Hollywood and Resiliency

Stephen DeAngelis

September 18, 2006

Rob Pegoraro recently wrote an interesting column in the Washington Post talking about the resiliency (or potential lack of it) of the film industry [“A ‘Mistake’ Hollywood Had Better Start Making,” 13 Sep 2006]. Pegoraro notes that Hollywood has insisted for years that it doesn’t want to find itself in the same situation the music industry found itself when the file sharing craze hit the Web. He rhetorically asks, “So what have the boldface names of the business spent the past few years doing?” His answer, “Ensuring that the most effective way to download a movie is via a peer-to-peer network that won’t pay a dime to any studio.” Not exactly the answer the film industry wants to hear.

The reason Pegoraro makes this claim is that “even as programs such as BitTorrent and its offshoots have made it increasingly easy to find flicks online, legitimate movie-download services have remained a joke. … They offer laughably small selections at prices offering little or no savings over the DVD and under insultingly limited conditions. Most movies can’t even be burned to DVD — something that people have been able to do with their own camcorder footage at least since 2001.”

Pegoraro is not suggesting that film industry won’t survive. There is still an incredible amount of money to be made in entertainment and celebrities will continue to fascinate the general population. Pegoraro’s point is that only resilient film companies will be able to take advantage of emerging opportunities. Two companies whose decision makers think they see those opportunities are Apple and Amazon. Pegoraro writes:

Now two companies that actually know a thing or two about selling entertainment online — Amazon.com and Apple — are making their own attempts to drag movie downloads into this millennium. Apple made its official entry into the movie-download business yesterday [12 September] at a splashy event in San Francisco, which included the introduction of new iPods and a preview of a set-top box, iTV, that will let viewers watch downloaded flicks on their TVs. Amazon’s Unbox service launched last week. The Amazon and Apple efforts show a lot more promise than earlier stores, with noteworthy improvements in the shopping and downloading experience.

Pegoraro isn’t signaling a touchdown, however, he notes the goal posts remain a ways down field.

At least at the start, they’re still stuck with the same old problem: The studios continue to show an amazing proficiency for finding reasons not to sell or rent digital downloads in ways that customers might value, all for the sake of protecting their existing retail channels. Hollywood’s attitude has been “movie downloads on our terms.” First it will take care of the stores that sell and rent DVDs today — along with every other outlet it furnishes movies to, from pay-per-view to cable movie channels to airlines — then it will see if it can start a digital channel on the side. So, for instance, many studios don’t want to price a movie download below what Wal-Mart charges for a DVD, lest the retail giant rebel at the impertinence. And movies offered for download can suddenly become unavailable when it’s time for them to move on to the next stage in the industry’s “chain of value,” whether it’s cable’s TBS or the clearance rack at Blockbuster. That’s understandable, but unsustainable, behavior. It’s a fundamental misunderstanding of how things work in a market where anybody can become a distributor, authorized or not, of digital content.

Pegoraro lays out the emerging challenge, likely path dependencies, and the kind of alternative future planning in which all resilient enterprises must engage.

Essentially, the Internet at large determines how movies reach customers, and studios need to figure out how to fit a cash register into that pattern — that is, by charging for quality and convenience that you can’t get with a peer-to-peer service’s random selection.

Pegoraro briefly reviews the angst the music industry went through before it embraced Apple and the ubiquitous iPod.

Now, music downloads are a thriving part of the recording industry. Apple says iTunes is the fifth-largest seller of music in the United States — and is on the way to passing Amazon to claim the No. 4 spot. Meanwhile, subscription services such as Rhapsody and Napster to Go provide a rental option never before available.

Like with every new development, horizontal scenarios play themselves out in interesting ways. For example, Pegoraro admits that local record stores have taken a hit even though the music industry has continued to thrive. He concludes his article this way:

The record labels appear to have accepted that their job is to sell music, as opposed to selling plastic discs with music recorded on them. Most movie studios still appear confused on that point. They need to get on with making that same “mistake”: It could be the most profitable blunder they’ve made in years.

Every resilient enterprise needs to understand its core competencies, determine whether or not those competencies have a future (think of companies who used to make slide rules), and then implement a plan that fosters the growth of its business model. The film industry appears to be clinging a bit too hard to the past.