Rebuilding Hollywood in Silicon Valley’s image

Last week I posted a rather pointed polemic titled “Suicide by strike” in which I argued that the big entertainment companies were acting suicidally in picking a fight with the writers at precisely the wrong time.

In this post, I more dispassionately outline my theory of why that’s the case, and what I think may happen next.

The writers’ strike, and the studios’ response to the strike, may radically accelerate a structural shift in the media industry — a shift of power from studios and conglomerates towards creators and talent.

First, some context. In Hollywood, the talent — actors, directors, writers — is unionized, and those unions engage in old-fashioned collective bargaining with the studios, also known as “the Man”. That collective bargaining establishes the economic framework by which most of the talent gets paid.

Last week, the writers’ union — technically unions, but I’ll use the singular form for simplicity — went on strike for the first time since 1988 after an acrimonious breakdown in negotiations with the studios over a new deal.

Significantly, the actors’ and directors’ unions are due to renegotiate their deals with the studios soon as well; some people in Hollywood believe that the studios are being deliberately hostile to the writers in order to send a signal to the actors and directors to not expect much.

The writers are on strike primarily over the terms by which they get paid “residuals”, or ongoing payments, for various forms of distribution of television shows and movies. In a simplified nutshell:

     

  • Due to amazing historical circumstances around the birth of the VCR in the early 1980’s, television and movie writers are currently paid approximately 4 cents for each DVD sold — bearing in mind that the average sale price for a DVD is over $10, and the cost of manufacturing a DVD is less than 50 cents. The writers want that residual rate doubled to 8 cents per DVD, and the studios are refusing.
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  • Currently, writers are not paid for Internet downloads via online video stores like iTunes and Amazon Unbox. The studios want to extend the current 4-cent DVD residual formula to Internet downloads; the writers are holding out for more.
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  • The studios are refusing to pay residuals on Internet streaming of television shows and movies — even when that streaming comes from their very own web sites and contains revenue-bearing commercials. The studios call all such streaming “promotional”. The writers are howling with outrage that if the studios themselves are streaming complete TV shows containing commercials, that’s clearly not just “promotional”. The writers have a good point.
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Taken on their own, these issues are most likely negotiable and solvable. However, trust between the two sides seems nearly nonexistent; the writers feel like they have been repeatedly burned by the studios over the last few decades; and the studios may well have a vested interest in beating up the writers in order to motivate the actors and directors to not push too hard in their upcoming negotiations.

And so, the writers are on strike.

How long will the strike last?

Nobody knows. The strike of ’88 lasted for up to five months. Some people in Hollywood think this strike could last until June 2008 or beyond. Or perhaps it gets settled tomorrow.

What happens if the strike continues for months?

Movie production will apparently be largely unaffected for quite a while; the movie studios have stockpiled scripts and are continuing to shoot new films.

Television, however, is a very different picture.

Scripted television production is already all but shut down. Most late-night talk shows are shut down. Most remarkably, many comedy and drama series are either already shut down or will be within the next several weeks. Why? Two reasons: first, television shows often don’t have scripts in hand for more than a few weeks of filming at any given time. Yes, Virginia, the writers of “24” really don’t know how it’s going to end when they start filming a new season. Second, many television shows are run by so-called showrunners who serve as both writers and producers; many showrunners are now refusing to work altogether — and the studios are already threatening to sue them for refusing to honor their producing contracts, further fraying relations.

If the strike continues into next spring, you won’t see new episodes of most scripted TV shows past Christmas — you’ll see reruns, and reality TV. Some people on Hollywood think this could permanently kill many of the shows currently on network TV — i.e. they may never start back up. (MTV’s “A Shot At Love with Tila Tequila” will, however, be unaffected.)

If the strike continues too far into next spring, it will also disrupt the production of pilots, which will mean that there won’t be any new shows for the fall 2008 TV season, which means you might not see new TV programming other than reality shows until 2009. 2008 may be, quite literally, a dead year for TV.

OK, now let’s get into my theory of how this may play out…

What are the probable long-term consequences of an extended strike?

First, ongoing alienation of a new generation of TV viewers.

The music industry’s war on digital distribution over the last 10 years, starting with their assault on Napster and continuing to all the present-day RIAA fiascos, has permanently alienated an entire generation of consumers, who are now voting with their wallets and not buying music. They’re still going to concerts, buying artist merchandise, buying video games that contain lots of music, even voluntarily paying Radiohead directly for free album downloads — but mainstream recorded music revenue is dropping like an anvil in a Bugs Bunny cartoon, with virtually no hope of recovery.

The TV and movie industry has already been conducting their equivalent war on digital distribution; as a result, most of the new consumers — kids, college students, young professionals — view iTunes and Amazon Unbox downloads as “too little, too late” when it comes to giving them the ability to watch what they want, when they want, on whatever device they want.

I think the TV and movie industry is at a turning point where things could go either way — they could repeat the critical error of the music industry and permanently alienate their customer base; or they could get it together and create viable models for the future that make consumers happy and make money.

The situation already wasn’t looking too good, but the one even more effective way to alienate viewers than attacking their viewing options is to actually kill the programs they are watching.

Which is what an extended strike will do.

Second, driving consumers even faster to the new range of activities they can engage in.

We all know the list: the Internet, social networking, user-generated content, blogging, video games, mobile phones, you name it. All the activities that consumers have discovered and adopted since the last writers’ strike in 1988, that they just love, and that have already been siphoning away time, attention, and money from TV and movies even without a strike.

Obviously, the less scripted television and film content that’s being produced, the more alienated consumers will shift over to all the new activities — and the less likely they will ever go back.

