The Southwest Parable

I saw the most fascinating commercial yesterday. It came from Southwest Airlines and urged viewers to go to Set Love Free and join the fight against the Wright Amendment. For those who don't know, the Wright Amendment is a piece of legislation that has limited the ability of Southwest to fly from its home airport of Dallas Love Field. As the other carriers left for DFW Airport, Southwest was left with Love all to itself, which caused a backlash from the major airlines that manifested itself in legislation banning interstate flights from Love. As enacted, the amendment allowed flights to and from the states surrounding Texas, and it has since been expanded to a few more states.

Just as the natural enemy of the hole is the pile, the natural enemy of the corporation is the government. Government intervention has always played a role in the fortunes of business, but how fatal can it be? The following story is for anyone who thinks that "things would be different if only we could get Uncle Sam off our backs":

Back when the earth was young, airlines operated much differently than they do today. There were a few carriers, and the government told them where they would fly and how much they would charge. It was nice--airlines made some good money and lived a very comfortable, color-by-numbers existence.

Enter Southwest Airlines. Southwest began operations in Dallas in 1971 after fighting (for 12 years) litigation intended to put it out of business. It aimed to become a low-cost carrier for the state of Texas, but its purpose was not fully realized until the Airline Deregulation Act turned the airline industry on its ear in 1978. The act subjected airlines to market forces, which prompted markedly different responses from Southwest and the rest of the airlines.

Most airlines sought to return to the stability they had seen under regulation. They organized themselves into hub-and-spoke patterns that gave each major airline a dominant territory and allowed it to (more or less) dictate prices within that region. Sometimes new carriers would enter and serve the same routes. Sometimes aggressive pricing and airport rules would drive them away; sometimes they would stay and cause a drop in prices. At any rate, the hub-and-spoke system allowed airlines to retain some of the comfort regulation had given them.

While government intervention was ending for other airlines, it was just beginning for Southwest. Regulation was a welcome current that lifted all planes, but the Wright Amendment was intended to keep only Southwest down. But rather than flee from Love Field (which is located in the heart of Dallas as opposed to DFW's suburban location), Southwest embraced it. It has incorporated the heart into its marketing communications, and it also chose the ticker symbol "LUV" when it joined the New York Stock Exchange.

Rather than trying to mirror the days of regulation, Southwest decided to compete in a new way. Southwest went from city to city rather than using hubs, and it stayed away from the behemoth airports that other airlines were flocking to. This, in addition to Southwest's using only 737 aircraft, led to quick turnaround times and high utilization. The airline also eschewed travel agents and frills and pursued an aggressive fuel hedging strategy in allowing itself to compete on cost and offer the lowest fares in the industry.

Air travel was naturally hit hard by the events of September 11, 2001. After flights were grounded for days after 9/11, the struggling airlines were bailed out by Congress through a $15 billion financial aid package.

So, all the airlines should have vivid memories about how the government has affected their operations. Hub-and-spoke carriers will have fond memories of how the government brought them guaranteed profits in the era of regulation and then gave them free money when their ability to serve customers was called into question. And Southwest will emit a distinctive scowl as it thinks about how the Wright Amendment has, to this day, hampered its business at its flagship airport.

The effect of government intervention on the airline industry is clear. And yet, it doesn't correlate with financial results. The "big" carriers have been devouring cash for years, and no amount of money from Congress is about to change their dire collective outlook. Southwest has been profitable for 32 straight years, despite government and competitors trying to keep it down. Southwest was delighted when deregulation came, and it did not need the 2001 bailout.


It’s not uncommon for businesses to view the interference of the government as a key factor in determining success or failure. Recently, the Sarbanes-Oxley Act, an overambitious attempt to correct the wrongs of Enron et al., has become the whipping boy of businesspeople, who say that it’s hurting the ability of smaller businesses to keep up (compliance costs resulting from the act are really high). While legislation certainly plays a role, the example shown by the airlines proves that it’s not deterministic. The bigger factor (and it's not even close) is the ability of a company to adapt and to reach customers, which arguably could be retarded by the government help that many firms would love to have.

