challenging times ahead.

Tomorrow: The Idea Is King.

To read the entire memo, go here.

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