Film Fund-amentals: The Strange Nature of the Digital Evolution

As we all know, Betamax was better than VHS. Vinyl records were superior to a CD. Personally, I suspect it is safer to take a printed book to the bathroom than a Kindle (OK, I haven’t been quite the same since I was caught sitting in the bathroom during an earthquake).

But none of this matters. Quality is not the determining factor in the digital evolution (I am calling it evolution rather than revolution because the process is closer in spirit to Darwin than Marx). Betamax lost out to VHS due to a variety of bad business decisions. CDs took over from LPs largely because of their greater portability. The sound quality became secondary. To be honest, my assumption about Kindle and the bathroom is based on personal hysteria.

The factors that determine successful change within the digital domain go way beyond the merely technical. Instead, they are a chaotic mix of business strategies, sociological attitudes, cultural assumptions and individual adaptability. Then add in the greater economic scene and the fickle (and nearly unpredictable) nature of the buying public. If you were to chart these factors, the result would resemble a PowerPoint presentation created by a deranged chimp.

Both the film and recording industries have spent more than 25 years trying to adapt and control the changes being caused by digitalization and the Internet. The mainstream record business is half-dead while simultaneously various forms of online and downloadable approaches are rapidly developing. The film industry is going through many of the same changes. Digital screenings (and digital distribution) are becoming common at theaters. The major companies are beginning to move aggressively into the VoD market. Publicly, Hollywood has taken on the digital challenge and is ready to steer its way into a future so bright every studio executive will have to wear shades.

Last Wednesday, Variety announced that the summer box office of 2011 is about to break the record set in 2009. It sounds as if the Hollywood plan is working. Or at least it does until you put it into context. For example, the cost of movie tickets has sharply risen during the past two years while audience attendance has dropped. In turn, most of the summer box office has been dismal, with only a few movies doing any amount of serious business. Ironically, the few titles that did well were ludicrously large hits, reaching over a billion dollars each (the billion mark is the new standard for tent pole productions).

However, since movies like Harry Potter and the Deathly Hallow Part Two and Pirates of the Caribbean 4 basically cost around half a billion to make (once you tally up production as well as PR and all other connected costs), that big global profit mark just isn’t too hot. The only movie this summer that actually has produced an enormous return on investment is The Help. Made for around $25-$30 million, The Help has currently taken in $118.6 million in US box office and has a near stranglehold on the number one slot. Technically, it has done more business than the last six big movies made with Johnny Depp (and Depp is one of the few marketable stars out there).

In reality, the current Hollywood strategy is not working. Privately, most studio executives know this and are feeling desperate. That is why they are so busy storming the digital playing field in a heated attempt to take control. This is part of the reason why the question of internet piracy has been a hot issue in Congress, various majors have been fighting against Netflix, Viacom is still trying to win an appeal in its suit against YouTube, and everyone is trying to cozy up to the social media sites.

But they will most likely fail because of their own mis-assumptions. The current emphasis on the over-produced tent pole movie is based on the idea that the audience will go to the theater for an extravaganza. But the audience drop is most noticeable with these movies. The current data do not support the idea that the audience is chomping at the bit for more ultra-expensive superhero movies (unless it’s Batman).

They hope that 3D will save the business. But it won’t. A few 3D movies have hinted at the superior possibilities of the new digital process. Most 3D films could have been directed by a blind man and nobody would have known the difference. The most important thing that modern 3D has done is to pave the way for total digital production and distribution. This new approach will be of great value to indie filmmakers, since it vastly reduces costs at both ends of the process. Of course this wasn’t the intention of the major companies, but it is the inevitable outcome.

The major companies will ultimately fail in their attempt to control the VoD market. They are still too bound to the cable TV distribution format to fully comprehend the radical difference in this rapidly emerging form. They are offering too few titles at too high of a fee to truly excite (or even attract) the online crowd. They seem convinced that people will pay more for quality entertainment. A few of these folks may also still have a Betamax stashed away somewhere in their office.

But the biggest problem for the major companies is the issue of centralized control. Every Hollywood studio is part of a massive corporate structure. They may or may not be too big to fail, but they are certainly too big to understand anything outside of this type of structure. By comparison, the digital world has no center, very little structure in any corporate sense, and largely floats between a wide variety of individuals and concerns. The conglomerate world is composed of massive interlocked divisions that operate in a top-down hierarchical structure. The digital world has no top, no down, and is structured in a non-linear order that often defies national borders and any single company’s control.

Which is why I keep emphasizing that the folks in Hollywood haven’t a clue what is hitting them. This is also why the indie structure is the only one that can, ultimately, withstand the massive process of evolutionary change that is beginning to take place in the business.