Third, and most significantly: catalyzing faster development of new business models for entertainment media.

Here’s where things get really dramatic.

The Internet has already been forcing a rethink of the structure of the media industry, particularly for entertainment. The strike is kicking that rethink into high gear. Here’s why:

The classic Hollywood economic model is built around the existence of a few very large companies — studios — that dominate production, marketing, and distribution.This has been the economic model since the birth of the entertainment industry, for fundamental reasons.

     

  • Historically, marketing and distribution of entertainment properties has been extremely expensive. Running big nationwide ad campaigns and getting distribution into TV networks or movie theater chains is expensive. And production has also been very expensive. Only a small number of very large companies can afford to be in the business.
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  • Because of that, those few very large companies — studios — have been bottlenecks. If you are talent — writers, actors, directors — you have to deal with the studios because otherwise you can never bring anything to market.
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  • The studios have rationally exploited their bottleneck status to demand ownership of the creative product. Writers, actors, and directors don’t own their output; the studios do.
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  • As a consequence, talent gets paid like hired guns, not owners.
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  • As a consequence of that, talent bands together to form unions — actors’, directors’, and writers’ unions — and engage in adversarial collective bargaining to try to extract a share of the ongoing economics of their output. Hence the residual system that’s in dispute today: 4 cents per DVD.
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Let’s contrast all of that to the Silicon Valley model.

In Silicon Valley, there are many companies, large and small, that create, market, and distribute products — and more such companies all the time. In fact, there is a whole industry — the venture capital industry — devoted to creating as many new such companies as possible, as rapidly as possible.

     

  • In Silicon Valley, creation, marketing, and distribution of a compelling new product is not very expensive. And with the Internet, marketing and distribution costs drop nearly to zero. Most successful Internet companies, large and small, use free viral marketing techniques and never run ads. And the whole concept of distribution costs goes away when everything is digital — the next set of bits costs nothing to manufacture.
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  • Therefore, there are no bottlenecks. Many companies, large and small, can afford to be in business — can afford to develop new products and bring them to market, market them and distribute them. And nobody can really block you.
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  • In Silicon Valley, the creators of the product — the talent — are owners: owners of their product, and owners of their company. In fact, the entities that finance the companies — venture capitalists, private equity funds, the public stock market — want the creators to be owners: in a world where there can be many companies, the best creative talent will be drawn to the situations in which they will be owners, and will be compensated as owners.
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  • Because of that, in technology, creators get paid like owners.
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  • Therefore, there are no unions. There is no reason for the creators to unionize — they would be negotiating with themselves. The concept of residuals does not exist — they’d be paying themselves. And alignment of interests between creators and financiers is near-perfect.
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I believe the entertainment industry is in the early stages of being rebuilt in the image of Silicon Valley.

What would a new entertainment media company, producing original content, look like in the age of the Internet?

     

  • Starting from the end of the process: you know distribution is now nearly free. Put it up on the Internet and let people stream or download it.
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  • Marketing is also free, due to virality. Let people email your content to their friends; let people embed your content in their blogs and on their social networking pages; let your content be searchable via Google; let your content be easily surfaced using social crawlers like Digg. All free.
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  • Production is very cheap. Handheld high-definition video cameras cost nearly nothing. You can do almost every aspect of production and post-production on any Mac. Hell, you can even score an entire movie for free — there are hundreds of thousands of bands on the Internet who would love to have their music embedded in a new entertainment property as promotion for the bands’ concerts and merchandise.
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  • The creators of the content are the owners of the company. The writers, actors, directors — they are the owners. They have a direct, equity-based economic stake in the company’s success. They get paid like owners, and they act like owners.
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  • Financing is straightforward: venture capital, just like a high-tech startup. We live in a world in which financing a high-quality startup is simply not difficult — not for a high-quality technology startup, and increasingly not for a high-quality media startup. Modern financiers love being co-owners of a new company with the talent that will make the company successful — and that’s how it will happen here.
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This is not a difficult thing to envision. And in fact, it’s already happening. Will Ferrell’s Funny Or Die, in which I am a minority investor, is one early existence proof of this model. And there are a ton of other such new companies either already underway, or currently being incubated, or currently being negotiated.

And in fact, there are a lot of historical precedents even in the media industry for the model of talent as owners, going all the way back to the original United Artists in 1919. Some of those precedents worked great — George Lucas, for example. Some flamed out. Of course, they were all up against the bottlenecks.

But here we are, living in a world in which the bottlenecks have suddenly become irrelevant.

I don’t think there’s any question that this is the logical model to pursue in the age of the Internet — the age of free distribution and marketing.

Suppose the writers’ strike continues for months to come — and even beyond that, suppose the actors or the directors also go on strike. In such a scenario, it is hard to see how many companies based on this new model won’t be created extremely quickly — after all, if you really can’t work for the Man, why not start your own company, if you can?

And if you are a primary creator in Hollywood, the model for starting your own company is suddenly becoming very clear.

Which brings me full circle to why I’m even writing about this topic in the first place.

As consumers — even alienated consumers — it would be sad to see the TV shows and movies we love not get made during a protracted strike. And certainly many people throughout the extended ecosystem of the entertainment industry — most of them not rich and not famous — will suffer financially.

However, in the event of a long-term strike, out of the ashes of the traditional model would — I believe — come the birth of certainly dozens, maybe hundreds, and possibly even thousands of new media companies, rising phoenix-like into the global entertainment market, financed by venture capital, creating amazing new properties, employing large numbers of people, and rewarding their creators as owners.

As an entertainment consumer, I’m ready for it, and I suspect you are too.

Hollywood, rebuilt in Silicon Valley’s image.