Hollywood Under Siege

California's economy is at war with itself. Like the Civil War almost 150 years ago, the factions are split geographically, but this time, the two sides are Northern California and Southern California--more particularly, Silicon Valley and Los Angeles. This battle turns on whether it's true that "content is king," as many people believe, or whether content is becoming a mere commoner while the technologies that distribute it become ever more valuable. The outcome of this struggle may determine the future of the entertainment industry.

There's no doubt that traditional content is in trouble. Theatrical box office and admissions (number of tickets sold), despite some fluctuation, have generally been flat for a number of years. The DVD business is declining, and Blu-ray may prove too little, too late. The network television business is harder than ever, and also in trouble are other traditional content industries, such as those centered on music, newspapers (as Los Angeles Times readers well know), books, and magazines. People still consume media the old-fashioned way, but fewer and fewer do so every day, especially younger people.

Why is traditional content losing its vigor? Everyone focuses on the culture of piracy, but there are other reasons as well. One is supply and demand. Demand for entertainment is relatively static, because leisure time is constant, whereas supply (online content) has grown enormously. Some of this is professional content, but even more is user-generated content (UGC). Other factors are the loss of physical form (intangibles generally seem less valuable than tangible things), the low-friction nature of the Internet (things that are easy to get cost less and lose value), and ad-supported new media business models (free things seem less valuable than those that are paid for).

Market forces are also key: Computers, Web services, and consumer electronic devices are more valuable when more content is available and, in turn, these products make content more usable by providing new distribution channels. That encourages the growth of UGC and pirated content, reducing the market share of paid professional content, and, not incidentally, increasing the sales of new technological devices and services.

All these developments have led to a migration away from paid media to UGC or pirated content. UGC is often a flawed substitute for professional content or traditional media. But that's little comfort, because competitive goods don't have to be perfect substitutes in order to acquire market share at the expense of established product. And, yes, in some cases, new media make money for creators and companies--but the money's much less than it used to be. As NBC Universal's Jeff Zucker lamented, the content industries are being forced to "trad[e] today's analog dollars for digital pennies."

Technology Rising

In contrast to the stagnation and decline of the Los Angeles content industries, the technology business is marked by innovation. New startups are formed almost every day, it seems, and existing companies develop new products and services on a continuing basis. Although Silicon Valley's bubble burst in 2001, innovation continues apace: YouTube, Facebook (a transplant to the Valley), and much of Google's enormous success are all post-bubble. This dynamic culture seems likely to continue for the foreseeable future.

Hollywood has always depended on technology, of course. Motion pictures themselves, as well as sound, color, television, cable, home video, and satellite, are all technological developments that Hollywood was able to absorb in a gradual fashion over a period of years. Today is different though: The pace of change in Silicon Valley is breakneck; in Los Angeles, not so much. Hollywood now finds itself yoked to an industry that evolves at a much faster rate, and the result has been a struggle over revenue, distribution channels, and control.

The entertainment industry has responded in several ways. One has been through brute-force lawsuits, such as Viacom's pending suit against YouTube and Google (YouTube's corporate parent) for copyright infringement related to users' unauthorized posting of Viacom content on YouTube. See Viacom Int'l, Inc. v. YouTube, Inc., No. 1:07-CV-02103 (S.D.N.Y. filed Mar. 13, 2007). The case may settle with a blanket license to YouTube, but then again, it may go to the Supreme Court. Other such legal action includes the many demand letters and lawsuits filed by the music industry against individual users alleged to have illegally shared music via such systems as BitTorrent. These responses have been only marginally effective.

Another route has been legislative. Even before the high-profile litigation campaigns, Hollywood tried to build defenses against technology with Washington's help, including two 1998 statutes strengthening copyright. One, the Digital Millennium Copyright Act, codified at 17 U.S.C. §§ 1201 et seq., introduced into copyright law the concept of technological measures that control access to works subject to copyright, such as digital rights management (DRM) systems. For the first time, it became a violation of the copyright statute to circumvent such measures, even if for the purpose of making what the copyright law would otherwise recognize as a permissible fair use. See 17 U.S.C. § 107 (defining fair use).

