Trends, Innovation and Money

In reading and tweeting on a few news items this morning, I was compelled to write a quick blog post.  I think I am restating the obvious, but sometimes it's good to remember simple lessons.  So, here it is:

If you want to make a lot of money in the entertainment business (or any other business), solve a real problem for a price that people are willing to pay.  That's what successful companies do.

What does that have to do with trends and innovation?  Every time the ground shifts in any industry, there are new rules and new issues to be solved.  Identifying those issues early and creating great solutions is the essence of opportunity.

No reason to belabor this point.  Here is the bottom line:

1.  Watch the trends.
2.  Understand how the industry is innovating and responding to those trends.
3.  Assess what new challenges will be created as a result.
4.  Devise brilliant, practical solutions to those new problems.

So, in our business, technology is driving tremendous changes in every area of the industry.  In an hour of creative, enlightened thought, any of you could probably think of ten problems that will need to be solved as a result.  Want to make a lot of money?  Start solving.

The Most Important Trend for Entertainment 2010

At this time of year, it's interesting and fun to think about where our industry is headed.  More specifically, what are the important trends in entertainment?  Which changes are most likely to impact those of us who don't work at NBC Universal?

We can talk about the various developments and what they might mean for the various sectors, but I think this coming year there is one single development that will be a game changer in almost every area of the business.  It is the convergence of the Internet with the home theater. 

Internet content has been moving closer to the living room for several years.  One major hurdle in that process has been the lack of enough bandwidth and speed to deliver large format HD content on a real time basis.  The combination of effective compression and faster networks has pretty much solved that problem.

Also, a truly effective and dominant solution for getting the digital content on to the TV screen had not yet emerged.  The TV manufacturers have taken matters into their own hands by integrating Internet inputs into the hardware architecture, and establishing alliances with content providers.  Problem solved.

So, for 2010 we will see the emergence of huge, sharp TV screens equipped with hardware and software that provides seamless access to everything on and off the 'Net.  We will be able to get endless amounts of full-sized HD content with surround sound at the push of a button.  Vevo, Netflix, Hulu and dozens of lesser known companies are poised to fill this newly minted content pipeline. 

And all of those TV sets boast at least a 120 Hz refresh rate, so they are 3D ready.  (In-Three and Reliance, Katzenberg, Cameron, and dozens of others are poised to feed dimensional content to consumers, both in theaters and at home.)

What's the business impact of this new technical capability?  It's quickly eliminating the DVD business.  It will be the final and fatal blow to the CD business.  It is putting pressure on theater owners to develop and deliver a superior experience.  It is already eliminating the "windows" strategy in the film distribution business.  It will give small film makers the ability to find their own audience (just like iTunes allowed independent music artists to find an audience).  It will create upheaval in the broadcast and cable businesses, forcing these companies to find better business models and deliver better programming. 

Virtually everything about our business will change when this final link is placed in the chain.  It is something that cannot be ignored; it must be embraced.  There is tremendous opportunity afoot for those who are poised to take advantage, and tremendous struggles for those who delay or resist.  My friends, the cheese is about to move in a big way.  If you have any doubt about whether I'm right, come to CES in Las Vegas next month and tell me what you see. 

The new horizon is now going to be solving the marketing problem.  It's hard enough to figure out what to watch with a couple hundred available channels.  How about when that number is infinity?  How do you decide what to watch when your choices are endless?  Whoever solves that problem stands to make a lot of money.  (Personally, I'm betting on Google.  They are really good at solving that type of problem.)

As always, I welcome your thoughts.

State Film Incentives and Smoking: An Email Exchange About Competing Policies

I had an excellent email exchange with Jonathan Polansky yesterday and today. Jonathan is a media consultant, anti-smoking advocate and the principal of Onbeyond, LLC , a media consultancy in Fairfax, California. His current project is on behalf of the University of California.

I am going to reprint our exchange for you because I think it raises some great issues. The essential topic is the conflict between state tax incentive support of films which can influence children and adolescents toward smoking, and how this conflicts with money that those same states are spending on anti-smoking education.

There is an underlying issue that is perhaps even more interesting -- when states facilitate film production through tax incentives, should the state be concerned with the content of the film? This raises a fascinating First Amendment issue -- if a state were to look at film content as a part of the basis for its funding decisions, would a refusal to fund a film on the basis of content constitute a form of unlawful prior restraint? How about issues of discrimination? If a state refuses to fund a film that is perceived as influencing children to smoke, how about refusing to fund films that include drinking or premarital sex or ...? Once you're on that train, where is the last stop?

State tax incentives as a communication control mechanism. Read my exchange with Jonathan before you decide. He makes some very good points. You may or may not agree with him, but the guy is an excellent communicator.

I would really love to get some comments on this issue. It adds an entirely new facet to the discussion of state film incentives.

Jonathan initiated our exchange with this email:

From: Jono Polansky [mailto:jono@onbeyond.com]
Sent: Sunday, November 08, 2009 1:37 PM
To: Roger Goff
Subject: Film incentives

Mr. Goff —

We noted your thoughtful post on the Iowa film incentive program — and what localities should think about before setting one up.

Whatever the job-creation value of film incentive programs, their indiscriminate funding mechanisms unexpectedly contribute to a serious public health challenge for states, according to a report to be released Tuesday, November 10, by University of California researchers.

Attached is a media advisory embargoed to 11/10. The full report can be downloaded, starting Tuesday, at http://escholarship.org/uc/item/8nc8422j.

We hope you find this of interest. Thanks for your consideration.

I replied as follows:

On Nov 8, 2009, at 2:41 PM, Roger Goff wrote:

Thanks for sending this, Jonathan. As long as you took the time to send it and write a nice note, I'll take a few minutes to respond.

Let me preface this by saying that I am 100% on your side on the broad issue. I am very much against smoking. I recognize that it does create huge health problems and places a financial burden on all of us. I also recognize that kids are subject to a variety of influences, media among them. Here's where I depart a bit.

