In the early days of Hollywood, studios were printing cash like the Fed. They were vertically integrated so they owned every piece of the production process:

  • Financing
  • Talent (e.g., actors / actresses, writers, producers, etc.)
  • Distribution (e.g., movie theaters)
  • Marketing

But the party didn’t last.

Because studios owned movie theaters, they had a monopoly over ticket prices. In 1948 the Supreme Court decreed a separation between studios and movie theaters.

This put studios on the path to where they are today.

Shortly after the ruling, Hollywood talent created their own independent guilds, unions, and agencies. This pitted the studios in bidding wars against each other which gave negotiating leverage to top talent and their agents.

Studios went from owning the entire production process, to only controlling the financing and marketing for films.

For most of the 80’s and 90’s, studios were still in a powerful position given their existing relationships. But once technology companies began to scale, they wanted a piece of the action too.

At first, tech companies tried to innovate on how movies were made by automating parts of content production.

After a few failed attempts, they realized their advantage wasn't on the production side. Instead, it was in using data to personalize the customer experience.

Netflix noticed this trend and began licensing old content to gather data on which shows were most popular.

As we know,  licensing old content worked so well that Netflix pivoted away from their DVD by mail business to streaming. But Netflix knew that licensing wasn’t a sustainable strategy. They didn’t own the content which limited their upside.

Instead, they needed exclusive rights.

Their first experiment with exclusive rights was with House of Cards. However, it wasn’t obvious this was the right strategy.

When Netflix first announced its purchase of House of Cards, their stock price plummeted to the lowest level in years.

But as we know, House of Cards became a smashing hit.

From then on, Netflix has aggressively purchased exclusive rights to content and produces its own content. Looking back, it was obviously the right strategy. As the stock price shows.

So, why was Netflix in a better position than the movie studios over the past decade?

Because movie studios are just intermediaries responsible for financing and marketing content.

Turns out, tech companies can do both of those things way better than studios.

First, in terms of financing, tech companies have a) more cash to deploy than studios and b) other profitable business units that can fund their losses in content production.

That’s why Amazon and Apple are aggressively purchasing content. They can use their  piles of cash from e-commerce and iPhones to acquire content. Their media businesses don’t make anywhere near the profit of their other businesses. But it gives them a relationship with customers so they can cross-sell their more profitable products.

As for marketing, tech companies are the best in the world at using data to personalize the user experience. This gives them another competitive advantage when it comes to TV shows and movies.

For example, Netflix knows every piece of content you’ve watched on their platform, how quickly you watched it, how you rated it, and much, much, more. Sometimes it feels like they know you better than you know yourself.

Meanwhile, movie studios still spend most of their marketing budgets in one of the most inefficient ways possible - billboard ads and TV commercials.

As we can see, most movie studios are competing in a game they can’t win.

So, what’s next?

Future of Hollywood

There are three main trends facing Hollywood today:

  1. Streaming
  2. Acquisitions
  3. Mobile

Today, there are only two major studios left - Disney and Warner. Other studios have either been acquired or aren’t big players.

Disney is in the best position because they own popular franchises (e.g., Star Wars, Avengers, Fantastic Four) which they can monetize in many ways (e.g., theme parks, merchandise, cruises).

These franchises are like social networks. They drive virality and have durable networks effects because the more people that enjoy them, the more you can talk about them.

This leads to cheap customer acquisition which can be monetized through a myriad of channels.

The last, and probably most important, trend today is the rise of mobile.

Pre-internet, Hollywood revolved around scarcity. Films and shows were distributed through network television and movie theaters. But there are a finite number of TV channels and theater rooms available.

Given this scarcity, who decides what gets played? That’s where Hollywood came in. In a world of scarcity, it’s valuable to have a centralized group of people deciding what will appeal to the most people. This ensures that content gets produced and that most people are satisfied.

But the internet changed everything.

With the internet, the world moved from scarcity to abundance. Now, instead of there only being 50 shows on TV and 20 movies in theaters, there is an endless stream of content. Not only the high-quality Hollywood content, but user generated content on sites like Instagram, Twitter, and TikTok.

Hollywood isn’t just competing with other studios, they’re competing with every single person on the internet.

But it doesn’t seem like Hollywood has understood this yet. One of the most hyped app launches of the year was Quibi. An app founded by Hollywood legend Jeffrey  Katzenberg.

Their strategy is to take high-quality content with expensive talent and format it for mobile. This strategy works in an age of scarcity when there aren’t many competing options to choose from.

But content on mobile is abundant.

So instead of paying top dollar for a handful of Hollywood producers, the winning strategy on mobile is to get as many people as possible producing content. Then, personalize the most engaging content for each individual.

This is the strategy used by each social media giant -  Instagram, Twitter, TikTok, Snap, and Facebook.

Conclusion

Similar to how the internet unbundled Hollywood’s control of financing, talent, movie theaters, and marketing, other industries are on the verge of unbundling as well.

The internet will unbundle education’s monopoly on knowledge, network, and credentials.

I also believe the internet will unbundle religion by providing products and services for purpose, community, and rituals. Soul Cycle and Crossfit are examples of this happening in the offline world.

The internet doesn’t just change existing industries. It redefines them.

‍

Posted 
Jun 14, 2020
 in 
Business
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