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The future of the business of entertainment

Those who don't learn from the past, are destined to blunder again.

The market forces that shape business and markets have been the same for longer than anyone can remember. Success usually tries to force competitors out of business, partly by market manipulation.

Thomas Edison is remembered as a great inventor who brought us many wonderful things, like electricity and motion pictures. In 1890, he owned most of the patents in the film industry. There was only one other type of camera. The MPCC had enforcers (thugs, mobsters, even law men) tour the East Coast areas watching for film production, and "enforced" patent rights, often by destroying their equipment or film footage. Foreign films and Hollywood films were out of their view, so they continued production.

Edison used the Motion Picture Patents Company (MPPC) to compete against foreign films on US screens, and used it to prevent MPPC members from going into film production.

Distributors and exhibitors were notified by Edison that those who didn't use only Edison's machines and films, would be sued for patent rights violations. Distributors and exhibitors approached Edison to license his technology, and Edison used it to try to force competitor Biograph out of the market.

Biograph stopped Edison by leveraging a patent on the Latham film loop, which was a simple but essential slack piece of film on the camera or projector, which even Edison had to use. Patents at that time were for 14 years, which kept competitors at bay for 14 years. Today we hardly blink at patent enforcement - it's just the way it is, and inventive people find another way to do it.

Independents circumvented the MPCC by simply moving to Hollywood. The effect was to boost the Hollywood film industry, and secondly, to slow the MPCC members, who refused to keep up with the times (longer reels), or be innovative. This is what almost always happens when competition is not allowed to flourish. But regardless, large businesses always try to extinguish threats to their core businesses.

History repeated itself when an MPCC subsidiary, General Film Company, monopolized movie distribution in the US. Several distributors took MPCC and General Film to court, and a Federal Court ruling effectively put MPCC out of business for anti-competitive activity that went way beyond patent enforcement.

History repeated itself again in 1919 when independents were suppressed in the market as commercial studios began to dominate the film market. Studio producers, much like today, were considered overbearing in creative decisions. (Steven Soderbergh echoed the same sentiments in his Impassioned 'State of Cinema' Address From the San Francisco Film Festival." There is always a tension between what makes the most money, and what is a creative artist's vision. In reaction to overbearing studios at that time, famous artists Charlie Chaplin, Mary Pickford, Douglas Fairbanks, and D.W. Griffith, formed UA United Artists® (UA), in a profit sharing arrangement.

UA struggled along after 1919. By 1941, studios owned or controlled the bulk of production, distribution, and theater exposition. Big companies had again found a way to squeeze out competition, especially the little guy. The UA principals formed The Society of Independent Motion Picture Producers and took studios to court. In 1948, the Supreme Court forced studios to divest themselves of theaters because of anti-competitive practices. But studios continued to own distribution.

What happened later to UA, poses the question of the wisdom of too much independent control. UA had a number of owners, with MGM being a recurring major stock holder. UA made many good pictures, and some good performing franchises (James Bond), but occasionally struggled financially. It only takes one failure in a down period to bring a company down. UA agreed to back a Michael Cinimo movie, Heavens Gate. Cinimo, an Academy Award winning director, had an autocratic style, would sometimes insist on 50 takes for a single scene, and produced a 4 hour, $44 million catastrophe, which netted only $3 million. UA fell out of favor in Hollywood production, financially ransacked, and barely managed to continue. (Today UA still makes successful franchise and other movies.)

Next: From history we know several things

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From history we know several things

1) Independents can be profitable and compete since they don't have the overhead of staff, property, and contracts, of major studios and larger organizations. Major studios actually ceased to be big production studios, decades ago. Most of them rely on major independents to make their movies, and instead they own the library of films and distribute. Independents struggle to compete with the big guys, but do occasionally prosper.

2) Major companies will always try to get away with anti-competitive activity to squeeze competition out. In today's theatrical release market, distributors send their movies to established movie chains, where they can make their usual agreements and expect a known profit percentage. Movie chains generally will not exhibit independent movies, instead relying on major distributors to advertise the movies to get a good audience. It may not be an exclusive arrangement, but it is a symbiotic relationship that inadvertently keeps out independents.

