2022-08-17 05:01:16
Coming soon market data/movies

Economist.com

The internet could be a boon for Hollywood—but only if it can conquer its fears

TO SEE what the future of film distribution might look like, go to a website called ZML.com. It offers 1,700 films for download to personal computers, iPods or other hand-held devices, or to burn to DVD.
It is inviting and easy to use, with detailed descriptions of each
movie, editors’ picks, customer reviews and screen stills. And the
prices are reasonable: “Atonement”, for instance, costs $2.99.

There is one small catch: ZML.com is a pirate site. Hollywood’s movie studios, which are used to dealing with scruffier crews like Pirate Bay,
a Swedish outfit, are aghast at how professional the newcomer is. “It
looks like a fabulous legal website,” says one studio executive.

The existence of ZML.com
illustrates why Hollywood is in two minds about the web. On the one
hand, the internet has brought a potent threat: pirates are plundering
films and carrying off booty that rightfully belongs to the studios.
Online piracy costs Hollywood less than the physical variety, ripping
off DVDs, but the gap is closing. “We are more
concerned about internet piracy than physical piracy, because
controlling it is harder,” says Ron Wheeler, head of anti-piracy
efforts at Fox Entertainment Group. Some in Hollywood believe that
internet theft could even be the death of America’s film industry.

On the other
hand, the internet offers Hollywood a great opportunity—which it has so
far been slow to exploit. There is every reason to think that people
will want online access to films, just as they do for music,
newspapers, television and radio. ZML.com is
proving that people will pay to download films to see at home when it
suits them. And once people can buy or rent films on demand, the
chances are that they will watch more of them.

The web is
already making its presence felt in the heart of Tinseltown: this
year’s Oscars extravaganza, which is due to take place on February
24th, nearly fell victim to a strike by writers over pay for the
distribution of their work on the internet. But for the time being
Hollywood is mostly stuck in the physical world. Every year it sends
thousands of heavy, expensive reels of film to cinemas by road. Only in
the past year or so has it started an effort to send out some across
the ether as ones and zeros. The DVD is a digital format, to be sure, but it comes in shrink-wrapped plastic.

Some studios
are enthusiastic about the internet. “In 2008 we will move full speed
ahead online,” says Thomas Lesinski, president of digital entertainment
at Paramount Pictures in Los Angeles. “It’s the great hope for new
revenue for the movie business.” But the industry has by and large been
slow: studios have only tentatively backed legal online film-download
services. Television, by contrast, has been much faster to embrace the
internet.

The choice of what is legally available online today is patchy. For instance, London buses are carrying ads for FilmOn.com,
a new download service. It promises “tons and tons of great movies”,
but you will not find “Mulva 2—Kill Teen Ape!” near the top of many
people’s lists. The internet has lots of legal sites like this, which
promise thousands of top-class titles but in truth resemble the worst
shelves of a bad video-rental store. ZML.com has a far better collection than most legitimate services do.

Another legal site, MovieFlix,
based in Los Angeles, makes its money from independent films, student
movies, straight-to-video titles and other eclectic fare. Its founders,
Opher Mizrahi and Robert Moskovits, stay away from Hollywood studios
because of their high fees. MovieFlix, which had revenues of $1.2m last
year, is rare among download sites: it turns a profit. “We are the
cockroaches of this space,” says Mr Mizrahi, “and we are survivors.”

Many better-funded services have fared far worse. Movielink,
which the studios themselves set up in 2001, with about $150m of
start-up capital, was sold last August to Blockbuster, a video-rental
chain, reportedly for less than $20m. CinemaNow,
which counts Microsoft and Cisco Systems among its investors, started
offering movies online in 1999 and is not yet making a profit, to the
surprise of its chief executive, Curt Marvis. Back then, he says,
everyone thought that selling films online would be a huge business by
now.