Another 1998 statute lengthened the term of copyright by an additional 20 years. See 17 U.S.C. §§ 301(c), 302-304. This change, though controversial, was upheld by the Supreme Court. Eldred v. Ashcroft, 537 U.S. 186 (2003). More recently - several days ago - the President signed the PRO-IP Act (S. 3325), which establishes a cabinet-level intellectual property czar and establishes other changes that strengthen copyright and trademark laws. These measures make Hollywood happy, but some digerati, such as Silicon Valley copyright lawyer William Patry, contend that copyright has been bent to the will of the studios, and now serves more to suppress new business models and preserve existing ones than to foster creation of new works.

Hollywood has mustered business as well as legal responses to technology, by playing one technology company (such as Apple) against another (e.g., Amazon), or building or buying its way into the digital distribution business (Hulu.com and MySpace are examples), with some success. The industry is also attempting to change some business practices, such as altering the scheduling of a movie's DVD, download, streaming and international releases in relation to the initial theatrical release, or changing the mix of scripted versus unscripted (reality and documentary) programming on network television and basic cable.

What next? Hollywood seems sure to survive the challenge posed by Northern California's technology industry. Film libraries have always had value, and will continue to, particularly now that technology makes it easier for even niche product to find its audience (the "long tail" phenomenon). Population growth in the United States over the next few decades means more customers. Internationally, rising standards of living, as well as continued population growth, may mean more business as well. However, the challenges are great: access to markets is not assured, political stability can be elusive, and reduction of piracy is at best a difficult task, and at worst effectively impossible.

Whether Hollywood will thrive, rather than just survive, is a harder question. The industry's inefficiencies are legendary, and generally not shared by Silicon Valley: they include bloated star salaries, inflated executive compensation, complex talent contracts, scarcely-comprehensible union rules, and labor discord driven in part by disputes over new media compensation. While experiments with new media may yet bring profit to old media companies, the question remains: Will Internet-based distribution (much of it ad-supported) and mobile ever generate as much gross and net revenue as traditional distribution? If so, how much of that revenue will be captured by Hollywood, and how much by the technology companies that own the new distribution platforms? No one knows, but there's been little good news in these areas for Hollywood.

If the studios continue to lose their grip on distribution--to become vertically de-integrated and disintermediated from their own distribution channels--they'll be left with content as their core business. That's a problem because, fundamentally, the economics of content creation are inferior to those of distribution. The former is an industrial process, painstaking and manual. The latter, in the digital age, is post-industrial and automated. Nothing in Hollywood's production mechanism has become faster or cheaper at anywhere near the rate seen in Silicon Valley, if at all. Indeed, much of that process, especially for studio films, has become more expensive, not less, in the past few decades. That's troubling for the entertainment industry. Like the British, whose monarchy is now a mere appendage to a parliamentary government, content may find its kingdom ever more circumscribed by technology.

Comments

[RedDogBear]

There is a very simple reason "traditional content" (by which I assume you mean TV and movies) are in trouble. Almost all of it is crap. Movies have been taken over by special effects, remakes, and focus groups. And TV is so bland and mindless. User created content or old movies/TV that you can find for free are more creative.

[DeeRule]

The problem with Hollywood is they've locked out so many artist like me until we had to deprive our self to go for our dreams some other way. We do really need support from big exuecutives and others but they are so satisfied with the people they know and not a new artist with a different craft of ideas.

We're being locked out due to fear of association and trust. As an Author of the baby schedule ruler many publishers have not considered what's new about my ideas because they have been so addicted to no change in their agenda attitude. Finally many like myself publish their work without the strong support of the distrubution channels because they fear us taking over.