3) All companies make mistakes, struggle from time to time, and sometimes go out of business. One major risk for independent producers is the demand for total creative control. If the producer and director are not business savvy, their insistence on control can put a company out of business. Businesses aren't charities or art houses. Businesses depend on profit to exist and continue making movies.

4) As Steven Soderbergh noted in his state of the cinema address, a business exec., with no real industry knowledge, may depend on statistics from focus groups to force all movies into certain molds that make the most money. Every action movie simply looks like the other action movies. (On this date, the audience appears to be burned out on the typical action movie - they are too much like video games.) And they can be wrong and make flops. But as UA saw, if you give total creative control to a director, you can end up getting less than 7% of your investment back, and go out of business.

All entertainment has the same problems

The first rule of any organization is to perpetuate its own existence, and this typically means using preferred trading partners and eliminating the competition.

In the television industry, we see many of the same problems that developed in the movie industry. The chances of an independent developing a show and getting it purchased by the networks, is very low. Broadcast networks have their trusted studios that they work with. Networks have contractual relationships with distributor/exhibitors. Network and cable channels have been unable to begin IP delivery because of these things. Consumers suffer.

There has to be a middle ground in business. You can flood the market with independent movies that no one wants to see, and all you get is a landscape that no audience will enter because they can't find good movies. Subscription Web sites offering these are dropping like flies. You can keep independents out and see cookie cutter movies designed to rake in over $100 million, with declining results over time and diminishing audience interest.

You can sum it up in one statement: "Creativity, without market and production discipline, only pleases the author or statistician, and is often destined to market failure." We are not the judge of what is a good story. The audience is.

From my own personal experience, I know the good and down side of business statistics. I managed a regional field organization, for a Fortune 10 company, in the 1980s. When I began, I had no business tools, so I started collecting and analyzing statistics. Soon, rather than running a business on imagination, territory assignments and profit forecasting began to look very realistic. My employees were very pleased with the fairness of the result.

As the larger organization began to copy what I was doing, I realized that in the wrong hands these statistics could backfire badly. In the hands of someone who didn't fully understand the business from working in it, misinterpretation would be very easy, and expectations would become ridiculous. It would be worse than when there were no statistics.

If you put business statistics in the hands of a studio executive who doesn't know the business well, you can create a lot of bad things:

  • One is expectations that certain things will work well, like repetition, and they don't.
  • Another is a very narrowly framed genre that continues to get narrower and narrower, as every last spec of interest gets pinched from the genre. It is the opposite of experimentation and exploring what an audience might like.
  • Another is the self-fulfilling prophecy that your demographic is most interested in certain things, so the demographic and interest get squeezed to a narrower and narrower age range, and the interest genre gets painted in narrower and narrower terms, so that your broad market becomes eliminated. (Think young adults and their interests, and declining theater attendance, while my own stats show a healthy interest in movies in all age ranges.)
  • Part of the problem is that investors and boards of directors of corporations insist on focusing companies on whatever makes the most money at the moment, with no regard for the future. They insist on following the same paths over and over again because they want reliable outcomes and are risk averse. Instead of stock dividends, they are mostly interested in the price of stock going up, and pay managers ridiculous salaries to make that happen, and all a statistician guided CEO can do is repeat past successes. So public companies (meaning those that issue stock), are guided by short term interests, and over-rely on this type of statistics. Their boom and bust cycle, when they do this, is almost inevitable.

    The theatrical release industry can stay healthy. I just saw Star Trek Into Darkness - great story that was awesome on the big screen. This was a $190 million movie - something only Hollywood and theaters can make and exhibit in this way. This movie, in this nearly 50 year old franchise, kicked butt in the more youthful Iron Man 3 demographic, grossed $84 million by the end of just the first weekend, and had the highest per screen of any movie to date, with very high word of mouth advertising, with CinemaScore giving it an A. (Paramount® reportedly expected $100 million for the weekend.) If the theatrical release industry goes away, it will be because of mismanagement and misjudging the market, not the switch to home theater viewing (which will definitely have a big impact on theater going, but not a death blow).

