Business, Finance & Economics

Hollywood meets the digital economy

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Movies available for purchase in iTunes Store (Image: Flickr user labnol (cc: by-nc-sa))

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With so much free content on-line, the business model for movies just doesn't work any more. Revenues from DVDs are declining fast, as is backing from wealthy "angels" with big money to spend.

And this was a summer of box-office flops. Studios are becoming revolving doors for executives, and are basing productions on comic books, graphic novels, webisodes and video games that can be serialized and "branded" for easy marketing. "Specialty" projects aimed at adults are fewer and farther between.

Patrick Goldstein, columnist and blogger for the "Los Angeles Times" says what Hollywood is going through isn't new to the entertainment industry.

"The music business and their revenue business model has been under attack for more than a decade, and there's almost been total collapse in the record industry. Television is under enormous economic problems now, especially broadcast tv. I think this is happening to every business down the line."

Goldstein says Hollywood is in a state of "panic" in trying to figure out what to do, and some studios have instituted cost-cutting measures.

"Panic is always a perfectly good response in Hollywood to any kind of technical change. There's a lot of hand wringing."

"The one thing you can cut in terms of your costs, if you're going to say cost-cutting is the answer, is you can cut your talent costs. And that's been going on across the board in the industry for the past nine months to a year.

"Meaning, if you're a big movie star, if you're a top filmmaker, you used to get a big, nice back-end of the movie -- you got part of the profits. By in large, the studios are cutting back on all of that. They're saying, 'you share in the risks with us; you don't get first-dollar gross, you don't get a share of the profits right away; you have to wait till we break even with all our expenses; and then, if the movie is still successful you can share in the profits."

Goldstein adds that the ability of movie stars to draw audiences has faltered in recent years. "A lot of the big hits of the year didn't depend on movie stars. They depended on concepts, on the comic book character. The movie star was not very high on the list of reasons why somebody went to see a movie."

James McQuivey, Media and Technology Analyst at Forrester Research, says DVD sales, which is a big money-maker for Hollywood, has reached a ceiling, and part of the reason is DVDs are no longer the only option when it comes to accessing movies.

"The DVD is only one among many, and that's only going to get worse ... because of the increase new ways in which you can have movies delivered. We've talked about movies being delivered over the Internet, which is actually something very few people have done; but those options are exploding. First it was from Apple iTunes, then it was from your Xbox; now you're seeing televisions that have built-in access to Blockbuster movie rentals ... or Netflix movies that can be streamed."

Mark Gill is Founder and CEO, The Film Department, an independent film financing company. Gill was formerly president of Miramax LA, which has recently gone from 500 workers down to 20. He says independent film studios have been hit hard.

"It's the end of an era, quite clearly. Miramax began that era with "Pulp Fiction," the first independent film that grossed $100 million dollars in 1994, I was lucky enough to be there then.

"But this is really the end, you see it with the closure of Warner Independent, Picture House, and Paramount Vantage and now with the rather radical shrinking of Miramax ... the fear is within a year or two, they'll shut it down altogether."

Now, as head of a film financing company, Gill says movie budgets need to be trimmed. "I would say star costs are only the beginning of it; overhead costs, marketing costs, picture production costs -- all of that can be radically reduced. I've do believe, and I've worked in studios for over 20 years, if they don't do something radical about it, they're going to be in trouble."

Jordan Levin was former CEO of the WB television network, and is now co-founder and CEO of Generate, a multi-platform production company.

He says consumers are increasingly consuming across multiple media platforms, and that younger consumers are used to more immersive entertainment experiences.

"We felt like moving forward, creating a production company that was defined by a platform expertise, meaning we're a film company or a tv company, really didn't reflect the marketplace; that the marketplace was increasingly about creating content and trying to think about how that content can live across multiple platforms."

Levin's production company creates content that lives across many platforms, and his focus is to very quickly bring to market, ideas and concepts that have traction on smaller platforms that might grow into bigger platform endeavors.

Forrester Research's McQuivey says a big mind shift that needs to happen in Hollywood; that it has to realize that big releases aren't always the best way to introduce content to the market.

"A lot of this is driven by the fact that I can't always be in a theater, I can't even always be in my living room; but I am close to a computer and maybe even closer to my iPhone. All of these devices are changing the way I can satisfy my video urges, whether its comedy or drama or action.

"That's something that Hollywood's just going to have to adapt to. They're going to have to think in some of those smaller units; they're going to have to be comfortable developing and releasing content intended for those platforms."

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