There are a few points that occur to me.

1. As a parent, I feel it is my responsibility to educate my kids. There is no way that I can keep them from being exposed to a wide variety of negative influences, nor would I necessarily want to. If I shelter my children completely from the temptations and bad behaviors with which they will be confronted, I lose the opportunity to shape their response to those issues. I have gone out of my way to make sure that my kids understand how unhealthy and damaging smoking (and drinking and drugs and unprotected sex) are so that they respond negatively to it when they are confronted by it. I feel I can only protect them by engaging them in the issue, not by avoiding it. So, I see smoking in films as an opportunity to reinforce their values in that regard.

2. I think your statistics are unfairly misleading. Taking the entire amount that a state spends on making films which include smoking, and holding it up against amounts spent on programs specifically aimed at anti-smoking education, is not comparing apples with apples. This would be like drawing a parallel between a film which contains a moment of contextual sexual activity and pornography. The vast majority of the money spent to support film production had zero impact on children smoking. Putting that entire budget in the negative column is ludicrous and in my view undermines the credibility of your position. When you're going to cite studies, if you do it in an obviously biased manner, you add little to the legitimate discussion of the subject matter. And that's something that I say often to a number of people on a variety of topics, because it is something we see often in this day and age of massive public discourse through the Internet.

3. I don't think I believe that a kid who would otherwise be a non-smoker will change his or her behavior because he or she saw someone smoke in a film. Obviously, this goes to my first point, as well. Kids need to have good parents and education, as well as a positive self-image and belief in their future. If you can give kids all of those things, then a cigarette in a film will have no impact at all. And if you don't do those things for kids, then they will probably engage in self-destructive behavior whether they see it in a movie or not. Am I saying that it is completely inconsequential? No, not quite. I understand that sustained exposure to behaviors can legitimize those behaviors in the eyes of youth and adolescents. But I don't think it is nearly as powerful as you make it seem.

And I am not saying that I am against anti-smoking education, although I am probably a little bit of a Libertarian when it comes to states spending money to promote specific ideologies. With that said, I don't consider anti-smoking to be an ideology because it is pretty hard to legitimately take the other side of the issue. Anyone who is pro-smoking is an idiot. I guess I can understand people who hold the broad belief that everyone should be allowed to do whatever they want so long as it is not hurting anyone else, but I also completely understand the public health arguments against smoking. Ultimately, as I said at the top, I am 100% anti-smoking and I find it hard to take very seriously anyone who tries to argue in favor of it.

Bottom line, you and I are on the same side of the issue, but I think you are standing much further out on the plank than I am. I balance the issue against other things that I think are also important, such as the First Amendment and support of the economy and the arts. I'm sure you value those things as well, but we probably have a bit of disparity in our priorities.

Again, thanks for including me in your discussion, and thanks for reading my blog. It is nice to know that neither of us is screaming into the wind and that someone is listening, don't you think?

Best of luck,

Roger

Jonathan's excellent response:

From: Jono Polansky [mailto:jono@onbeyond.com]
Sent: Monday, November 09, 2009 11:05 AM
To: Roger Goff
Subject: Re: Film incentives

Thanks for your thoughtful response, Roger.

The evidence that exposure to on-screen smoking leads adolescents to smoke is conclusive. The full texts of numerous peer-reviewed studies supporting this conclusion can be found at http://www.smokefreemovies.ucsf.edu/godeeper/the_science.html, as can reviews of the research such as National Cancer Institute (2008). Rigorously controlled studies are the basis for the attributable risk used to estimate the impact of movie smoking on youth smoking prevalence.

Incidentally, the research evidence indicates that the children of non-smoking parents are at least as vulnerable to this recruitment channel as children of smoking parents. We all aim to influence our kids in the right direction. The problem is that other influences can be as strong or stronger.

The film industry is already grappling with the issue of smoking in kid-rated films — and no longer disputes the science. Major studios have largely eliminated smoking from G/PG films in the last couple of years (with trivial benefit to adolescents) and the majors have added anti-smoking PSAs to their youth-rated DVDs with smoking. The MPAA has also claimed to make smoking a consideration in ratings, but the record shows that it does not up-rate for smoking and avoids labeling smoking in most PG-13 movies opening wide. Pressure from state Attorneys General, Congress, and national health organizations has at least gotten the industry's attention.

As for your point about apples-to-apples, the investment that states make in film subsidies at this time directly conflict with the resources devoted to tobacco prevention. The report estimates that about 60 percent of the subsidy money is going to films with smoking imagery. That $830 million is about $100 million more than the states spend on all aspects of tobacco prevention. Because films with smoking account for about half of all new young smokers each year, indiscriminate state film subsidies of this scale significantly undercut the state interest in preventing kids from starting to smoke. Comparing the state spending on film subsidies and on tobacco prevention captures the budgetary emphasis placed on these two conflicting policies.

Perhaps a "consistent" libertarian would condemn the state film subsidies out of hand — and government anti-smoking programs along with them. For the rest of us, who want to see public resources used well, the wasteful conflict between these two programs begs for resolution.

The report does not advocate to end public film subsidies. We are proposing that these programs be amended to avoid subsidizing films with content that powerfully subverts another public good (and state policy priority): the prevention of youth smoking. If these film subsidies are economically justified, tweaks that protect young people from a public health danger that costs more lives than drunk driving, drug use, and criminal violence combined could assure the sustainability of these programs.

Given evidence that these film programs appear not to create jobs but merely shift them around from state to state, the broader public interest is probably best served by seeing if the $196 billion annual health costs from tobacco can be reduced, to a significant degree, merely by adjusting tax credit eligibility criteria in these programs. Based on 2008 data, three out of five domestic film projects would be completely unaffected by the eligibility change proposed in the report.

