Film Distribution and Home Entertainment in 2015

There have been some very interesting articles recently predicting how consumers will be entertaining themselves five years from now.  The implications are significant.  Let me give you some highlights, and then make some quick comments.

- Displaybank, a consumer electronics research group predicts that sales of 3D televisions will grow by 91% this year, making up 3% of the world televisions by the end of the year.  The study projects there will be 83 million 3D displays in homes by the end of 2014.  That represents 31% of the world market.  Those are really huge numbers.

- GigaOM Pro is predicting that by 2015, 60% of the TV's sold will have a direct internet connection.  This year, 3.7 million applications designed to be run on televisions will be downloaded.  However, by 2015, that number will grow to almost 1 billion!  That is an enormous number!

- The Los Angeles Times reports that Google is about ready to launch its Smart TV software that will allow consumers to navigate between TV, streaming content, home videos and any other number of media formats and sources.

- Last week, Hollywood studios won a ruling from the FCC that clears the way for streaming first run movies directly to consumers on the same day that they are opening in theaters.  (Businessweek's coverage of the implications of that ruling is pretty good.)


You can see the trend here.  Conventional wisdom in 2010 says that within 5 years consumers will be fully connected and entertained without leaving their favorite chair.  The implications for our collective physical fitness are frightening.  But aside from that, what does it mean for the entertainment business?

Are theaters wasting money installing digital 3D systems and amazing sound?  Are consumers just going to buy a giant 3D TV and 7.1 surround system and watch everything at home?  Click the Domino's app in the corner of their screens and have their favorite pizza show up in 30 minutes or less -- for a fraction of the cost of popcorn and Coke at the cineplex?

Despite these projections, I don't believe that the theater business is dead -- but it is definitely facing some challenges.  On the one hand, I believe consumers experience a palpable excitement when watching a film in a dark room with a few hundred strangers, on a giant screen with seat-shaking sound.  And I think people will always want to get out of their house and "do something" other than watch TV.  Going to a movie is the primary way they fill that need.  But I also think that theaters have to work hard to continue to deliver a high-quality experience at the right price.


The problem is that the distributors who already take the bulk of the ticket price from the theaters may soon become direct competitors.  If the distributors make more money piping the film directly to consumers' living rooms, then they have no incentive to help theater owners fill their seats.  That makes it very hard for theater owners to deliver a superior product at a reasonable price.

For the next few years. there will be a real wrestling match between theater owners and distributors and consumer electronics companies.  I think  Sony wins either way as it will continue to sell TV's and distribute films.  But Regal and AMC are facing a much bigger challenge that might even result in another round of downsizing for those major chains.

I welcome some comments and other points of view.

Hollywood Futures Market A Good Idea?

My good friend, Tammy Hunt (talent manager and entertainment professional extraordinaire!), shot me an email yesterday asking if I thought the approval of the futures exchange for trading on film performance is a good idea. I had been following the progress of that story, but I hadn't really stopped to consider the implications.

This afternoon, I responded to Tammy, and I actually was pleased with my answer.  So, I decided to repost it here.

I would love to know what anyone else thinks on this topic. Please comment or tweet with your thoughts.  I'm curious to know how other film professionals view this.

My response to Tammy:

Tammy - 


That's a really tough question.  On the one hand, it sounds kind of fun to be able to bet on box office outcomes, and make some money if you're good at it.  But the stated rationale behind these models is to allow studios a vehicle to protect their risk.  In other words, they can bet on a certain level of performance that will give them some of their money back if the movie doesn't perform well.  That means they are betting against their success.


So, you have people who have some control over the product's performance betting that it will perform badly.  That's like letting a basketball player or referee bet on the game, right?  Obviously a bad idea.  Or maybe not.


The counter argument is that while the studio might make money from underperformance (as a result of its futures contract), it makes more money if the film performs well.  The futures bet is only a hedge that theoretically allows the company to take a larger risk on the success of the picture, which actually means it's good for the business.  If the studios can give the films a bigger push because they will get some of their money back if it doesn't work, that is actually good for the film industry.  


The larger risk is if individual executives play the futures market.  They could theoreticlaly sabotage a film, causing the studio to lose money while they cash in individually.  But that can be (and should be) monitored and punished severely.  I don't think many film executives would be stupid enough to try that, but it could certainly happen.


Going through that analysis, I believe it should be a net positive for the business.   There could be some abuse, but in reality it doesn’t severly undermine the motivation to succeed and it could be a very useful tool for the film industry.  And beyond that, I think a lot of smaller, unaffiliated investors will have a good time trying to guess which films will perform well.