Dee Rule

[rjmiller]

Hollywood is a big bloated behemoth. The cost of making a studio film is out of control, making it a difficult prospect to turn any kind of profit. Of course, it's entirely the fault of the industry, but they want to pass the buck on to the consumers. They blame piracy, but the fault is entirely theirs for not creating content that is worth paying to see.

Here's a good post of the topic from Todd Alcott (writer best known for Antz): http://toddalcott.livejournal.com

[HarryOvercoat]

Don't artists always require tastemakers/patrons/employers. Would there be modernist painting without Walter Pach and Gertrude Stein? The truth is most people want to be observers and not observed. Every technological revolution temporarily democratizes the old technology until it's effect is so diluted it no longer draws interest. The development of cheap 35mm cameras didn't turn everybody into great photographers.

There will always be a need for gatekeepers and it's only a matter of time before those people emerge. The studios have always done distribution and access the best and they'll get it together with these new technologies. Why not a simultaneous distribution system were all these media are utilized at the same time for a particular event. We kinda just saw that with Obama. I think people will always be attracted to a spectacle and it's only a matter of time. The next Tommy Matolla's just waiting to appear.

[ndem]

Watch Steal This Film...I heard the same argument a conferences with artists and creators of all kinds worried about how tey will monetize their content...the reality is already here....we cannot just employ gatekeepers...but find new business models!!!!

The cream will always rise to the top! just create better stuff! Find new ways to monetize! Even contributions! Say no to gatekeepers controlling what you see. People WILL pay for quslity.

It can be a win win situation!

[BlackJAC]

Plot Hole: why pay when you can get it for free? Radiohead allowed people to name their own price for the last album, and only a third of them paid.

There's no incentive to create quality if you're not going to get compensated for your efforts.

[scottellington]

"In Rainbows was physically released in the UK in late December on XL Recordings and in North America in January 2008 on TBD Records and charted at number one both in the UK and in the US. The album's success in the US marked Radiohead's highest chart success in that country since Kid A, while it was their fifth UK number one album."
--Wikipedia

Is that the album you mean? Maybe 15 minutes of immortality isn't worth nothing in the course of a 22year career.

"Explaining the reasons behind the delivery and pricing scheme, Jonny Greenwood said, 'It was an experiment that felt worth trying...[and] it's fun to make people stop for a few seconds and think about what music is worth' ".
--Wikipedia, again.

[scottellington]

Thanks for the reference. Google>YouTube>.flv download>site>donation for both documentaries, and a subscription to the newsletter.
Content isn't king, anymore; it's more invaluable than that.

[scottellington]

Thanks for an article that covers a great deal of ground. My problem with this description is the fundamental preconception that artists require employers.
I, for one, don't need to see incredibly expensive productions. I'd be more than content to download the video of a table-read of The Water Engine (for example), or the MP3 of Joss Whedon commenting on just about anything.
As the costs of production and distribution decrease, thanks to increasingly affordable technology, the need for stupifying sums of money provided by corporate monarchs turns totally yesterday.

I'm still waiting for proof of the liberating properties of The Technological Revolution in the Information Age. Apart from StrikeTV, fascinating entertainment doesn't seem to be happening in any big way. And that's mysterious, because I'm anxious to pay for content that's free of the strings of despotic "angels".

[HarryOvercoat]

I can't believe that Nor Cal's techno-assault on Hollywood is that dyer a challenge. First, Mr. Handel doesn't mention people love movie stars, celebrity. Sounds stupidly simple but stardom is the thing that drives the entertainment industry. Second, hasn't this all happened before? My father came to Hollywood in 1950. His first job was to purchase content for ABC-TV. The studios managed to starve TV of content deep into the seventies. By then the congloms that owned the studios simply bought up the broadcasters.

Perhaps people are temporarily dazzled the novelty of UGC, but I can't believe that Hollywood would let the pipes drive the industry? Steve Jobs a star maker? Hmmmm.

[BillSeward]

Well, that's an overview. The solutions concerning distribution, piracy, content vs, technology are really bound up in a real understanding of the internet and it's usage's by the current and coming generations.

