The Hollywood Economist

Hollywood’s New Year

My predictions for 2006.

One doesn’t need a crystal ball to see that Hollywood’s future is now inexorably tied to the small screen. Just look at the studios’ own internal revenue numbers. Before the invasion of television, the big screen (aka movie theaters) provided 100 percent of the studios’ revenues. Now it accounts for less than 15 percent. The small screen—which includes computers, portable DVD players, and iPods as well as televisions—provides 85.6 percent. To be sure, much of Hollywood’s celebrity culture, and the entertainment media that feeds off it, remains rooted in nostalgia for the big screen. Meanwhile, the MBAs that run the studios—and their corporate owners—have come to grips with the cruel reality that the movie business is no longer primarily about movies, it’s about creating intellectual properties—the current term of art for a movie, TV series, or game—that can be sold or licensed for personal entertainment in a raft of different forms and markets. According to my crystal ball, the further migration of Hollywood—even with its sticky celebrity culture—into home entertainment will be greatly accelerated in 2006 by the following five events:

1. The success of Google’s Wi-Fi experiment in San Francisco.

In October 2005, Google offered to provide a Wi-Fi service that would enable anyone in San Francisco to connect without charge to the Internet. Google would make its profit not from an access charge, but from the ad revenue an entire broadband-wired city would provide. If the experiment proves successful—and Google’s Wi-Fi platform proves stable—nothing will stop the company from rapidly extending this concept to other cities. Reportedly, Google has already lined up unused fiber-optic cable that spans the country. Such a free Wi-Fi network would mean that the Hollywood studios would no longer need to rely on cable operators—or even telephone companies—to have a two-way pipeline into homes. They could directly rent any movie to consumers and bill their credit card (like everything else is billed on the Internet) without paying a cut to cable operators or local televisions stations.

2. The further collapse of the video window.

Up until recently, the studios gave theater owners a five- to six-month window before a movie was released in video stores. But now with mass merchandisers selling most of Hollywood’s DVDs—Wal-Mart alone accounts for over 30 percent of DVD sales—the pressure on the studios to time their release in accordance with retail selling seasons, such as Thanksgiving and Christmas, is becoming nearly irresistible. After all, a single Wal-Mart order can amount to $100 million. So, as the studios dance to Wal-Mart’s tune, the window between the theatrical release and the DVD release can be expected to further shrink, if not disappear entirely. As a result, more and more people will choose to wait for the DVD instead of going to the theatre. The resulting loss of audience will then further speed the death spiral, which will eventually drive many theaters into bankruptcy.

3. The proliferation of digital video recorders.

The digital video recorder has a variety of flavors—stand-alone DVRs such as TiVo, portable DVRs such as the iPod, and integrated DVRs such as those offered by Time Warner—that allow consumers to easily capture movies and TV programs and then watch them when it is convenient. As the universe of digital channels continues to expand—the telecom giants Verizon and AT&T plan to pipe thousands of channels through telephone lines—the DVR will be the ultimate enabler of home entertainment. Only 9 percent of households in America now have DVRs, but as the cable and satellite providers replace their customers’ cable boxes with integrated DVRs in the next three years, that number will mushroom to over 40 percent. Such a plethora of personal entertainment (including news) that can be watched whenever the viewer wants to, without commercial interruptions, will take a huge chunk out of the “clock” of potential movie-goers. The studios depend upon a large number of people to turn up at theaters on opening weekends, but soon these moviegoers will have the alternative of watching a downloaded movie or TV program.

4. The Blu-Ray DVD.

When the Blu-Ray DVD is introduced in 2006, it will have the backing of all six Hollywood studios as well as all the major computer manufacturers. Its virtue for Hollywood is that, although it is the same size as the present DVD, the Blu-Ray can hold six times as much data on multiple layers. This immense storage capacity will allow studios not only to re-release their libraries in the high-definition format, but to add whole new products to the package. For example, Sony, which has helped pioneer the Blu-Ray and will equip its PlayStation 3 with it, is considering adding 3-D versions of movies. Since some of the multiple layers can also be used to record material downloaded from the Internet, the Blu-Ray will also allow studios to sell consumers add-on interactive games, musical videos, and even sequels to the movie.

5. The mandated digital conversion of television.

Congress passed legislation in December requiring that all television signals be converted from analog to digital by Feb. 17, 2009. This means that Americans who don’t want to buy a converter box will need a digital television set. Nowadays, most digital TVs sold are equipped for high-definition. So, in the next few years, a huge part of the population will be able to watch a picture at home—whether it is a football game, a made-for-TV series, or a reality show—that approaches in visual quality the fare in movie theaters. As a result, digital HD television will deprive theaters of a significant part of their audience. The Hollywood studios, as the kings of content, will profit the most from the transformation of the entertainment economy. The theaters and cable operators (unless they can acquire their own content), on the other hand, will have a much more difficult time surviving the increased competition for the clock and wallet of the audience. And the couch potato will have many more, though not necessarily better, reasons for staying home.

Happy New Year.