The kind of thing that Southwest has that allows it to prosper goes by many names: a business model, core competencies, synergy, a mission, a vision. Let's just call it love. And to paraphrase one of history's greatest philosophers:
If I have planes and routes and cash,
And I have help from Uncle Sam,
And I have Uncle Sam holding down the other guy,
But have not love, then I have nothing.

A Film Industry for the 21st Century

Last week, I was thinking about going to see The Aristocrats. I've always been somewhat interested in comedic theory, and the subject matter of that film, plus the people appearing in it, have made it one of those films that I have made a point to go see.

But I haven't gone to see it yet. Two things have stood in my way. The first is the fact that, at the time of its initial Austin release, the film was showing only in one inconveniently located theater at an inconvenient time. The second, and most important, is the frustration I experienced with the thought that I even have to go to a theater to see this movie.

With all of the problems the film industry has been experiencing lately, there's been a lot of talk about the problems that have been created by DVDs and home theaters, as if movie studios are locked into the current business model forever. Like record companies, film companies find themselves at a crossroads, and like record companies, they will continue their downward spiral unless they try to adjust to consumers rather than dictating to them.

It seems to me that the lure of the theater has always been twofold: it is an experience and it’s a deliverer of content. For many movies, primarily action, horror, science fiction, and the like, the theater provides the ideal setting in which to experience a film. It also provides a destination for couples and for groups that has been a part of American culture for generations. But in many other circumstances, the movie theater has always been the only way to see a film that you really don't care where you see it.

Given that theaters have played such a large role in the development of the movie industry, it's understandable that any noteworthy film must pass through them. But looking at it with a fresh set of eyes, it's peculiar that if, heaven forbid, you want to see Must Love Dogs, you must choose between spending a ton of money to see it on the big screen and waiting several months for it to come out on DVD. What value does the theater add for a film like that, or for countless other films that are making pointless pit stops at movie theaters? If we could rebuild film distribution from scratch it would probably look completely different than the system we have arrived at. The good news is that we can still get there in a few steps:

1) Destigmatize direct-to-video releases
2) Release DVDs more quickly, in many cases bypassing theaters altogether
3) Align film promotion with distribution
4) Make theaters fun again

In 2004, the big six movie studios made profits of almost $14 billion on the video releases of their films and almost $16 billion on television licensing, while losing over $2 billion at the theaters (admittedly, much of the profit/loss mix probably has to do with wacky Hollywood cost accounting, but at any rate theaters have certainly declined recently). It's clear that theaters aren't working the way they should, and I think the most obvious solution is for films that aren't well served by theaters simply to go straight to DVD. In the new system, films that do not require massive sound systems and are not likely to enjoy a two-month theater run get to premiere at Blockbuster.

The obvious problem that exists with this proposal is that "direct-to-video" has always been synonymous with "clunker." This really shouldn't be--there are some films that are made for theaters and some that aren't. But if you think eschewing a theatrical run is a death knell, take a look at Disney. After releasing successful animated films, its sequels have primarily gone direct to video. After Pocahontas became a hit in theaters, Disney made rental/home video hits out of Pocahontas: Journey to a New World, Pocahontas Down Under, Pocahontas and the Ghastly Ghost Town, Pocahontas Meets the Jetsons, Pocahontas vs. The Harlem Globetrotters, and Pocahontas2K.

The key is to expand the public's perception of what qualifies as a direct-to-DVD release. In order to help transition consumers to a new way of viewing movie rentals, studios should start things off with a near-blockbuster, a comedy or drama starring a Cameron Diaz or a George Clooney, with essentially the same promotion a big-time theater release would receive.

