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Jonathan Handel

Jonathan Handel

Posted: November 12, 2008 04:15 PM

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.

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