Why Hollywood is Afraid of a Futures Market - The Truth

There is a lot of resistance in Hollywood to the futures market being finalized by Wall Street brokerage, Cantor Fitzgerald.  In short, CF is seeking final approval to operate an exchange that will allow investors to place bets on the future box office performance of Hollywood films.  Sounds like fun.  So why is there such aggressive resistance in Hollywood?

A quick story that will illustrate my point.  A few years ago, one of the big tech companies (it might have been Apple or Microsoft - I can't remember) started an office pool among its employees on which products would sell the most.  Interestingly, they found that the pool was a much better predictor of success than their product development process.  In other words, when a group of people are placing bets, it tends to accurately mirror the ultimate results.  The larger the group of people, the more accuracy.  And I suspect when they are betting serious dollars, it might sharpen the focus even more.

Hollywood, and specifically the marketing of motion pictures, is very much built on creating and controlling the perception of reality.  If you have a bad movie, you still might make money if you can convince enough people to see it before the word gets out that it's not very good.  In the age of instant word of mouth via social networks, it has already become difficult enough for marketers to control the message.  Now Cantor Fitzgerald wants to create a financial exchange that is likely to become an accurate predictor of the truth.  The truth -- often the enemy of people facing the task of selling a mediocre product.

Cantor Fitzgerald says that the film futures exchange will give the industry a legitimate way to hedge their investments -- a level of protection against a film performing badly.  I think the executives would rather maintain control of their own version of reality and hope they can get enough people to the theater to lessen the losses.

Actually, I see both sides.  I'd rather try to salvage success than bet on failure.  On the other hand, I'm always in favor of anything that brings more light and truth to a situation.  I'm betting Cantor Fitzgerald will ultimately prevail.

Thoughts anyone?

Tom Tom iPhone App - An Example for Today's Business

I saw an article this morning about improvements in the iPhone navigation/traffic application from Tom Tom.  It struck me that this provides a great example for a lot of companies of how to manage strategy in a dynamic environment.

Tom Tom was chasing Garmin in the navigation hardware business.  However, as car manufacturers quickly adopted built-in navigation systems, and the number of iPhones exploded, prices for free-standing navigation devices plummeted as the market for that hardware virtually collapsed.

A lot of companies in that situation evaporate into the annals of business history.  Tom Tom aggressively moved to capitalize on its momentum under the new rules and become a leader in navigation software for iPhones and other devices.

This is a great example of moving your cheese before someone else does.  In an industry where technology is driving change at a dizzying speed, you need to re-envision and reinvent on an almost constant basis.  This seems to apply in almost every business.

Every Monday morning you should ask yourself, "What business are we in?" and take the broadest possible view in answering the question.  Embrace change.  It's a winning strategy.

Technology Fuels Cultural Growth

That's right - you read that title correctly.  I believe that the technology revolution of the past couple decades is perhaps the biggest boon to our collective culture in the entire history of mankind.  Many of you probably disagree with that statement -- at least I hope so.  It is the perception of a conflict between technology and culture that I seek to dispel. 

First, I view "culture" for these purposes as our expression, access and exposure to the unique and creative elements that make us all human.  Of course, this is in large part the art and entertainment that we choose to experience, and the creative expressions which provide those choices.  But it is also the ideas, philosophies, debates, rants and everything else that each of us absorbs as a part of our ongoing mental and personal development - our growth, if you will.

Obviously, the digitizing of content has facilitated access to a larger volume of cultural elements for each of us, with the Internet as the obvious vehicle fueling that access.  But my point goes behind the pure quantity of images, ideas and stimuli upon which we can lay our eyes, ears and hands at any given moment.  I am speaking more of technology as a catalyst to the actual creation and expansion of these ideas and expressions.

When the mass distribution of music was controlled by a handful of companies, the game for composers and musical artists was to create music that would help those gatekeepers to earn more money.  That was the only way that your music would be included in the "pipeline," and that pipeline was the only way to get heard by an audience of any significant size. 

However, today anyone can make their music available to an audience of hundreds of millions of people.  They won't all hear it or even find it, but all of those people will have access to it and so the potential for mass impact is there.  Knowing that a real audience exists, creators are free to create from their heart in an expansive way that they would not have considered before.  They aren't trying to catch the ear of a record industry executive; they are adding their voice to the collective culture hoping that other people who dance to the beat of a similar drum will find and enjoy their creations.  The potential to be heard provides a reason to speak up - it gives voice to millions who would never have uttered a word in the absence of that vehicle.. 

