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Wednesday, August 24, 2005

Hollywood's Changing Business Model 

Summer Fading, Hollywood Sees Fizzle

The movie business is suffering mightily this year, and unlike the music business, doesn't have the convenient excuse of Internet piracy to blame for its problems. (Sure, there's piracy of movies, and a lot of movies can be found on the Darknet, but most people don't know how to find them). The New York Times article, linked above, neatly summarizes the situation.

Grab: Multiples theories for the decline [in ticket sales] abound: a failure of studio marketing, the rising price of gas, the lure of alternate entertainment, even the prevalence of commercials and pesky cellphones inside once-sacrosanct theaters. But many movie executives and industry experts are beginning to conclude that something more fundamental is at work: Too many Hollywood movies these days, they say, just are not good enough.

Well, duh.

The sad thing is that this isn't a new phenomenon. The vast majority of movies released are mediocre at best, but the movie business, over the past two decades, has been saved by luck and library. The luck comes from the occasional big hit that drags people to the theaters, and increases ticket sales for lesser movies. And the library--the vast collection of films owned by the studios--has been monetized by video sales (twice over, first with videocassettes, and then DVDs).

But this year, without any new breakout hits, luck hasn't been with the studios. And the libraries are getting exhausted, as evidenced by the slowdown in DVD sales. And that has exposed the deeper problems of the movie business.

One of those is arrogance. As Robert Shaye, the chairman of New Line Cinema says in the New York Times article quoted above, "[Y]ou could still count on enough people to come whether you failed at entertaining them or not, out of habit, or boredom, or a desire to get out of the house. You had a little bit of backstop."

Another is the desire of incumbents to protect their positions by blaming other incumbents. Movie studios blame theater owners for running too many commercials, charging too much for popcorn, and allowing the experience to be as pitifully awful as it is. Theater owners blame the studios for tightening release windows between theatrical and the aftermarket of pay-per-view and video, and for releasing poor product. But neither recognizes fully that years of abusing their power have allowed audiences to seek other forms of entertainment, and have allowed technology to create alternative ways to view movies that are a better value than going to the movie theater.

And it's technology that has changed forever the basic business model of the studios, as recognized by people like Robert Iger of Disney and Warren Lieberfarb, formerly of Warner Bros. They ponder a business where movies are released to theaters and home theaters simultaneously--the direction in which things are obviously moving. But the challenge is large for the studios' spreadsheet jockeys, because the current business model depends on careful control over how a movie is released, and where and when. If that control is lost, it's hard to see how the studios will replace the total revenue stream of a movie (from domestic theatrical, then international theatrical, and on into the downstream, which includes airline viewing, hotel room pay-per-view, home pay-per-view, DVD, pay cable, broadcast TV and a re-release on DVD as a special edition). And it's hard to see how the studios will market their releases effectively in a world where you can see a first-run movie at home on the day it's released, since so much of Hollywood marketing currently depends on the run-up to a theatrical release.

Much like newspapers, who won't be motivated to invest what it takes to effect a complete change in business model until it's too late (since they're focused on protecting their shrinking profit margins), movie studios will have to be dragged kicking and screaming into the next five years. (You may recall that when home video first started to rise, the studios went all the way to the Supreme Court to try to stamp out this threatening business. Thankfully for their bottom lines, they failed to kill home video).

So why this long post on the movie business in a blog about b2b media? Because all media business models rely on the same fundamentals, sure, and because the lessons of Hollywood matter to us, even if we'll never walk down a red carpet for the premiere of a new magazine or trade show.

Here are the primary lessons I draw:

* The quality of content matters. When content is marginal and commoditized, audiences will find other ways to entertain and inform themselves.

* Ownership of content doesn't guarantee the ability to control the business model. Audiences control the business model, always.

* Past success (and profit) hinders our ability to take a risk on the future, and we often only make fundamental changes when we're absolutely forced to, and not when it would make the most sense.

* Spreadsheets, budgets and P&Ls aren't business models.

I wonder what the b2b media business would look like if we started with a blank piece of paper--or, perhaps more appropriately, no paper at all.

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