Let some 'Titanic' stardust blow our way

LOS ANGELES - It has been, of course, Titanic week, the week in which the movie took 11 Academy awards. It is also the showpiece week of the United States' largest export industry, entertainment. It is hard to grasp fully the scale and might of Hollywood without being there, so a brief visit last week was an education in raw economics.

Most of us (including Chris Smith, who launched the Government's plan to boost the UK film industry last Wednesday) have moved on from the idea that economic activity has to involve the making of things: we accept that services are just as useful to humankind. Many service industries have begun to use the language of manufacturing: financial companies talk about designing, manufacturing and distributing pensions, just as one might talk of designing, manufacturing and distributing cars. And, for more than a decade, there has been a clear relationship between investment in information technology and in service industry employment growth (see left-hand graph).

But it requires a leap of imagination to move from IT, which we can all recognise as being important, to something like Titanic. Some hard numbers may help. By last week this single movie has grossed $1.25bn (pounds 750m) world- wide and $496m in the US, so it is earning more from exports than from the domestic market. In the US it has been on the top spot for 14 weeks and with the possible exception of the re-release of Grease, there is not much on the horizon that can replace it as number one.

There have been enormous secondary effects. The US television audience for the Oscars was its largest ever: 55 million people watched the entire show. There has been a boom in Titanic-related books: eight of the top 50 books are associated with it, including four about actor Leonardo DiCaprio, targeted at his core audience of girls aged between 8 and 14.

But perhaps the most interesting aspect of this tale is not the power of the one bull's-eye, but the indication of the solidity of the entertainment industry as a whole. There is a depth to the industry which critics tend to miss. When Titanic revenues flag there will be other products swinging in behind. The other films featured in the awards have seen strong revenue growth, and if the next number one is the 20-year-old Grease, it would be an extraordinary demonstration of the depth of the industry's back- list.

Entertainment has always been a great generator of jobs. In fact, it has rescued the Los Angeles economy from what would otherwise have been a difficult transition as cuts in one of its other key industries, defence contracting, have bitten into employment (right-hand graph). Seen in macro- economic terms the entertainment industry will last year have been the main engine generating the US's $25bn surplus in trade in royalties, fees and other intellectual property. In micro-economic terms it has become the main engine driving the economy of the US's second-largest city.

This raises three key questions. First, is it really a good idea to have one industry so dominate an economy? Second, why is this concentration happening? Third, what are the implications for Hollywood's principal overseas sub-contractor, the UK?

The answer to the first must be no. It is never wise for any city or country to have too many economic eggs in one basket. We know what happens to single-industry cities when the industry declines: it has taken two generations for Glasgow to rebuild its economy after the decline of shipbuilding. Entertainment is growing strongly and it is better to be selling to a global market of private individuals than - as does defence - a single domestic buyer and a few often capricious foreign ones. So in that sense the Los Angeles economy is more diversified than when defence was a larger employer than entertainment. But one day entertainment, like every industry, will go ex-growth. Then what?

I suppose the policy advice would be to try to maintain and foster other industries. The normal rule of business is to reinforce success, but at least be aware that world-dominating industries can turn downwards.

There is a parallel here with London's financial services industry. The two urban agglomerations are roughly the same size. Employment in the City's financial business and in LA's entertainment industry are roughly the same. Net foreign earnings, again, are of similar magnitude. But London's hold on financial services feels a little more fragile that LA's on entertainment, for global domination is not nearly so complete. We would be in a mess if that engine stutters.

Why is there this concentration of industry? In a world of mobile capital and instant communications, industries ought to be able to locate just about anywhere. But they don't; they cluster. The only obvious explanation is that human capital clusters. Anyone serious about a career in one industry has to go where the main activity is carried out. And any organisation serious about a business has to go where the people are. The scarce resource is human capital, more so now financial capital is so mobile and technical know-how can be bought in. Expect this clustering to become more evident as globalisation continues.

As far as global entertainment is concerned, this is good news for the UK. Today we are mainly a supplier of talent rather than an independent player. Nothing wrong with that - the talent is well-paid and very diffuse, for the UK is strong not just in front-of-camera players but also in a vast army of "manufacturing" workers in the production process. But there may be a bigger prize out there.

In most industries there seems to be room for one big production centre in more than one zone. So there should be room for two or three centres, not just one. That is what has happened in financial services and in civil aircraft manufacturing, two particularly concentrated industries. A question: is there room for a significant concentration of the entertainment business in the European time zone?

If there is, the only possible location is the UK. That is not to denigrate the continental European industry, which will always for cultural reasons have distinct domestic markets. But if you are chasing the export business it has, surely, to be developed out of the present sub-contracting role. If you are serious, you have to be able to sell into the US market, and turning sub-contracting into a self-standing enterprise is not a bad way of doing that.

How do we do this? There is no magic wand. The process will ultimately have to be bottom up, not top down. This is not to sneer at Chris Smith's initiative: to set up the Film Policy Review is a powerful indication that this government is serious. But whether the various ideas outlined will make a material difference is another matter. A government can remove obstacles, but it can do little to promote something that would not work without public support.

The good news is that you do not need many people. Someone here told me that any industry only really needs half-a-dozen stellar talents to succeed. Perhaps a bit of an exaggeration, but the self-reinforcing nature of success in entertainment suggest that a tiny handful of people can enable it to achieve critical mass.

These people certainly exist in the UK, particularly in music, where we have a larger market share than in film. Think Lord Lloyd-Webber; think Simon Fuller (Mr Spice Girls), who has now brought British singer Jimmy Ray into the US top 20 and is getting front-page treatment in the US press.

Meanwhile, being a sub-contractor has its virtues. US audiences of Friends are enjoying a budding romance between Ross and Emily, played by Helen Baxendale. Why an English actress? The show was a prelude to the ending of the present Friends series, which finishes with a trip to London. That was being filmed last week.