Nor are the
studios making much money online. They have dozens of deals with
internet services around the world. Warner Bros, for instance, supplies
small selections of its films to 38 separate digital-distribution
services, according to Screen Digest, a research firm in London. In
2006, estimates Screen Digest, online distribution of movies generated
a total of $58m in America and western Europe. Screen Digest expects
this to rise to $1.2 billion by 2011. But that is still below 5% of its
forecast for total home-entertainment revenue.

Consumer-electronics
firms are longing to supply Hollywood films. According to Screen
Digest, online viewing is most likely to take off on services based on
their devices. So far, people have been most interested in buying films
for gadgets such as Apple’s iPod or Microsoft’s Xbox 360. Apple’s
iTunes has captured almost 80% of the download-to-own market; the Xbox
has won more than 70% of online rentals.

At the International Consumer Electronics Show (CES)
in Las Vegas in January, everyone was waiting for Apple to announce
that iTunes would start selling new movies from all six leading
studios. Hitherto, only Disney had granted Apple access to new releases
(Apple’s chief executive, Steve Jobs, sits on Disney’s board); a couple
of other studios were giving it older titles. In the event, Apple’s
deal was disappointing: it got the go-ahead from all the studios only
to rent their films, not to sell them. According to a person familiar
with the negotiations, however, this was because of the Hollywood
writers’ strike over new media. Now the studios are waiting to see
whether actors walk out over the same issue. When the labour troubles
are past, Apple is likely to get a proper download-to-own deal with all
six studios. For Hollywood, this would be a big step towards the
internet.

There are two
broad reasons for Hollywood’s tardiness. The main one is the industry’s
aversion to making big changes to its business model. In part this is
because it takes so much risk in its day-to-day operations. “Every
weekend, we sit on pins and needles watching to see if our films will
flop,” explains a studio executive, “and that doesn’t encourage
risk-taking in the business as a whole.” There is a less defensible
explanation too: “Hollywood’s value system is not necessarily about
growth,” says Dan Jansen, who runs the Boston Consulting Group’s media
practice. “It’s about recognition for films.”

For the moment, most people are still happy with DVDs, so the studios have had little incentive to switch to an unproven new format. The DVD
business is huge, bringing in $23.4 billion in America last year,
against $9.6 billion from the box office. The studios are terrified of
damaging that source of revenue. In 2006, when Disney made a deal with
Apple to sell movies via iTunes, Wal-Mart, America’s biggest retailer,
reportedly threatened to retaliate: the internet, after all, bypasses
it. Wal-Mart accounts for about 40% of DVD sales in the United States and if it sharply cut shelf-space for DVDs,
the lost sales would far outweigh new digital sales in the near term.
At the end of last year Wal-Mart shut its ten-month-old movie-download
site. Now that it no longer has a foot in the internet camp, studios
expect it to take a harder line against any further efforts they may
make to favour online distribution.

Not everyone agrees, however. Wal-Mart and other big retailers rely heavily on DVDs
to bring higher-income people into their stores, says a studio
executive. “So they don’t have a leg to stand on threatening to pull
shelf-space.” For this reason, he believes that Hollywood should be
able to cultivate online revenues without greatly disrupting its
existing businesses.

In any case, there are now signs that the DVD
boom has come to an end—which should also encourage the studios to
worry less about Wal-Mart and to move faster online. After its growth
slowed in 2005 and 2006, spending on DVDs fell
by 3% in 2007 (see chart 1). Some in the industry are pinning their
hopes on fancier, “high-definition” discs—another physical
format—rather than on the web. But so far, sales of such discs have
been minuscule—largely because of a war between two formats, HD DVD and Blu-ray. Although the war ended this week, when Toshiba said it would abandon HD DVD, high-definition discs are unlikely to bring growth back to the home-entertainment business.