A distribution system that has shifted in favor of rentals means some big changes for film promotion. For theater releases, it’s all about opening weekend, which almost always establishes a high point for revenues and precedes a geometric decline over the following weeks. Presumably, a film that’s starting out in rental outlets can be a little smarter about promotion. Rather than an all-out media blitz, studios could use a phased approach to advertising and television appearances, staying longer in consumers’ minds and retaining the ability to adapt promotions to changing perceptions and other new developments.

Whatever the future movie distribution arrangement may be, it is obvious that movie theaters will need to make some changes. Considering the cost, the distance, and the cell phones and talking, movie theaters are beginning to lose the battle with home theaters. In a word, they’re boring. To become the meeting places they used to be, they should take a page from drive-ins, Rocky Horror, and other innovative theater concepts of years past. Theaters that serve meals, invite participation, and show old movies in new ways are doing quite well, and they could well be more sustainable than a stale viewing experience that is entirely dependent on Hollywood’s ability to produce movies that are not themselves stale.

Every year, Hollywood gets together, hands out some statues, and pats itself on the back, proclaiming the love that everyone else has for what they do. That love, though, is not a given, at least not any longer. If box office receipts are any indication, the way consumers want to experience movies is changing, and movie studios can position themselves well for the future if they stop pointing fingers and start listening to movie watchers.

The Terminal

I finally saw The Terminal--what a great film. It's one of those rare movies that weaves an interesting story from the simplest of circumstances. It had only a few characters and took place in a single building and didn't have much of a plot, but I didn't want it to end. It was great to see the workings of this mini-society that we are all familiar with just in passing through, and the film shows that surviving the day-to-day drudgery has a lot to do with your temperament. And, best of all, I finally began to understand what all the fuss over Catherine Zeta-Jones was all about.

I'm tempted to say that Frank Dixon, the customs official portrayed by Stanley Tucci, suffers from Snidely Whiplash Syndrome, but I think his story is really a lesson in organizational behavior. I've been in organizations in which the management loses its people, and The Terminal reminded me a lot of those times. Dixon begins by trying to quickly get rid of Viktor Navorski, the Eastern European who doesn't have a home. His dismissiveness turns to curiosity, which turns to contempt. How people deal with the rules of a bureaucracy is a major theme of the film. In Viktor, Dixon sees his opposite, a man who finds joy in the hand he has been dealt rather than being hamstrung by the rules. Viktor's approach to life earns the appreciation of the terminal's hourly workers, giving him a power that sometimes conflicts with Dixon's positional power. By the end of the film, Dixon is trying to undercut Viktor to preserve the hierarchy and, presumably, the rule of law.

Many times, people who have risen to a position of power tend to take a fixed sum view of the amount of power, or love, or whatever, within an organization. They think that their position affords them x units, while the level of the organization below them is entitled to x-1, the level below that to x-2, and so on. When an underling gets some attention or does things in a new way, one reaction is to restore the "natural" order by leveling that person off. After all, more for them means less for you. But a good manager sees things differently. Think back to another Tom Hanks film, Big, in which an employee who is with the company for a week unexpectedly rises to a VP position. His unsympathetic rivals are jealous, while the CEO is portrayed as intelligent in a very practical and unpretentious way.

I've worked in the terminal before. Not an actual terminal, but a place where the smartest people were all at the bottom. I had a summer job at a book warehouse in which college students (and some graduate students) worked hourly jobs and had fun, supervised by high school grads and career book warehouse employees who were convinced they had a monopoly on the right way to do things. This is an extreme example, because the management had both less education and a worse attitude, but you can probably guess the result. We formed our own little society that had its own dynamics that were separate from those of the larger organization. Any time upper management came down to squash us, it just made the subculture that much stronger.

The only critique I have of The Terminal is that I didn't really buy Tom Hanks as a Krakozian refugee. To me, Mr. Hanks will always be a castaway, an astronaut, a computer-generated cowboy doll, a guy with AIDS, a kid in an adult's body, a retarded Alabama ping pong virtuoso, or a guy who cross dresses to get a good deal on an apartment. Or a mermaid.