The same is happening in all areas of creative expression -- not just music.  For example, would I bother to write these words if the Internet didn't exist?  What would I do with them?  Put them on a piece of paper and nail it to a wall?  And if I didn't have a reason to write, would I have spent the last hour considering and expanding my beliefs on the topic?  My ability to blog inspires me to think.  I don't know that anyone will ever read this, but the fact that they might is enough to cause me to consider and develop my ideas and to add my voice to our collective culture.  It is personally enriching for me, even if no one reads it or responds.  But it is also a process that will inspire many people to think and express ideas that will change the world in amazing ways.  Without the distribution vehicle created by technology, would these historic ideas (and resulting changes) come into existence?  Certainly, not all of them.

Because technology is giving us ways to move even more content at a higher speed, this same process is now expanding to films and other audio-visual expressions.  And in that arena the development of digital technology has not only created new channels of distribution, but it has also made the creative process much less expensive and thus available to millions instead of a chosen few.  We will see films and expressions that simply would not have been created in the absence of the capabilities afforded through technological advancement.

I think if asked about technology's impact on the quality of our culture, many people would initially respond that that it has been a negative.  It's simply not true.  Perhaps we don't get exercise or enjoy nature as much as we would if we didn't spend so much time looking at digital displays.  But each of us has more opportunity than ever before to impact our world, and that is inspiring us to think and dream and create and challenge and consider and respond and participate.  If culture is the collective expression of mankind, technology has fueled a cultural renaissance of truly epic proportion.

Film Business Remains Strong -- But Different

It's Monday morning -- a holiday in the U.S. celebrating our Presidents.  For those of us in the film business, that means one more day for folks to see another film before heading back to another week of work.  This weekend's box office was topped by a star-packed film that critics hated.  "Valentine's Day" made almost $67 million in its first three days of release.  That is a huge number for a light romantic comedy that opened to a pretty negative buzz.  The lesson here is that apparently some stars still matter.  You can argue about whether folks were more interested in seeing Julia Roberts or Taylor & Taylor (or Jessica or Ashton or Bradley or George -- or because they know that Garry Marshall is a great director), but the crowds definitely came out for the stars.

This is actually good news.  From the standpoint of my business representing producers, my initial reaction is to flinch at anything that gives bargaining power to the talent.  But the truth is that we are all in this business together and I want the audience to love actors. I want writers to write great scripts, directors to make stunningly beautiful and poignant films, and actors to deliver performances that stir the hearts of millions.  That is the essence of what makes the film business so wonderful, and such a great business.

And it is apparently working.  Even the number 10 film in this week's box office derby did over $4 million at the box office.  The overall box office numbers were huge.  I was at the multiplex with my family yesterday and there were several films that were selling out shows in the middle of the day.  The film business is doing great.

So why is it still a little (actually, more than a little) difficult to get films into production?  Why is film finance money so tight?  Tax incentives are still lucrative and plentiful. The talent is still willing to work for reasonable guarantees (compared to past years).  Technology allows us to make really high quality pictures for a fraction of what it used to cost.  Costs are going down and sales are going up.  That sounds like a place that most investors would want to put their money.  So what's the problem?

The challenge (I never like to use the word "problem") is that the revenue streams are changing and no one knows what the new revenue structure really looks like.  The studios are moving towards shorter theatrical release windows to allow for earlier DVD releases.  Except everyone sees that the DVD (and soon the Blu-Ray disc, as well) is dying a relatively speedy death.  Hollywood Video is done and Blockbuster is following (but hoping to use its market power to arise as something new).

Within a very short time, consumers will be pushing a button on their remote and pulling a high definition, 3D version of a relatively recent film onto their living room big screen.  That scares a lot of people in the industry because they aren't sure how they continue to make big bucks from that model.  So, they aren't sure how much to spend on a film or how to make deals that won't make them cringe when they pull the contract out of the drawer five years from now.

It is a time for vision and courage, my friends.  It is in times of change that the opportunities are greatest.  It is possible to create assets today that will be bearing fruit for years to come.  And the key is recognizing the power of the long tail.

A copyright lasts for decades, but we have been trying to make all of our money back in the first weekend of release.  If we look at each film as a seed that is being planted (rather than a pinata that is bursting open while we scramble to grab the most candy as quickly as possible), we can build strong, profitable businesses.  Each picture needs to be nurtured and encouraged to find new audiences year after year.  And we need to connect with those audiences in new ways that make them eager to spend a few dollars to engage and continue those relationships.  It's still about stars and stories and beautiful sights and sounds, but let's not think of each new film as a one-night stand.  Let's take the time to form relationships with our audiences that will pay dividends over many years.