Indeed,
Hollywood’s desire to preserve its existing business rather than
embrace a new one echoes its misgivings a few years ago about the DVD
itself. In 1997, when the new format was about to be born, three
studios, Paramount, Disney and Twentieth Century Fox, came out against
it, remembers Warren Lieberfarb, who is widely credited with having
fathered the product as it is today. They were worried that selling DVDs
for $18 apiece would cannibalise their sales of video cassettes to
rental stores for $65 each. None of the three studios is proud of that
episode now.

Moreover, as
well as boosting sales overall, the internet will make it easier for
the studios to make money from their libraries—bricks-and-mortar
retailers, after all, have limited shelf-space, and mostly stock new
releases. Digital sales yield a higher profit margin too. Virtual
distribution does away with manufacturing, packaging, transport and
inventory costs. At the moment, the studios get $18 per film from a
Wal-Mart or a Best Buy and about $16 for a digital sale, but because of
the lower costs they make about $3 more on each film when sold
electronically.

A bigger risk
than angering Wal-Mart is that Hollywood will be undone by internet
pirates. Imaginative, reasonably priced legal products are the best
antidote to piracy: anti-piracy heads at the studios, indeed, clamour
for well stocked, convenient movie-downloading services. Fox’s Mr
Wheeler says that content owners should offer people “ubiquitous access
to our products online at reasonable prices”. Mr Wheeler also hopes
that internet-service providers can be drafted into the fight. In
November France’s president, Nicolas Sarkozy, backed a proposal to
require ISPs to detect and cut off conspicuous pirates. Britain’s government is said to be considering a similar law.

The second
reason for Hollywood’s sluggishness is that the studios and the
consumer-electronics industry have not overcome three technological
hurdles. Downloading a film still takes a long time—in America, about
30-40 minutes on average (see chart 2). Movies in high-definition
format would take about four times that. But broadband speeds are
increasing all the time. In Japan and South Korea it now takes between
five and ten minutes to download a film in standard definition.

Another
obstacle is that most people want to watch films on television, not on
personal computers—especially if they have wide, “home-theatre” TV screens. Products connecting PCs
and televisions have been available for years but have not caught on,
because they are hard to install and operate. That is changing. Apple
has just overhauled its linking gadget, Apple TV, to make it easier to use. At the CES
in Las Vegas, says Alan Bell, Paramount’s chief technology officer, new
televisions and set-top boxes that connect directly to the internet
were on show, “so the PC is not the bottleneck in getting digital content from internet services to the TV screen that people saw a year ago.”

The last
hurdle, and perhaps the highest, is the lack of common standards among
websites and devices. “Imagine if you went to Wal-Mart to buy a new DVD player and then found that your DVDs
from Best Buy didn’t work on it,” says Mitch Singer, chief technology
officer of Sony Pictures Entertainment. Movies on the internet, he
says, is “a format war on steroids”. Each download store sells
different usage rights. Hollywood is trying to do something about this.
Late last year a group of studios, retailers and consumer-electronics
firms met to discuss an idea of Mr Singer’s for a standardised
electronic movie product called Open Market. But the talks are at an
early stage, and it will be tricky to get companies such as Apple and
Microsoft to agree to common standards.

Hollywood’s
dealings with the consumer-gadget companies also betray its habitual
caution. The studios fear that Apple could become the Wal-Mart of the
internet—a giant with power to push them around, continually pressing
prices down. Maintaining pricing online is a particular worry. “People
think that if it’s online it should be free,” says one studio head. One
answer to pricing pressure online, though not a complete one, would be
to experiment with putting advertisements around films. Last year
Paramount gave a selection of films to a service called Joost
that streams them free, supported by advertising. Movies are doing very
well on the service, says Mr Lesinski. Paramount plans to conduct more
online experiments in 2008, he says. The lion’s share of its library
and all its new releases will be on the internet within a year or two.