As the major studios and their parent companies have learned, the on-screen smoking issue is not going away. In part, this is because the film industry collaborated commercially with the tobacco industry to promote smoking and brands in at least six of the last eight decades. Those who back public film subsidies need to acknowledge this legacy, which the nation is still paying for, and recognize the continuing power of films to shape tobacco use. It is a problem. It can be fixed.

Thanks again for your consideration.

Best regards,

Jonathan Polansky

Consultant to University of California, San Francisco

Center for Tobacco Control Research and Education

jono@onbeyond.com

415-453-9369

Technology and The Collapse of Distribution Windows

An article in today's Variety details efforts by the MPAA to help its members gain the ability to broadcast first-run movies directly to consumer's homes. The article raises a few issues:

1. Apparently, approval from the FCC is needed for the MPAA members to use DRM protection on the broadcasts. Not surprisingly, the studios would be unwilling to give consumers access to broadcasts of first-run features without technology that prevents copying of the content.

2. Exhibitors are opposing the MPAA's efforts because there is a strong suspicion that the films would be broadcast during the first-run exhibition window. Exhibitors view this as a huge threat to their business. Logic dictates they are probably right.

3. A point not really addressed by the article is the impact of this action on the other distribution windows. Doesn't an early broadcast of the film essentially eliminate (or at least substantially devalue) the VOD, Cable and DVD windows?

It would seem that the studios are attempting to set up a model that eliminates as many middlemen as possible. Essentially, this goes back to the old days where the studios actually owned the theaters. They would make a movie and then have consumers pay the studio directly for the right to watch it.

The direct studio broadcast model being pursued by the MPAA is the digital-age version of studio-owned theaters. The studios can make a film and deliver it directly to consumers. However now consumers don't even have to leave their favorite chair to watch the film.

Here are some arguments on the studio side. Many knowledgeable people in our industry say that home viewing is not competitive with the theater experience. The superior size and quality of theater exhibition, together with the opportunity to get out of the house to do something fun, make going to the movies an "event." Plus, the social aspect of watching the film in a group of people definitely provides an energy that is impossible to duplicate in your living room. Bottom line -- many people will still go to theaters to see films, even if they can get the same film in their home.

Further, showing a film simultaneously to theater audiences and home audiences allows for a consolidation of marketing dollars. This means that the overall spend on advertising can be less, making it easier for the filmmakers and studios to make a profit. This ultimately should allow studios to release more pictures, giving consumers a wider range of attractive choices.

Further still, if studios can lower distribution costs by eliminating middlemen, this ultimately serves consumers. The essence of our economic system is to encourage business models which drive prices towards their natural bottom -- the real value of the product or service being provided.

However, when a single company controls the entire chain of a product or service, from development to delivery, it might have the ability to lower prices to consumers, but it has no economic motivation to do so. When it is not competing at any point in the process, it can charge whatever it wants. This is called a vertical monopoly and it is technically illegal. The argument could be made that direct delivery of content by studios is a violation of antitrust laws. (I'm not sure this is a winning argument, but it is an argument nonetheless.)

Certainly, if studios broadcast first-run features directly to consumers day-and-date with the theatrical release, it will have a huge impact on the current "windows" which are the essence of modern-day film distribution. I'm normally a proponent of change because I believe it often creates new opportunities as the old model dies. However, I'm not sure that's true in this case. Giving studios even more control over the delivery of film content does not seem to serve consumer interests. There are no new opportunities which will arise as a result -- unless someone has a really good idea for a way to use a bunch of empty movie theaters.

Markets, Sequels and Other Things Filmmakers Need To Understand

As the name of the blog implies, I am all about the business side of entertainment. I suppose I'm fairly creative for a lawyer, but I inevitably look at the entertainment business as a fun, challenging and interesting way of making money. If you're not in it for that reason, then what you're doing isn't really a business.

(As an aside, I do serve as a music supervisor for films and there is certainly a creative element to that. My background in music serves me well in that regard, but it doesn't change my view of film primarily as a business rather than a purely creative endeavor.)

That's why I was so happy and excited to read this article from Clive Frayne in his Filmutopia blog. (By the way, Clive is a very smart guy and everyone should be following his tweets and reading his blog. He really understands the business of independent film.) Clive gives an intelligent and articulate discussion of how and when to find the market for your film. I really don't need to reiterate his points. Just read the article and pay close attention.

I find it interesting that Clive published this particular article on the same day that the L.A. Times blog was reporting that Paramount is already talking about the sequel to Paranormal Activity. For those of you who live under a rock (or intentionally avoid reading news about films other than your own), Paranormal Activity was made for about $15,000, sold for about $300,000 and was the top grossing film in the domestic market this past weekend, having earned over $62.5 million so far. Brad Grey says it might be the most profitable Paramount release of all time.

So, there is no question Paramount will release a sequel, right? After all, they don't need to find the market. The market is everyone who is flocking to the first one. Just feed them another helping, right? Maybe not.

The Times blog makes the obvious point about the sequel to Blair Witch Project (which you probably know was a huge financial flop -- and a terrible movie). The question might be whether it is logically inconsistent to attempt a sequel to an anomaly. Greek Wedding and Blair Witch Project and Paranormal Activity are anomalies. They are small, inexpensive films that find an audience and grow beyond anyone's expectation. I don't think you can plan that, and thus I'm not sure you can have a successful sequel to that kind of film.

On the other hand, Saw VI also came out this weekend (losing the box office race by a wide margin to Paranormal Activity). That's perhaps the best example of many small horror films that have spawned mini-franchises, earning more profits with each new release.

Ironically, the biggest problem for Paranormal Activity 2 might be that the budget for the sequel will be several million dollars. Big budgets can create lazy filmmaking where the genuine edginess of the inexpensive original is replaced by a slickness that is much less intense and thus much less scary.

Ok, I'm starting to talk like a creative guy. I'm completely out of my element. So, you real filmmakers tell me -- can Paranormal Activity 2 ever be as scary as the original, or is it destined to lose money? If you were Paramount, what would you do to secure the market from the first film, and ensure the success of the sequel? (Clive, if you have an opinion on this, I would love to hear it.)