    Disciplined creativity means:

    • Write, produce, and direct what you want to write, as much as you can.
    • Understand (through market/audience research) what the audience wants, the trends, and use that as a base.
    • Be unique and original - duplication is a downward financial slide.
    • Architect stories so that they have audience appeal - don't follow formulas. People love architecture; they hate boxes that all look the same.
    • Be innovative and explore to discover new audience interests and trends.
    • Avoid the overuse of statistics.

    Next: Market convergence.

     

     

     

     

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Market convergence

Market convergence happens all of the time. For example, Ericsson™ recently purchased Microsoft MediaRoom®, and they will use the service to support their products, and maybe others. Market convergence is a long term scenario in which technology, business growth, and market forces shape which players end up in the big three or four lasting providers and the two or three niche providers. This may take 15 to 30 years, but could happen more quickly. Technical capabilities (cable) for streaming broadcast on a large scale is not expected to be in place for around 10 years because of the need for new equipment. At this moment it is anybody's guess who will win the big three spots.

The winners will likely stream video to all devices. They may have created or purchased their own CDNs. It's just as likely, and even more probable, that CDNs will provide distribution infrastructure just like the electrical power company transmission lines, natural gas pipelines, and cable companies have. The CDNs may buy the cable companies and provide infrastructure from source through the last mile.

Mergers will likely depend on who has gotten contracts with major content providers, such as Universal Studios®, Disney, ABC, cable channels... and gotten big. The niche players will probably host independents that don't mix with the Goliaths, and these niche players will have a difficult time maintaining market visibility and channels.

A hedge-fund manager (May 2013) reportedly is recommending that Sony® spin off its entertainment divisions (TV and movie studios) to focus on core technology products, for higher profitability. It never ceases to amaze me that making a good profit isn't enough - boards and investors are only willing to settle for high, short-term profit, with little regard for the future. Preceded by years of diversification, the focus then became stripping down and refocusing companies - merger mania in the decade through 2007 - to increase profits. For example, AOL® began as a small technology company, got large and in 2000 merged with (Purchased) media conglomerate Time Warner, then spun back off again in 2009 as business units focus and profitability changed, and now AOL buys other media companies. Market evolution ever changes.

Apparently the hedge-fund manager fails to see the synchronicity of hardware and digital entertainment products, and that size matters. I guess I shouldn't mention the 17% decline in TV viewing in 2012, which probably went to IP, where there is little viewer discrimination between TV and movies, and they do a tremendous amount of it over game consoles in proprietary content networks.

The holy grail in this industry will continue to be quality content. Winners will have three things:

  1. Quality content that is new, original, unique, meets audience wants
  2. Enable the audience to find the content through advertising and relevance algorithms
  3. Access to the audience preferred exhibition devices, in distribution windows

Sony®, MGM, XBox®, WII®, and Viacom®, in my opinion, look unprepared to compete in the new markets with NBC™/Universal, ABC/Disney, and CBS/CW, although Viacom did make its library available to IP distributor Joost, which failed, and Viacom owns a percentage of Disney. (CBS split from the global entertainment company Viacom, but owns the CW network, which was the first to make its content available to Apple.) This is just my speculation - what do I know? (I only predicted the success of IP distribution in early 2001 - probably late.)

Investors and content aggregators will likely become gate keepers who supply the big market distributors with any independent content. Many existing online services already use content aggregators to screen content, put it into the form they need, and provide it to them. As aggregators get larger, they typically become less available to smaller independents (read they become exclusive to those with a lot of high quality content in their library of offerings).

Today there is great opportunity for innovative creators and entrepreneurs. It's the best opportunity to get into this lucrative market and grow. But the future is much less certain for Independents. We've already seen Independents locked out of most smart devices unless they are on Roku®.

