THE BLOG
02/17/2011 10:39 am ET | Updated May 25, 2011

Are Studios Dead?

While it may be true that in the movie business nobody knows anything, although I imagine James Cameron begs to differ, what about other businesses? Steve Jobs seems to know exactly what we want in elegantly styled electronics products, even before we do and even if they aren't quite perfect. Jeff Bezos knows how to sell us almost everything we want online -- and we thought he'd never make it past books. And how about that guy at Groupon who just turned down $6 billion for a company that didn't exist 3 years ago and has zero barriers to entry in its business plan -- he must know something. Of course, you can forget about Jesse Eisenberg/Mark Zuckerberg -- he knows, what, about 600 million somethings.

So, what does this have to do with movie studios? Well, it's possible that the General Motors model of a studio -- to paraphrase Alfred P. Sloan, "a movie for every person and purpose" -- where one studio and its executives try to make a steady stream of comedies, dramas, genre pictures and those $200 million-plus things that hold up tents, is over. With studios' high overhead and proven inability to control costs on one hand, and the daily onslaught of new technology that takes their product from them in ways they can't understand and pays them less per viewing on the other, the very model of a modern major studio may just be dead.

It's a mixed up muddled up shook up world if you're a major studio; everything that should go up is just going down -- movie admissions, cable TV subscribers, and most dramatically DVD sales -- while the wrong things -- motion picture production and distribution costs, Redbox rentals, internet streaming and Netflix's share price -- all keep going up. Only the steady rise in the average price of movie tickets -- up 5% in 2010 over the prior year, keeping box office results flat while attendance fell 5.3%, makes the business seem in okay shape. But, it's not. Especially if you plot rising ticket prices and falling attendance on the same x:y graph and think about where that ends up.

In the past, when studios green-lit their movies, theatrical performance was always the variable with video revenue and cable output deals a given, escalating based on box office gross. But now, with DVD sales down 33% over the past four years and cable networks like Showtime less interested in studio output deals, how can a studio even begin to green-light a movie based on historical revenue assumptions that are unlikely to be accurate 12-18 months later when the picture comes out? The existing major studios are all part of very large corporations, so their continued existence is not in jeopardy. Their corporate parents may get tired of owning them, like General Electric, but a bad movie or a few years of them isn't likely to put them out of business. And while now nearly everybody can make a movie (but not necessarily get it released) the major studios still do something that other movie companies can't: produce, distribute and market motion pictures on a worldwide basis, in all possible media and, of equal importance, collect the money.

What the major studios don't seem to be able to do, however, is adapt their current business model to the new world. They're still making a yearly portfolio of unrelated movies with decision-making done on an incremental basis, paying big participations on expensive star-driven pictures in success (maybe less first dollar gross but then it's just a participation pool with a minimal or no distribution fee and 100% of video income thrown in), while owning all the failure. While studios can say that financing partnerships lessen their risk, they also lessen the upside, which is what you're in the movie business for in the first place.

It's possible, then, that the better model is the one practiced by Apple, Amazon and yes, Jim Cameron: do what you do, do it better than anybody else in a way or volume that allows you to exact a premium, build brand loyalty and keep your competitors out. Apple, Amazon, Groupon and the Facebook, despite their different businesses -- one sells stuff they make, one predominantly sells other peoples' stuff, one allows other people to sell their stuff to people who otherwise wouldn't buy it, and one allows everyone to sell themselves -- have something very important in common: a direct relationship with their customers and customers' affinity for their brand.

Studios long ago ceded that relationship. Back when, when people actually went to the movies every week, that relationship existed and studios had individual identities. And they controlled all aspects of the motion picture process -- the talent, the production,

distribution and exhibition of the pictures and the publicity surrounding them. Those days, of course, are long gone for a variety of reasons: crushing overhead, the Justice Department, technology the studios didn't control and lack of foresight. The world is a different place, and movies may just have a different place in it.

For the large corporations that control the 6 remaining major studios, what is the maximum point of leverage, and therefore revenue potential: producing content or controlling its distribution? With the high cost of producing content, a studio wants to maximize distribution of its product to consumers, but some of the alternatives, Redbox rentals for $1 or unlimited streaming on Netflix for $9.99 a month and whatever Amazon may do generate relatively minimal revenue and commoditize the product that the studios spend so much to make. And here the movie business is unique as the cost of making movies is totally separate from the price at which they're sold, and increased costs cannot be passed on to consumers. So as a studio you're torn between getting your content out there in the form that consumers demand while trying to retain some control so you're not, say, merely providing a loss leader to companies who's main business is something else, like electronic devices.

In the future, fortune will favor the content producers with direct access to consumers, especially in the home and through the electronic devices that serve as extensions of the home -- News Corp. which controls Fox and Direct-TV, Comcast with its purchase of NBC-Universal and Disney with its network and cable channels and its brand that guarantees access and Apple in its back pocket (actually it's the other way around). Warner, which recently spun off Time-Warner cable, has the sheer power of its size. Paramount and Sony are riskier; the former with less connection to the home and the later with a foreign parent preventing ownership of a network (Is it odd that we allow foreign governments to own a good part of our country through Treasury bonds and other investments but we won't let them tell us what to watch?).

Now, don't let me go all Peter Bart on you but here's a memo: what the movie business needs is a unified plan and someone to lead it. Where is the movie business' Steve Jobs, the person who knows what people want to see before they do, knows that giving content away for free on the internet isn't such a good idea and who creates excitement, brand loyalty and an enduring corporate culture? Or is the development and production process for movies just too attenuated so that what once seemed like a good/clever idea isn't when it finally gets made and released? And, is it unrealistic to expect that the same group of executives can effectively manage a diverse slate of 20 pictures, year in and year out, especially given the cost of all that?

Before, even without enlightened leadership we could count on the intersection of self-interest and money to secure a future for the movie business. But now, with so much uncertainty in the economy, turbulence in the distribution of motion pictures, reduced shelf space for DVD's at Walmart and maybe no shelf space at Blockbuster, and with the stakes so high because of the costs, there is no safe harbor. While change may be a natural cycle of any market economy, the motion picture business has to be careful to not bring it upon itself. Schumpeter would call this "creative self-destruction." To avoid this, there must be a consensus among studios, talent and their representatives and unions. The unanimity with which the studios generally approach union negotiations should be brought to bear on distribution windows, technical standards and other forms of distribution, as well as talent relationships, just so long as cooperation stops short of collusion.

If a secure future for studios is no longer merely controlling a vast library, it must be controlling the destiny, and exploitation, of their product. And in that, what is the defining relationship? It is the one with the consumer. It's what Apple has mastered with their products, their stores; their community. It's what Netflix has done by making its streaming service available on over 100 platforms -- truly Movies Everywhere. That's what studios or their corporate parents need to create and if it's not through their content, it's through how that content is delivered to the consumer. Consumer products companies create that relationship through brands, reaching through the retail outlets for their product to consumers. But movies aren't really brands (and neither are stars; they, like Soylent Green, are just people) -- brands offer security, status by association and trust, not to mention premium pricing. Movies are individual products that have one weekend to make a first, and lasting, impression on their audiences. Studios risk their future by ceding the relationship with the consumer to all those who sell their product.