Iowa Tax Program Update

After yesterday's post, I got into a great Facebook discussion with attorney/writer/producer/sales agent, Darlene Cypser (@DarleneCypser) of Colorado. She was kind enough to provide a link to the actual auditors' report which ostensibly caused the governor to shut down the program. Darlene suggests that, based on this report, there was definitely a problem. I don't disagree, but we probably differ slightly on where to place the blame.

I have to agree that the report describes circumstances under the program that were almost certainly not in the state's best interests. Ultimately, I think the report supports my suggestion that more careful planning and operation is critical for a successful program. My reading of the report is that a lot of smart Hollywood people figured out ways to mostly stay within the letter of the law while maximizing their tax credits using strategies that the State of Iowa never anticipated.

And I think that's the key. I think Darlene wants to hold Hollywood accountable, but most everything I read in that report could probably have been anticipated and prevented with more careful planning and drafting of the law. I don't want to sound like a typical L.A. entertainment lawyer (or at least like the popular misconception that we are a bunch of arrogant sharks), but if the Iowa regulators understood the Hollywood movie-making culture, they would know that every effort would be made by producers to squeeze the maximum dollars out of the law as it was written. They could have hired any number of consultants that would likely have anticipated every maneuver, and then they could have crafted the law to prevent most of the alleged abuses.

You can't blame a producer for chasing dollars any more than you can blame a lion for eating an antelope. It's what they do. Some people may not like the way they do it, but it is naive to think that they would leave any money on the table. That's not consistent with the prevailing culture of Hollywood film making.

As far as the governor's reaction, even after reading the audit report, I think I would have been much quieter and less dramatic in my response. Clearly some things weren't working. So, they could slow down the application process, get some better regulations written, quietly replace a few people and continue the program. I think that the starting and stopping is potentially much more damaging to their perceived desire to build a film industry than any over-payments. They should just take what they've learned, correct their course and keep going.

Ok, that's all from me on this topic. I think it is probably more interesting to me than to most of you. I'll look for something a bit less dry for my next post.

Iowa Film Tax Incentive Program: Is There Really a Problem?

There is an excellent article in today's Wall Street Journal about the suspension of the Iowa Film Tax Incentive Program. Clearly, the program was driving a lot of film business through a state that would otherwise have very little. But when an audit of the program expenditures revealed subsidies helping to purchase luxury cars, an expensive bed and an iPod, the governor halted the program and heads began to roll.

In reading the article, it seems that everyone was probably acting within the technical limits of the law. No one has claimed that these expenditures were not allowable under the program. However, having the state pay for half of a film producer's Mercedes clearly went against the local sensibilities. This isn't about math or money as much as it is about a clash of cultures. It's like inviting a rock musician or famous athlete over for dinner. You're very excited until you see what they're really like, and then you can't wait for them to leave.

Objectively, it does seem that the Iowa program might have been crafted in a bit of a hurry. I haven't examined the law in detail, but a 50% credit is definitely a big number and allowing things like vehicle purchases, without careful limitations, might not be smart.

Being in the business of representing producers in the financing and production of films, I am naturally a big fan of state tax incentive programs. However, I also know that the best financial arrangements have to truly benefit all parties in order to be successful and sustainable.

In designing and implementing a film tax incentive program, I think states need to follow a few simple guidelines:

1. Before drafting the laws and regulations, states should consult with people who really understand how films are financed and produced. The regulations need to not only provide a list of acceptable expenditures, but also guidelines for a responsible production. The state should approach each film like a bond company or an investor, looking at the budget, schedule and personnel responsible for making the film.

2. The goals of the program need to be carefully considered and honored in the crafting and implementation of the program. There are obviously potential short term benefits in the form of additional tax revenue. But there are also potential long-term benefits from improvements in infrastructure, education and culture. The program architects need to consider how these goals will be reached, and how long it might take. Then, they need to make sure the program drives money and other resources in the right directions, and that they can sustain the program long enough to reach their goals.

3. Finally, they need to really do the math -- both at the front and the back of the process. It is important to quantify expected benefits and then measure results to assure that the expectations are occurring. Inevitably, there will be some discrepancies, but regulators shouldn't overreact. Instead, they should evaluate, adjust, and try a few possible strategies. Nothing is going to work perfectly from the first day. And who cares what kind of car the producer drives home if the state is truly getting the intended benefits?

The real lesson here is that building any industry is not an overnight process. If Iowa had instead decided that its future was in high tech, it would have needed to spend a lot of money to attract technology people and companies. Some of that money would probably be wasted and the program would probably need to be adjusted, and it would take several years before they could truly measure the program's success. It is really no different when building a film industry.

The folks in Iowa need to put aside their Midwestern sensibilities (and I say that with all due respect for those values). They need to stop being offended and start being pragmatic. If they are just looking for some fast tax revenue and to hang out with famous people for a few days, then I agree that they should stop wasting their time and money. But if they are looking to build something that truly benefits their citizens for years to come, then they should get the program back online -- perhaps going a bit slower and being more careful in their application process while they figure out what works and what doesn't.

Hollywood: Are Things Really That Bad?

Earlier this week, I was listening to my favorite business podcast - The Business, hosted by Kim Masters. Let me preface this by saying that I am not picking on TB or Kim. In fact, I am a huge fan of both. I think Kim is seriously one of the very best entertainment reporters I've seen, heard or read.

With that said, I have to complain about the negative tone of some of her recent reports. This week's show had a trio of wonderful, articulate writers talking about how terrible the business is and how bad it is out there for writers and how CBS doesn't buy as many pilots anymore and how big writers are competing for small jobs and on and on and on... I had to turn it off. And that's the first time I've ever turned off that podcast before the final sign-off.

And of course, this is not the only place that negative reports are showing up. They are everywhere. It seems that reporters can't wait to jump on the next indicator of doom and gloom in the entertainment business.

