For Hollywood, the future is here. It’s just not evenly distributed

By David Larkin , written on September 23, 2013

From The News Desk

Clay Christensen’s theory of disruptive innovation explains how incumbents are often trapped by their own success in a low innovation cycle. As they respond rationally to current incentives from their biggest customers to provide incremental improvements in their current products, smaller and lower margin market entrants can creep up the value chain with wholly new approaches.

For major movie studios, selling theater tickets to consumers that requires them to  transport themselves to a certain place at a certain time, often make them wear 3D (non-Google) glasses, and then months later sell many of those same customers hunks of laser etched plastic, is a lot more profitable than licensing the film to digital distributors for rental or as part of a subscription service like Netflix. Especially if you can send that same film overseas and do it all over again.

It’s probably more accurate to say that Hollywood is in the simultaneous, repeatable event business, not the film business. It’s a business model based on creating artificial scarcity and charging more for the least efficient distribution method, which infuriates  readers of PandoDaily and the other tech blogs.

This doesn’t mean that studios executives think their business is robustly healthy, but they are not sitting on their butts either. In their efforts to keep the revenue pump flowing they have gone in for bigger and more spectacle, largely to take advantage of emerging markets. This summer has seen some spectacularly costly failures such as “The Lone Ranger,” but some of the films that tanked domestically such as “After Earth,” may swing to profitability through international box office receipts (“After Earth” domestic box office $60,522,097, international box office $183,089, 885,

Steven Spielberg made headlines when he said Hollywood would "implode" if it continued to focus only on bigger and bigger blockbusters, but the film business won't go down without a fight.

The summer of 2013 was the most binary in history at the US box office, with both record receipts and more than its share of expensive bombs. There was more than a 50% percent increase from last year in films costing $75 million or more to make. It’s a go big or go home strategy. Meanwhile, international box office is up 32 percent over five years ago, driven by growth in various international markets, including China, Russia and Brazil. The Chinese box office ($2.7 billion) grew by 36 percent in 2012 to become the largest international market. Increasingly Hollywood is making films that will “play” overseas leading to what some would characterize as a homogenization of the product. But as Hollywood becomes more like McDonalds is there room for a more artisanal approach?

The old fangled film distribution paradigm is not the only game in town. In fact, there are more competitors to that model than ever, but to date, no digital first strategy has come close to the grosses of a major release. “Bachelorette,” released by Weinstein-backed Radius Films, was the first movie not released theatrically to make it to number one on iTunes. The film took in $5.5 million from video-on-demand (or VOD) rentals compared with just $418,000 earned in domestic theaters. Radius was started by the Weinstein Company as a multi-platform releasing company. The new breed of disruptive film company execs like Radius’s Tom Quinn and Jason Janego consider their Rentrack numbers for VOD sales and rentals perhaps more important than box office numbers.

Of course, Bachelorette cost a paltry $3 million to make, compared to an average summer blockbuster like "After Earth," which ran $135 million. Even the summer hit “The Heat,” a modestly priced movie by Hollywood standards, cost an estimated $43 million to get to market and made a hefty $156,625,657 in domestic box office. Hollywood’s gamble is that lavishly produced films will bring in the big bucks. According to Box Office Mojo, the major studios have released 51 films so far this year that have taken in 79.6% of all receipts.

The number one VOD movie of all time, according to Rentrak, was “Bridesmaids” with more than $24 million in VOD revenue. But “Bridesmaids” also made north of $288 million at the worldwide box office during its theatrical run and had more than $100 million in Blu-ray and DVD sales in the U.S. The studios are more concerned with preserving the highly lucrative but eroding Blu-Ray/DVD sales market, by offering digital sell through formats such as the emerging Ultra Violet.

They look at digital rentals and subscription services as a last option. Much like airlines, they price according to what the market will bear. The day after the Oscars, a slew of movies nominated for major awards but did not win, began offering cheaply priced rentals for the first time. Again, this makes perfect sense if you are not in the media business but in the event business.

Innovative anyplace-anytime distributors like Radius, along with Todd Wagner and Mark Cuban’s Magnolia Pictures, Entertainment One, Gravitas, IFC and an emerging cohort of others, will continue to experiment with alternative distribution, partly from necessity as bigger and bigger movies soak up more and more of the available number of film screens. They will likely continue to generate higher digital grosses for their successful independent features.

But it will likely be a while before they are considered more than an interesting idea to be casually monitored by the Big Six: Warner Bros, Universal, Buena Vista, 20th Century Fox, Sony and Paramount with Lionsgate and Weinstein close at their heels. In fact, television, which now offers an unprecedented amount of high-quality content on networks like HBO and AMC, is a business model of far more competitive concern to the film business than the eternally struggling indie film market. To avid followers of shows like “Breaking Bad,” each linear episode, amplified by twitter, has become an event in its own right.

In the meantime, Hollywood has an opportunity to embrace the digital revolution -- but it's to reinvent the relationship with their customers rather than disrupt their existing distribution model.

In a digital world, leveraging consumer data is key. But as movie industry trade site declared, “From a data standpoint, the movie industry is pretty much blind.” What scares Hollywood about Netflix is that movie executives suspect that Netflix may know something they don’t, and can make decisions based on empirically analyzed data rather than hope and precedent. The studios construct demographic profiles of their desired consumers to target marketing campaigns to reach them. Netflix doesn’t care if you are a 53-year-old man or 16-year-old girl. When it recommends content to you, it is based on your actual viewing preferences.

Hollywood still employs intensive mass marketing to drive rapid demand at film launch, in expectation of fleeting consumer attention. The studios create the product and generate demand, but do not engage in fulfillment. This has allowed emergent digital platforms from Apple to Amazon to own their customer relationships.

This means:

  • Film marketing is still practiced as a series of separately planned and executed silos–theatrical, DVD/Blu-ray, digital/VOD rather than as a holistic life-cycle.
  • Marketers do not know who are at the theaters or who watches their films, physically (via DVD or Blu-ray) or digitally (via Amazon, iTunes, Netflix, etc.)
  • Customer interactions are not captured and cultivated; opportunities to collect data that could be used for future movie marketing campaigns are missed.
According to the Hollywood Reporter, marketing a film worldwide can cost $175 million. Why must Marvel have to find the same customers over and over to watch each new “Iron Man” movie? If Hollywood can learn to foster relationships with its customers, it can help create an enormous saving that will flow straight to the bottom line.

Maybe one of these summers, Hollywood’s business model will crumble through its own sheer weight, and as developing markets reach the level of digital maturity of the United States, the overseas box office propping up the big studio business model will wither away. The studios with TV production arms already make more profit from TV than movies.

Hollywood is not just about presenting a well-told tale; it’s also about scale and spectacle and glamour. That costs a lot of money and employs an army of artists and craftsmen who all need to be paid. I think the days are far off when a lone genius can conjure it all on kitchen table. It’s nice to be able to watch a character driven drama like “Fruitvale Station” from the Sundance film Festival one night, and watch a city get leveled by super powered aliens on another night in “Man of Steel.”

Hollywood may well be disrupted one day. But I for one am already looking forward to taking my young son to “Avengers 3."