The current toe in the water content on the net models: Hulu, MySpace, etc., are straightforward. Hollywood says, "we make content available to you, entire libraries in some instances, you exhibit the content on your site, you run ads, we split the money 50/50." That's pretty much it right now.

The big problem with that model is the core of the current labor unrest with SAG. The creative artists aren't getting a dime. That, of course, can't continue, and, anybody who is serious about the survival of the creative members of the community - you know, the people who MAKE the product, needs to understand that the current deal on the table to SAG is unsignable.

[BillSeward]

Mr. Handel doesn't even mention the current economic meltdown, but, whether the economy is melting down or not, the artists need to be tied into a percentage of the distributors gross. Period. It is simple and it covers both the producers and the artists.

I have two teenage sons and they give me a real-time insight into what the coming generation actually does. Here it is: the younger one (15) watches endless skater videos on Youtube. He watches mostly nonprofessional content. Not all, but most. There is the iTunes downloads, the downloaded episode of the TV show, the movie, etc. The older one (17) watches series and movies as well as a lot of Youtube as well. He will download a movie for a fee. He will download music on iTunes for a fee. He will download entire a to z episodes of a TV series, and watch over days and weeks.

[BillSeward]

Otherwise they iChat - a lot, IM a lot. That's about it.

They buy pay-per-view movies via our Cable system, when we let them Same with the computer purchases. They come via our credit cards, so, it's when WE let them.

None of this precludes either of them from getting wildly excited about a coming movie that they really want to see - in a theater.

The theater experience is NOT going away any time soon. Why? Because it's a whole different experience than watching anything on-line or on TV, or on-line via TV. It's big: the sound, the images, the impact. That is NOT coming to a computer or a TV near you.

It's a social event - a place to meet friends, girls, a date opportunity when that starts happening.

[BillSeward]

Microsoft, Google, and so on don't do that. And they won't. It's entirely unnecessary to their profit stream and entirely outside their business model. Will they, or anyone else in Silicon Valley, start hiring pro actors, writers and directors to make content? Don't hold your breath. Why? They're freaking multibillion dollar companies doing what they do now. So, will the next "Friends" come out of Silicon Valley? No. It will come out of Hollywood. That's where those people are who know how to do that, have the infrastructure to do that, have the experience and the know-how.

It bears similarity to Silicon Electric car technology. They make them. But they cost $100,000 a pop. So, outside of George Clooney and Cameron Diaz, you won't be seeing them tooling around L.A. anytime soon. Why? Because Silicon Valley startups and their financial backers hit the wall outside of computers on distribution. That's why Detroit is in danger of bankruptcy or extinction unless they, with massive government aid, retrofit their factories to make, small, electric or natural gas or whatever technology is settled upon, cars, that can be mass produced on a gargantuan scale. That is NOT happening out of Silicon Valley.

[BillSeward]

Piracy needs to be a top priority of both the industry and it needs to be backed up by the government. The music business is a test case of what NOT to do. They didn't react, they didn't know what they were dealing with, and by the time they did? It was too late. The on-line distributors are already, exactly like the traditional theater owners, engaging in an approximately 50/50 split on ticket sales, so to speak. Only it's ad revenue. Hollywood provides the content, on-line companies: Hulu, MySpace etc. show it. They keep half the income from the ads. Hollywood keeps half.

This all ties back into the current SAG struggle going on right now. SAG MUST get it right. The DGA, WGA and AFTRA did NOT get it right. SAG MUST secure a fair percentage of all profit off their work. Transparency needs to become the coin of the realm. No more Hollywood accounting. Not for the net. That needs to be locked in to the next contract. Those saying "make the deal - take what they're offering" need to understand if they miss this bus, it's never going to turn around to pick them up - not three years from now, not ever. "Where's the money? Show me the money?" they demand. Wrong question. What's the WAY SAG gets paid? THAT'S the question. The money will come. The contract MUST be right NOW to protect actors when it does.