I'm not buying it. Maybe it's my Taoist bent, but I believe there is good and bad in every set of circumstances, and you need to report on both. And if you're in those circumstances, you need to be able to see it from both sides, and then chase positive results.

In the music business, starting several years ago, the shrinking power of the major labels and distributors also resulted in a wide range of artists and genres gaining a level of success that they could never achieve when the industry was controlled by a handful of companies. As any industry changes, the companies that are dominating under the old model will lose power. Kodak and Polaroid were dominant players when snapshots were shot on film. In the digital world, they struggle to compete. Xerox almost went out of business thinking it was selling copiers, while its competitors made great strides focusing on information and document management. A different spin on the same business; but it's your point of view that makes all the difference. There are countless other examples.

In film and television, as broadband delivery takes hold, Blockbuster struggles to compete in home video where it once dominated. The television networks struggle to get the attention of viewers they once had all to themselves. Studios struggle to make money as technology levels the playing field - first in production, then in marketing and soon in distribution. This is the nature of business. The cheese moves (another reference to one of my favorite business books).

But as the established players lose power, other new and nimble players gain opportunities. There are new independent distributors popping up. There are new marketing models. And to Kim's credit, she has been all over the Paranormal Activity story. (Who makes a movie for less than the cost of a nice motorcycle and gets it released by Paramount to the tune of $70,000+ per screen in its first week of limited release?!!) That story would not exist under the old model dominated by the big players.

Writers should stop lamenting and start writing. If you have talent, figure out where to put it to best use under the new rules. Good stories are good stories. Don't complain because you can't sell another one to the same guys who bought the last six -- just figure out where the money is going to come from for the next six. And the same goes for everyone who was making money under the old system and is now making less. You are creative people. Get creative in your business practices and figure out where the new opportunities are. People are still going to the movies. They are playing games and watching videos and amusing themselves in any number of ways. They want to be entertained. Entertain them.

Am I naive? Maybe. But I don't think anyone can see an opportunity that they don't believe exists. Yeah, maybe I'm naive, but I don't think I'm wrong. You tell me.

Current Trends in the Film Industry Create Both Challenges and Opportunities

In this article from Friday's Variety, Peter Bart and Michael Fleming paint a fairly negative picture of the current state of the Hollywood film business. In its subtitle, the article promises both the yin and the yang of the prevailing conditions, but by the end of the piece, it feels like a lot of yin and only a little yang. They don't really put much emphasis at all on the bright side of the picture.

That gloomy sentiment is echoed in this L.A. Times article from Ben Fritz and Claudia Eller. The focus of this coverage is Sony's decision to cut back on development and purchases, and how this is representative of a downward trend in a volatile industry. With the descriptions of upheaval in studio management positions, the implication is clear that this is a dark time for the film business.

I agree that we are in a challenging environment. DVD revenues are indeed falling and the studios are protecting their profits by cutting expenditures and hording cash. However, box office numbers are solid. Audiences are still looking for good films every weekend, and they don't necessarily need to see huge stars or big special effects.

This is the same weekend that Paranormal Activity managed to make over $7 million on about 200 screens. An amazing performance! This is a film that was originally shot for less than the cost of a studio executive's Prius. Paramount and the P.A. filmmakers are looking at huge profits as this picture rolls out to a wider release. The news is definitely not all bad.

The studio pullback is creating opportunities for alternative financing sources and new distribution companies. There are some very smart people entering the theatrical distribution business, and I don't think they are wrong. And I believe that Reliance, Imagenation and Barclays are not stupid for putting their money into the development of feature films (although @davidgeertz thinks I'm crazy for saying it and he might be right).

The Variety article makes the point that actors and writers are willing to work for lower wages, and we all know that there are a large number of attractive tax incentives available for productions of all sizes. This is a time when producers can make excellent films at a reasonable cost, and that is exactly what the market is demanding. The shrinking DVD market will eventually be replaced by revenue from PPV and other direct delivery systems. The decreased costs of digital theatrical distribution will eventually float down to the bottom line. The film business is changing, but it is actually improving in many respects.

This is a time when creative, entrepreneurial producers can make great strides. As is often the case, when the larger, more established players in an industry are pulling back, it leaves a hole for smaller, more nimble companies to gain market share. I honestly believe this is a time of great opportunity for independent filmmakers and distributors.

If you really think I'm wrong, tell me why. (@davidgeertz, that means you.) I invite and encourage other points of view on this.

Smart Money Chasing Proven Producers

An article in today's Variety gives details of recent deals where financial partners other than studios are backing development efforts of proven film producers. The top line relationship addressed is Barclays Bank's reported backing of Jerry Bruckheimer's development efforts with a $20 million credit line. The article also discusses yesterday's Imagenation Abu Dhabi deal with Walter Parkes and Laurie MacDonald, the Reliance arrangement with a slew of big-name actors and directors, and Arnold Kopelson's backing by a Texas fund. There is a definite trend here.

The economics are simple. Smart money wants to be in the film business. Box office numbers continue to soar, and the returns on a successful film can be enormous. I have always shared with clients and investors my belief that the risk/reward ratio for intelligent film financing is much better than for almost any other business. That doesn't mean it's the safest investment in the world but, in my experience, the potential returns more than justify the risk of loss.

If you want to put money in films, it makes sense to bet on proven track records. Studios' recent reluctance to back the development efforts of even the best producers is creating a great opportunity for other companies seeking a smart entree to the film business.

This is further evidence of the health of our industry and another reason that those of us who make our living in this business do so with growing enthusiasm.

Pros and Cons of the New Ortenberg Business Model

I had a great discussion today with Ted Kroeber regarding the new venture from Tom Ortenberg, One Way Out Media. The new company is slated to undertake a variety of functions in the independent film world, including financing, distribution and consulting. This of course takes advantage of Tom's vast experience and superior track record in the film industry.