Hopefully Youtube® and Vimeo® type services will continue in the market where innovators and creators can bring their new content and find an audience. This can serve as an incubator for Independent producers and for experimental content. The Internet has provided an entrepreneurial space, and unless equipment manufacturers find ways to lock out Independents, this should continue. For example, if a smart TV manufacturer buys Roku and locks out Independents from having channels on the device, the Independent market will revert to PC viewing only. The battle for viewers has a lot of money and power connected to it, and Independents have never had much of either.

Independents are likely to have the same fights they have had in the past: The battle for production, the battle for distribution, and the battle for exhibition. Large companies will try to keep them out of the market through market manipulation, such as by locking out from content aggregators, not allowing access to distribution platforms, not allowing access to distribution pipes (CDNs) and not allowing access to display devices. The book industry is fraught with these same problems, and electronic distribution has alleviated some of those problems. These battles are likely to be fought in the courts.

The FCC needs to make sure that independents have an available and sustainable path to consumer devices, and let consumers decide whether or not they want to watch independent productions. This path might be similar to cable channels that allow community access, or similar to Roku channels. Roku sees virtual MSOs coming: Roku CEO Wood: Virtual cable MSOs 'inevitable'

Update: Several consumer devices connect Internet programming directly to TV, but the Web browser is limited to Google TV. Streaming Media Blog list: Streaming Media Devices.

Open Access Content Example

Advertising

Advertising is essential to the financial success of a VOD (online/cable/satellite) movie. But advertising online can be done in many forms that don't have to be expensive:

  • Build a following on social media venues, so you have a built-in audience (page likes, followers).
  • Ask viewers if you can notify them by email or social media when you do your next release.
  • Both of the above mean that you need a Web and social media presence for your business. There are businesses that can help you develop an initial following for very little expense.
  • Encourage viewers to rate your movie. People want to see movies that others think are good.
  • Give free passes on social media to get the viewing and audience ratings started.
  • Make it easy for social media word of mouth integration, by putting social media links on your site. (Add This makes this easy.)
  • If you are getting good ratings for the movie in its genre, consider putting the revenue back into paid advertising.
  • Notify movie bloggers that you are available for an interview, to promote your movie.
  • Notify critics and reviewers of your movie launch, and give them a free pass.
  • Use Facebook ads, and other social media ads - they haven't gotten expensive yet.
  • Self-rate your movie by the W3C worldwide ratings, W3C Powder document movie rating example, so people know what to expect and whether or not to let their children watch.
  • Make your listing available to filmthreat.com, indiewire.com, etc. These are sites for people who like independent movies.
  • Enlist your Web site in a banner ad exchange, such as whambanners.com (free) or banneradexchange.net (free or small charge [.05/thousand] if you can't display ads).
  • If the results are looking really good, advertise on cable channels. They cost around 1/10th. as much as broadcast networks.
  • Make sure the host you put your movie on, features the movie for a while.

- Dorian

Next: Reference, Legal

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Reference, Legal

References:

Wikipedia article: Motion Picture Patents Company

Wikipedia article: United Artists

Business Week article: Netflix, Reed Hastings Survive Missteps to Join Silicon Valley's Elite

Moviephone article: Star Trek Into Darkness box office

HomeMedia.com article: IHS: Cable Operators Should Invest in CDNs

Fiercecable.com article: Roku CEO Wood: Virtual cable MSOs 'inevitable'

Companies mentioned, or commonly mentioned on this Web site:

