YouTube as Video Store

How the site’s modest new movie rental service could radically change the way Hollywood does business.

Internet famous still doesn’t quite cut it in the film world. Last week, at the Sundance Film Festival in Park City, Utah, YouTube held a press conference to launch its brave new $3.99 video rental service  and introduce its featured filmmakers. Unfortunately, after opening remarks, everyone was promptly ejected. Yes, Google does have a market cap of more than $170 billion, and YouTube welcomes more than 1 billion viewers a day. But Robert Redford, apparently, wanted the room.

YouTube isn’t just having trouble booking a hall. Its new video rental service has been criticized and even mocked. The idea is to use the familiar YouTube format to allow users to rent films that as of now are not available in the theaters or through other traditional forms of distribution. The service’s initial offering is five independent films that in their opening weekend grossed something like $6,000.

YouTube’s own users were among the critics, seemingly offended by the idea of paying for anything. “The beginning of the end,” wrote one user in comments; “i thought the purpose of youtube was to watch videos for free.” Another wrote that “Youtube is seriously [sic] selling out,” apparently unaware that YouTube, in fact, already sold out to Google in 2006 for $1.6 billion.

Yet big things have small beginnings, and it’s a mistake to underestimate what YouTube and Google are doing here. It is true that Apple and Netflix, its rivals, have their own online rental services and currently offer much more product. But YouTube’s service is more idealistic and more radical, aspiring not simply to succeed in the film industry as it is but to challenge its very structure. In that sense, it is a cousin to Google’s other projects, like Android, whose immediate target is less market share than industrial change.

What YouTube wants to create is what it calls an “open platform” for film distribution. According to group product manager Jim Patterson, YouTube has designed a platform that will “provide a level playing field that treats large content and small content equally, where a film can rise to the top based on its popularity alone.” That might not sound all that revolutionary, but it is—film distribution hasn’t been open or neutral since 1894 or so. What YouTube rental offers is a vision, however far off, of a future where independent film is the norm, not the exception; where filmmakers rise in viral fashion online; and where producers are masters of their own destiny.

To say there is room for change is to state the obvious. The movies remain the only media industry generally unaffected by the rise of the Internet. In 2009, despite the wobbly economy and the supposed threat of Internet piracy, the industry posted more than $10 billion in domestic box-office revenue, the highest in history. The revenue from DVD sales and rental was roughly $17 billion. Online film sales, which YouTube would be a part of, meanwhile, accounted for just $100 million, or 0.3 percent of total feature film revenue.

How has the American film industry remained unaffected by changes in technology over the last decade? One reason is that films take forever to download, and a computer isn’t a perfect substitute for a movie theater or, for that matter, a big TV. What’s more, the Hollywood studios have retained their strong control over the distribution of films—both their own, mainstream films and those made by independent producers.

Yet at the same time, movies are no longer truly scarce or expensive to make. If you’re willing to set aside special effects or name-brand actors, the costs of making a film have gone way down. Still, as things stand, a filmmaker needs to find a distributor if he wants to reach anyone outside of the festival circuit—because only distributors have the relationships with exhibitors, cable companies, and the stores that do DVD rentals and sales. Most films reach the world through the studios and a handful of other distributors, who decide, in effect, what films make it into theaters and which will never be seen outside the festival circuit or even the editing room. Nearly 10,000 films are submitted to Sundance every year, and of those, last year, a grand total of 53 made it to theaters.

Today, most independent films play at a few festivals and then disappear forever. The average Sundance film from 2008—say, A History of My Sexual Failures,one of my favorites that year—isnearly impossible to get your hands on in any form. Online distribution could change this. It could even change the balance of power. YouTube rental and similar products at Apple and Netflix are the apparent heirs to the DVD market and, as such, have the potential to control the bulk of film revenue. So far, however, the online firms have been more part of the system than a challenge to it. Apple’s online store is a virtual DVD store, with roughly the same schedule of release and the same prices. Netflix, unlike Apple, maintains a giant inventory but is also attached to the current distribution system. As Netflix explains on its Web site, “First and foremost, Netflix accepts submissions from distributors with whom we have relationships.”

What’s different about YouTube is that it aspires to be an “open platform” for all film, not just a carrier of products already picked up by distributors. In other words, it wants to offer filmmakers an opportunity to leapfrog the distributors and reach customers directly.  A filmmaker, in theory, could use YouTube rental to build up a “viral” base before moving onto a theatrical or cable deal. If a producer can get her film started by reaching consumers directly, the films that succeed will, to an extent never seen before, depend on the decisions of customers, not studios.

That vision is admittedly idealistic, and extraordinarily difficult to reach. A major hurdle for YouTube’s idea of an open platform is that distributors, who still hold the power, won’t put up with it—that is, they’ll refuse to deal with any producer who makes his film available on YouTube. According to Mynette Louie, producer of Children of Invention, one of YouTube’s five launch titles, distributors are used to a progression that goes “theatrical, cable VOD [video on demand], DVD, online,” and “any deviations from this freaks them out.” Distributors, in a sense, want virgin films, not films that have been online. That means it may be hard to use YouTube to get publicity, if the very act of being on YouTube is seen as spoiling the film for any other form of distribution.

There’s also the fact that most filmmakers want to make films for theaters, not computer screens. So unless YouTube buys theaters, in some ways its impact may be limited; the theater remains the place where a film earns a reputation, one that eventually leads to DVD sales. That sentiment was captured by filmmaker Galt Niederhoffer, whose film The Romantics, starring Katie Holmes,was one of the breakout films at Sundance. I asked her whether she’d ever consider using YouTube rental. “I’ve got nothing against YouTube, and I’m not a snob,” she said, “but this movie was made for the big screen.”

The question is whether such concerns are nothing more than adjustments, mere hurdles rather than deal breakers. YouTube is in this for the long haul—it has a day job—and its parent, Google, understands the power of a business strategy that seeks not to succeed within the system but to try to change that system from its foundations. It may not happen right away, but one day, films may begin their lives small, in the online world, and graduate to the big screen.