On the positive side, I think Tom's business model shows a recognition of the many and varied needs of independent filmmakers. Tom sees that many projects are missing only one or two links in the "success chain" and he sees an opportunity to fill those gaps.

On the other hand, I see a couple of potential problems. First, to compete effectively it is often best to focus. Not only does this send a strong message to the marketplace, but it allows a company to concentrate on the things it does best. The second risk for One Way Out is that it could be perceived as a competitor by many of the companies with which it needs to have close relationships in order to succeed.

With that said, I believe that Tom can overcome those challenges and be successful in this venture, as he has been in his prior positions. However, I suspect that his business model will evolve over time and his focus will narrow once he finds the areas in which he is gaining the most traction and making the most money. We all are watching closely and wish him the best.

TV Widgets - A Revolution In Interactive Media

For those of us who watch the media landscape (and make our living in the entertainment business), the development of truly interactive television is an elusive landmark that has been slowly approaching for years. It has become almost a myth, with millions of dollars already lost because it failed to develop as quickly as many hoped it would.

In the past year or so, I have written fairly often on the development of the new generation of web-enabled TV's and the various deals being made between web-based companies and hardware manufacturers. It has been clear for some time that web-based media is finally heading for the living room big screen. This should be the key to real-time interaction between consumers and content providers. However, the actual mechanism for this interaction has not been clear -- at least not to me.

This article in yesterday's Hollywood Reporter gives a simple explanation of the missing link between consumers and big-screen web content -- it's widgets. With companies like Yahoo taking the lead, there is a quickly growing inventory of software widgets which will sit on the screen of web-connected televisions. These widgets will allow viewers to interact with the programming, or keep track of information unrelated to the programming, or engage in any variety of online activities without pausing the program or looking away from the television.

Up until now, a growing number of consumers have been simultaneously using their computers to access web content while they are watching their favorite programs on TV -- risking neck injury as they quickly look back and forth between the big screen and the small screen. This chiropractic dilemma will soon be solved as widgets will allow consumers to create custom web interfaces that sit in the corners or edges of their TV screens, allowing them to enhance or supplement their viewing experience in any number of ways.

From a business standpoint, the article outlines the cost of developing these software tools vs. the lack of a clear revenue stream. The revenue potential is obvious to me. This is the "buy" button that has been fighting for space on TV remote controls for years. Using the same payment system that powers pay-per-view (or pre-loaded secure credit card information or prepaid debit accounts or PayPal or any number of other methods), we will be able to order any product or service at the very moment it is being shown to us. We will be able to participate in game shows as the broadcast is unfolding. We will be able to engage in genuinely shared viewing experiences with friends on the other side of the room or the other side of the country. The possibilities are almost endless.

Read the article and then just think about it for 10 or 15 minutes and I bet you will have a half dozen great ideas for how this technology will be used. Those ideas are the basis of a huge business opportunity. Interactive television will be its own media category. Decades from now, these widgets will be looked upon as one of the developments that completely changed the media landscape. This has the potential to be as revolutionary as television or the Internet itself.

Recorded Programming Has Not Significantly Altered TV Viewing Habits. Will it ever?

Today's Hollywood Reporter carries an article on the impact of digital video recorders (DVR's) on television viewing habits. The article tracks a study on the topic, and makes a couple of interesting points.

First, although many homes (36%) now have DVR's as a part of the home entertainment system, over 90% of TV viewing is still done in the traditional linear sense. The programs recorded on the DVR are generally treated as alternative programming to be viewed when nothing better is currently available. In other words, viewers still ask "What's on?" and when the answer is "Nothing," then they turn to their DVR.

I'm thinking about what might drive that behavior. Perhaps it is the social aspect of knowing that when you are watching a program at its scheduled time, you're seeing it "first" -- at the earliest possible moment, along with millions of other viewers. It is an experience shared by the fans of that program - each in their own home, but watching together.

When you watch a recording of the same show at a later time, psychologically you know that those millions of other people already know what happened. You are no longer part of the "club;" you don't feel like a true fan of the show. True fans like to be on the cutting edge of the developments in our favorite episodic programs. The DVR takes us out of that club.

When other people are talking about the program at the office the next day, we don't want to be left out of that conversation. In fact, we will probably exclude ourselves from the discussion so we don't hear a "spoiler;" finding out what happened before we get a chance to see it for ourselves. We actually lose a real social touchstone by not having watched the program along with the other fans.

The other point which I found interesting was that even though many programs are available on Hulu or other services, 99% of programming is still watched on the television screen, and not on a computer screen. This doesn't surprise me as truly seamless integration of Internet-based programming into home entertainment systems is just emerging. (I had lunch with Jonathan Handel this week and he told me about a spectacular deal he got on a 1080p with integrated web access. With prices dropping so fast, that technology will surely spread very quickly.)

But when Hulu is just another channel on your television, will the true fans still have a desire to see their favorite programs at the earliest possible moment? Honestly, it's a phenomenon I had not considered before now. I have been assuming that digital technology would eventually eliminate the traditional TV model all together -- that programming would eventually just be produced and released for viewing at each consumers' individual leisure -- one giant YouTube of media. I had actually envisioned traditional broadcasting as a dying medium. In reaching that conclusion, I had completely discounted and ignored the social aspect of broadcast television.

Now, I remember sitting with tens of millions of viewers watching the final episode of MASH, knowing that I was likely part of the largest viewing audience ever. I remember the feeling of knowing that most of the country was simultaneously watching those images and experiencing emotions similar to my own. It was very powerful -- perhaps more powerful than the program itself. Yet, in the face of digital technology, I have been assuming that this "social event" quality of popular programs would be inevitably and easily sacrificed to personal convenience.

Sitting all alone at my computer, in a quiet house in the middle of the night, I am now forced to reconsider. Our actions are motivated first and foremost by our emotions, and perhaps there is an emotional component to broadcast television programming that cannot be recorded on the hard drive of a DVR or computer.