ABC is a name used by the American Broadcasting Company
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AMAZON PRIME® is a Registered Service Mark of Amazon Technologies, Inc.
Apache™ and the Apache feather logo are trademarks of The Apache Software Foundation.
AWS® is Registered Servicemark of Amazon Technologies, Inc.
AOL® is a Registered Trademark of AOL Inc.
Apple® is a Registered Trademark of Apple Inc., registered in the U.S. and other countries.
BOXEE® is a Registered Word Mark of Boxee Inc.
BlackMagic® is a Registered Trademark of BLACKMAGIC DESIGN® PTY LTD
BLOCKBUSTER® is Registered Trademark of Blockbuster L.L.C.
BRIGHTCOVE® is a Registered Service Mark of Brightcove Inc.
Brightcove Video Clous is a Service Mark of Brightcove Inc.
Canon is a Registered Trademark of Canon Inc.
Charter On Demand® is a Registered Service Mark of Charter Communications Holding Company LLC
CINEMANOW™ is a trademark of BBY Solutions, Inc.
CloudWeb is a name used by Innovative Scaling Technologies Inc.
Comcast® is a Registered Trademark of Comcast Corporation
Disney is a business name of Disney Enterprises, Inc.
EDGECAST® is a Registered Service Mark of EdgeCast Networks, Inc.
Ericsson™ is the trademark or registered trademark of Telefonaktiebolaget LM Ericsson
Fandango℠ is a proprietary service mark of Fandango, Inc.
FIos® is a Registered Trademark of Verizon Trademark Service
HBO® is Registered Trademark of Home Box Office, Inc.
HULU® is Registered Trademark of HULU®, LLC.
iTunes® is a Registered Trademark of Apple®
Kompressor is a name used by Kandalu Software.
LIMELIGHT NETWORKS® is a Registered Trademark of Limelight Networks, Inc.
Linux is a name used by Linux.org.
LONGTAIL VIDEO® is a Registered Service Mark of LongTail Ad Solutions, Inc.
MEDIAROOM® is a Registered Trademark and Service Mark of Microsoft Corporation
MGM (Metro Goldwyn Mayor) trademark is a logo with Leo the Lion
Moviefone® and Moviefone.com® are Registered Service Marks of AOL Inc.
MOVIES.COM® is a Registered Trademark of Fandango, Inc.
MOVIEWEB® is a Registered Service Mark of MovieWeb, Inc.
NBC™, the NBC logo, and the NBC Peacock are trademarks of National Broadcasting Company, Inc.
NETFLIX® is a Registered Trademark of NETFLIX®, INC.
NIKON® is a Registered Trademark of Nikon Corporation
Ooyala™ is a trademark of Ooyala, Inc.
Panasonic® is a Registered Trademark of Panasonic Corporation
PARAMOUNT®, PARAMOUNT PICTURES®, and PARAMOUNT STUDIOS® are Registered Trademarks of Paramount Pictures Corporation
PlayStation® is a Registered Word Mark of Sony Corporation
RACKSPACE® is a Registered Service Mark of Rackspace US, Inc. DBA Rackspace Hosting
REDBOX® is a Registered Trademark of Redbox Automated Retail, LLC
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ROKU® is a Registered Word Mark of Roku, Inc.
Sony® is a Registered Word Mark of Sony Corporation
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Sundance Institute is not trademarked, but is used since 1981 by Sundance Institute, which hosts the Sundance Film Festival
Sundance Channel® is a Registered trademark of Sundance Enterprises, Inc.
Time Warner is a business name used by Time Warner Inc.
TiVo® is a Registered trademark of TiVo Inc.
UA UNITED ARTISTS® is a Registered Service Mark of United Artists Corporation
UNIVERSAL STUDIOS® is a Registered Service Mark of Universal City Studios LLC
VIMEO® is a Service Mark of VIMEO LLC
VUDU™ is a trademark of VUDU, Inc.
WII® is a Registered trademark of Nintendo of America Inc.
Wowza® and Wowza Media Systems™ are Registered Trademarks of WowzaTV LLC
XBOX® is Registered Trademark of Microsoft Corporation.
YouTube® is a Registered Trademark and Service Mark of Google, Inc.
VIACOM® is a Registered Service Mark of Viacom International Inc.
Any trademark not listed out of oversight is a Trademark or Registered Trademark of it's respective owner.

Mention of any business in this article, or lack of mention, is not intended to endorse, disparage, favor, or disfavor any business.

Movie names that are mentioned are not given reference citations. This is because numerous studios are involved in production, and they then assign distribution rights to multiple distributors, and these rights can be sold to other distributors. For production and distribution information on any movie mentioned, consult the Internet Movie Database, or other authoritative listing.

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