Short of
selling films on it, Hollywood certainly knows how to use the internet
to its advantage. Its use of viral online marketing is one of the most
sophisticated of any industry. Jeff Berg, chairman and chief executive
of ICM, a talent agency, says that about 8% of
the total marketing spending on films goes to the internet; in five
years’ time, the web will take 20%. Paramount’s “Cloverfield”, a
low-budget monster movie shot as if by an amateur with a camcorder,
earned $40m in its opening weekend in American cinemas last month,
crushing the competition. It built its audience on the internet: a
mysterious trailer for another, unidentified movie led to a website and
started an online treasure-hunt for more clues. Popular movie websites
such as aintitcool.com buzzed for months about the mystery film.

Creatively,
too, Hollywood is harnessing the internet. Studios are using it to find
global pockets of interest. “If there’s 1m people around the world who
are interested in ice-fishing,” says Jeremy Zimmer, co-founder of
United Talent Agency, “we can make a movie for them.” Studios are using
their customers’ opinions to shape their films. “Snakes on a Plane”,
for instance, started off in development as a horror film. As the
project got attention online its maker, New Line Cinema, listened, and
changed the plot to be more comic in tone. Blowtorch, a young media
company making video content for 18- to 24-year-olds, is pushing this
further. It will allow audiences to influence its movies via the web.
They will be invited to vote on elements of a film’s soundtrack, an
actor’s wardrobe, or even character development.

Don’t lose it in your popcorn

ICM‘s
boss believes that the internet will lower barriers to entry for new
film-makers. “Sites will spring up specialising in independent films
and short movies,” says Mr Berg, “and these will be showcases, similar
to film festivals.” Jaman.com, a download service for independent films from around the world, is a good example. The makers of “Indoctrinate-U”,
an independent film about a lack of free speech at American
universities, have used the internet to build an audience. The movie’s website
invites people to sign up with zip codes; if enough do, local
screenings are arranged. United Talent Agency has set up a special
internet unit, UTA Online, to find and develop
new talent. The new unit encourages people to get in touch—unheard of
in the original “don’t call us” business.

In the long
term, many people expect that the internet could undermine Hollywood’s
system of exclusive “windows”. Cinemas get a film to themselves for a
period of weeks, then it goes to DVD, then to
video-on-demand and online services, then pay-cable television, and so
on. And many films are still released in different countries at
different times, usually starting in America. The system is a gift to
pirates. But the studios are wedded to it, especially the cinema
window.

The internet creates immediate global awareness of movies, says Reed Hastings, chief executive of Netflix, a DVD
rental-by-mail company, so the studios are increasingly choosing to
release films at the same time everywhere. They have already shortened
their windows, he says, and that could be a step towards getting rid of
them. As people buy home-theatre systems and the convenience of the
internet makes it even harder to get people out of their homes, the
cinema window will come under ever greater pressure.

It will
doubtless take Hollywood a few more years to work out how to deliver
films over the internet. Meanwhile, studios and retailers are poised to
introduce movie-download kiosks, using flash memory. Several companies,
such as MOD Systems, of Los Angeles, have cut
download times to a few minutes; Ireland’s Porto Media claims a time of
17 seconds. The idea is to put kiosks in such places as shops, airports
and petrol stations. Using Porto Media’s system, films are downloaded
onto a tiny device (pictured) which plugs into dock attached to a
television. Kiosks could hold more titles than physical video shops and
would never be out of stock. Twentieth Century Fox is looking at
several competing kiosks, says Mike Dunn, head of the studio’s
home-entertainment unit. It will test them this year.

“The
flash-memory-enabled kiosk is an interim solution which overcomes many
of the weaknesses of the present model and the current deficiencies of
the internet,” says Mr Lieberfarb, who is on the board of MOD
Systems. Customers will get used to downloading films and transferring
them between devices, which will prepare them for proper online
distribution. Kiosks will make money for retailers too, so that they
could help the studios keep Wal-Mart and others sweet. That is the kind
of careful step forward that even Hollywood can dare to take.

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