Negotiation: Eloquence Does Not Equal Effectiveness

Most often, I like to write about developments in the entertainment business and the likely implications for members of that industry. But every once in a while, I feel compelled to share something I've learned in the course of my work day. Usually the lessons are not new, but have only been forgotten. I figure sometimes all of us can use a reminder.

Recently, I have been reminded that effective communication is really not a function of vocabulary, or even intelligence. In order to find the right words to bring the other side around to your way of thinking, you need to really understand the person on the other side. There is only one good way to do that -- by listening closely to what's being said.

My fresh perspective on this important insight has come to me in a book I am currently reading -- Just Listen by my friend and mentor, Dr. Mark Goulston. Those of you who have had the pleasure of spending any time with Mark know that he has a stunning ability to condense complex information to its simplest and most powerful form. He redefines the concept of getting to the "heart of the matter."

Mark's most recent work is no exception. In his concise, direct manner, he reminds us that we can't get what we want unless we truly understand the person who has the power to give it to us. It is not a matter of knowing a lot of large, impressive words to say, but instead choosing the right words for each situation. And the only way to find those words is by listening closely to the person you need to convince.

Sometimes it seems that lawyers think they are getting paid by the word. Many of my colleagues have developed the habit of using hundreds of words where perhaps a dozen well-chosen words would have had more impact and yielded better results. Thankfully, Mark has reminded me not to fall into that habit. I get paid to communicate on my clients' behalf and get consistently great results. That's my job. And I can only be good at my job if I pay close attention to what the other side is telling me.

This is a lesson for all of us, in every aspect of our lives. Listen first, talk second. If you can't find the right words, then listen some more. A brilliant solution generally comes to us not from thought and analysis, but from truly understanding the problem. There's only one way to do that -- get more information. Listen.

Blockbuster's Dilemma

This week Blockbuster announced it will likely be closing almost 1,000 of its stores in the near future. Of course, this is no surprise. It has been clear to everyone who watches this industry that the retail video store is dying a not-so-slow death. And the success of the Redbox kiosk business is speeding that process.

So, Blockbuster is now going to spend up to $60 million in shutting down over 20% of its stores in order to save about $30 million a year in operating costs. That means it will take about 2 years for this move to even begin to save money. In the meantime, they are going to spend a bunch of money installing about 10,000 kiosks in an effort to challenge Redbox.

So, two years from now, Blockbuster's best case scenario is that it is perhaps effectively competing with Redbox in the kiosk business, but probably still not making a profit. And they will have announced another round of store closings by then, which will probably cost them more money.

And the real problem is that, in two years, both Redbox and Blockbuster will be that much closer to total obsolescence, because everyone knows that the actual end game is digital distribution. Even Blu-Ray is recognizing that its disc business has a limited lifespan, and is already pushing connectivity with its BD-Live initiative.

So, it would seem that Blockbuster is looking at a few more years of trying to stop the bleeding, while Netflix, Vudu and others get further ahead in the digital delivery business. If Blockbuster wants to ever be a winner again, it needs to also put some significant resources into that arena now. And that means even bigger short term losses.

But the problem is that Blockbuster has a bunch of contracts to distribute DVD's. It can't just stop that business. Not only would that leave it with no revenue and no business model, but it would kill its relationships with studios and distributors. And the Blu-Ray disc business appears to have a few years of life in it as Blu-Ray players come down in price and Christmas is approaching and the economy is slowly improving. Blockbuster can't afford to miss that opportunity, as limited as it might be.

In other words, Blockbuster is actually doing the only thing that it can do under the circumstances. It needs to take a circuitous route to its new long-term strategy, otherwise it will have no future at all. Very tough situation. The only way this could have been avoided would have been much better planning starting at least 5 or 10 years ago.

In the early days of MP3 and Napster, it was immediately clear that discs of all sorts had a limited lifespan. Blockbuster could have started making a new plan way back then. But they were still making tons of money and they wanted to think that they were somehow immune to the inevitable. Obviously, that was a big mistake, and a big lesson to be learned by all.

Your cheese is going to move, so you might as well be the one to move it. (If you don't get that reference, you really need to read more. Check out the Spencer Johnson book here.)

Digital Cinema Funding Comes Out Of A Coma

This week's big news on the business side of the film industry has to be JP Morgan's announcement of its return to the digital cinema funding business. The Wall Street survivor announced a $525M fund that is targeted to roll out about 500 new digital screens per month, almost doubling the North American penetration by the end of 2010 to as many as 13,000 screens. The fund will ultimately underwrite up to 15,000 conversions, and will also support 3D equipment in many of the new locations.

If you have followed this story for the past few years, you know that there was over a billion dollars of funding headed for the digital and 3D theater markets when the economy collapsed last year. A lot of studios had already launched their 3D plans in anticipation of the new screens, but then the funding evaporated (with the rest of the lending market). This slowed the D-Cinema roll out to a crawl and left the studios fighting for domestic screens on which to release the 3D projects they already had in production.

This announcement by JP Morgan is good news on many levels. First, it means that the theaters will not be hamstrung in their quest to offer the ultimate 3D experience in a theatrical environment. With Sony and other consumer electronics makers rushing the development of 3D home theaters, it is critical for theater chains to go as fast as possible to capitalize on that market before it gets diluted.

Second, this means that studios will be able to keep their 3D films in theaters longer, thus making more money. That means that development of additional 3D productions should pick up.

Third, the development of more digital screens means that the ultimate cost of theatrical distribution should trend downward. (With the payment of virtual print fees, this won't be immediately apparent, but it will still happen.) That means that more films will theoretically have the financial strength to reach big screens. Of course, a lot of other factors have an impact on small film distribution, but independent distributors (such as the new venture from Rich Wolff and Richard Ross) should benefit.

Finally, participants in the 3D business such as In-Three and, most obviously, Real D, will enjoy the benefits of a market that will expand much faster than it has to date.

This is good news all the way around. And perhaps most important, for the entertainment industry, this is a strong sign that the economic climate is indeed moving in a more positive direction.

Cross-Platform Synergy Isn't Just an Advertising Strategy

A day doesn't go by without some media executive talking about "promoting a brand across all of our platforms." In normal person speak, this means, "I think we're finally figuring out how to make the Internet work for us."

Initially, I think traditional entertainment companies viewed the Internet as a threat (of course) and then as another place to advertise their films and programs. Now they are recognizing that digital media is not only a powerful tool to educate and attract an audience, but it has the potential to drive new revenue, as well.

The key is interactivity. This has always been the magic of the Internet. It is the only medium that allows instant, individualized feedback and action. You see something you like and - click - you're on it. This dynamic interactivity has given a tremendous boost to research departments. The instant feedback allows creative and media approaches to be adjusted almost on the fly in order to maximize impact and efficiency.

But even more important, digital media brings the impulse buy into the living room. Take a couple beats to think about that. When the programming on your TV screen is being served from the Internet, you have the capacity to see it and buy it, without leaving your chair. That is a development with enormous impact.

That was the holy grail that was envisioned a decade or more ago when the first "BUY" button was put on a remote control. As it turned out, those buttons never did anything. But now that vision is finally becoming reality. We have the infrastructure and the technology that has turned TV advertising into point-of-sale advertising. That's huge and it will be the norm, probably within a couple years.

Whether it's Tivo or the new Netgear box or the Netflix Roku box or one of the Vudu joint ventures with TV makers, or any other similar device. As long as it has an input from the Internet and an HD output to your TV, it is part of the revolution.

So, while the media producers are crossing their platforms, the guys upstairs are getting ready to sell stuff. When you can point your remote at the sweater on a Desperate Housewife, and it shows up at your door the next day, the decreased value of content won't sting the entertainment companies nearly as much.

An Honest Take on The Current State of Indy Film

The recent coverage by the Hollywood Reporter of the independent film business included an article by by Steve Zeitchik on the current state of the industry. While Steve starts with a lot of doom and gloom, implying that the entire industry may be on the brink of collapse, he ultimately paints a fair picture that I found somewhat positive.

His ultimate conclusion is that producers need to keep their budgets tight and focus on "commercial" films in order to succeed. In other words, make movies that people want to see at a price that distributors can pay and still make a profit. Honestly, that just sounds like good business to me.

Just like the Internet companies of the '90's ultimately learned that revenue does matter, perhaps the independent film business is learning that profit matters. If you want to stay in the business, the people who finance your films need to make a profit on their investment. This is nothing to lament. Perhaps more than anything, this indicates that the independent film industry is maturing into a real business instead of a glamour investment or a vehicle for benefactors to underwrite their favorite flavor of creativity.

An industry that operates on the basis of profit will be more stable and predictable, and allow solid careers to be built over time instead of riding a roller coaster of popularity based on fortuitous circumstances. I have always counseled my clients, whether producers or investors, that the film business is an excellent investment when you make the right picture at the right price. There is nothing wrong with that.

While many filmmakers may disagree with me, I don't think that making money and making art are antithetical pursuits. If you make a film that lots of people will pay money to see, your art has likely impacted the society to a significant degree. If an artist's only goal is to craft a strong message from his or her heart, but that tree ultimately falls in the forest where very few hear it, then this pursuit is arguably not a part of the "business" of film -- at least not in my mind.

Those of us who pursue film as a career know that we must find an audience for each project, not just a benefactor. If that philosophy is becoming more pervasive, I have no problem with that. And that's why I find Steve Zeitchik's observations to be encouraging. He paints a picture of a business environment in which many film professionals will feel comfortable and will ultimately succeed.

I welcome and encourage other points of view. I know there is a valid discussion to be had here, and I know my perspective is not the whole picture. Please feel free to disagree with me.

Viacom vs. TWC: Who has the power in the new media landscape?

Happy new year to all. Early this morning (technically after the old contract expired), Time Warner Cable and Viacom reached a new deal. Basically, the story was as follows: Viacom felt that TWC was paying too little for Viacom programming relative to the number of viewers. A Bernstein media analyst, Michael Nathanson, backed this up in a published report, and he appeared to be right. So, Viacom demanded a big raise for the next three year contract and TWC balked. Here's where it got interesting.

As the deadline drew near, Viacom launched a media blitz which emphasized that TWC customers would no longer get to see SpongeBob, Dora the Explorer, The Colbert Report, The Daily Show and MTV. It was a total of 19 Viacom cable stations that would drop off of TWC if a new deal wasn't reached. Viacom even ran crawls on their programming telling TWC customers to call TWC to complain about the potential loss of their favorite show. TWC countered with its own media campaign, but clearly Viacom grabbed the upper hand by getting there first and strong.

Nathanson pointed out that both companies would suffer significantly if a new deal wasn't reached. Some TWC subscribers would probably jump ship (presumably to satellite carriers) to get the Viacom programming. It would be difficult to get those people back once they were gone. However, Viacom would also lose almost 15 million TWC households and that would have a large impact on ad revenue.

So who really has the power in the new environment? Is content still King? It would appear that way in this case although the terms of the settlement were not publicly announced. (I imagine they will be released, leaked or calculated shortly.) Viacom looks like the winner as their media blitz seemed to force TWC's hand. But was it a smart tactical play or real negotiating power that really made the difference?

TWC's pipeline into millions of households generates a lot of revenue for Viacom and other content providers. That can't be overlooked. But looking ahead, as the Internet becomes a viable alternative as a delivery system for large format programming, it would seem inevitable that TWC (and Comcast and Cox and the rest of the cable systems) will see their power erode. And that's why they are working real hard to be in the telephone business (where the formidable competition is AT&T and the phone companies, along with VOIP).

In my mind, it's a tough time to be in the cable business. It would appear that content is indeed still the King. Perhaps TWC should work harder on developing proprietary programming while they still have a semi-captive audience.