27 January 2008

The New Studio

I have a bet with a colleague. It's a very serious bet with the highest possible stakes (No, silly, not our immortal souls. A bottle of good Scotch).

My colleague thinks that either movies or music will still be sold with Digital Rights Management in 2012. I, on the other hand, know DRM will be long gone by then. It should be gone now, because it doesn't work. But that's not why it will be gone. It will be gone because it's bad for business.

DRM is bad for business for lots of reasons, but the most important reason is very, very simple.

All products generate sales by exposing people to the product. People who are exposed to the product and don't like it aren't potential customers; they'll never pay. The people who like the product after they're exposed to it are potential customers; they're the addressable opportunity - the "fan base". The people who like the product and decide to buy it are the paying customers. The trick in business is to maximize the number of paying customers.

The first step in the DRM business model is this:

  1. Shrink the fan base by making it impossible for potential fans to try the product.
Any business model that starts this way will be destroyed by a business model that increases the size of the fan base.

The music industry has figured this out, and DRM for music is already dead. Every major label now sells DRM-free music, and Radiohead has proved pretty conclusively that people will pay good money, voluntarily, if you put good music up on the Web with no restrictions. Not only that, they'll pay a premium for limited-edition collector's sets, and they'll still buy shipping containers full of your CDs - and your brand new vinyl LPs.

It's amazing that it took Steve Jobs to teach the music business that DRM was a bad bet; after all, record label executives are the same people who used to bribe DJs to give music away free on the radio. But two cheers to the labels anyway; freeing music will result in more music and better music; it may even allow artists to keep some of the money they are currently turning over to agents, managers, and label executives. (well, ok, probably not. But we can always hope.)

Hollywood is lagging behind the music business; Hollywood still hasn't admitted that the DRM business model is a guaranteed loser. There's a reason Hollywood hasn't admitted this: the stakes are too high. As Upton Sinclair famously put it, "It is difficult to get a man to understand something when his salary depends on his not understanding it".

Hollywood isn't run by people who watch movies or who make movies. It's run by people who fund movies. The purpose of a modern movie studio is not to make movies. It's to make money. A lot of money. Not for directors or actors or writers (especially not for writers!), but for studio executives and producers. Whether the movies are good is a minor concern. The major concern is whether the revenues are good.

At this point I want to make it clear that I am a capitalist, and I'm completely behind the idea of businesses making a profit. The problem I have with the Hollywood studios is that their business model is increasingly driving them to try to make more money by making the product worse. This is bad for the audience, of course, because it means we have to watch a lot of awful movies. But in the long run it's also bad for the studios, because it means that someone is going to come along and put them out of business by making a better product for less money (Clayton Christensen explained how this phenomenon kills successful companies in his book "The Innovator's Dilemma". If you're a studio executive, read the book. Now, before it's too late. If you're too busy to read the book, you can just read the Wikipedia entry.)

Movies are hugely expensive today. Paying movie stars is very expensive; exotic locations are very expensive; special effects are very expensive; unionized crew and soundstages are very expensive; and distribution and advertising are insanely expensive. If you believe Wikipedia, the average cost to produce a Hollywood feature is now about $50 million; the cost of advertising and distribution drives the total to $100 millon.

This is a big problem for the studios. If you're spending $100 million, you can't afford a failure. You've got to make the $100 mil back just to break even.

You might think people who are putting $100 million into a movie and who can't afford a failure would make damn sure the movie was great.

You'd be wrong.

You can't make a great enough movie to guarantee $100 million dollars in ticket sales; almost no stories are that good, and almost no movies are that good. Even movies which are that good won't necessarily make $100 million - maybe they'll just win a lot of Oscars and change the way a generation thinks about the world - and leave you famous and $80 million in debt.

Studio executives are smart businesspeople. They know they can't make a good enough movie to earn a profit on a $100 investment. So instead do the only thing they can. They make movies which will sell more than $100 million worth of tickets even if they suck.

They do this by appealing to their audience the same way the Roman emperors appealed to their audience: bread and circuses. Brad Pitt all oiled up in leather armor? You got it. Bruce Willis crashing a car into a helicopter? No problem. Halle Berry giving a blowjob? Absolutely. You want the good guys to win? We can do that. Want the guy to get the girl? Why the hell not?

This stuff is mesmerizing in the previews. But once the audience gets into the theater, the game's up. The audience figures out very quickly that they've been tricked. The story makes no sense. The special effects are just a gimmick to distract us from the boredom of the action. The sex isn't as good as what we can get free on the Internet. The characters are two-dimensional robots; we hope in vain that they'll die.

By the time the audience is in the theater, though, it's too late - the studio has won. All the studio needs is four days. Opening weekend. The studio makes its money before the audience realizes the movie sucks, and before they can tell their friends. The chumps who wander into the theater a week later, or watch the movie in foreign markets, or buy the DVD, are gravy.

Theater owners and distributors love this. Zillion-dollar blockbusters with lots of sex and blood and explosions and huge advertising budgets keep the seats filled, and the money keeps pouring in.

The dark side of all this, of course, is that there are no theater seats left for good movies - especially good movies with small advertising budgets. Even if you save your pennies and make a very good movie for $1 million, you still have to pay $40 million in advertising and distribution to compete with the people who make bad $100 million movies.

Actors and directors know this, and they do things to try to sneak the occasional good film into the theaters. George Clooney makes movies that suck (Ocean's Twelve) to earn enough money to advertise movies that don't (Good Night and Good Luck). Robert Redford runs a festival whose whole purpose is to convince distributors that good movies have a big enough audience to fill a few of their valuable seats for a week or two.

All this explains why DRM makes sense to movie studios; the single most important thing a studio has to do is to make sure nobody sees the movie before opening weekend. Because if anybody sees it early and starts telling people it's no good, the whole house of cards collapses, and everybody loses giant piles of cash. If DRM can allow studios to send the movie to reviewers and Oscar voters without taking a chance that a copy will get loose and screw up the release - well, bring it on! If it can protect dailies and rough cuts and test screening copies from escaping into the wild - hallelujah! This is the most important reason studios use DRM; preventing DVD piracy is nice, but a tax on recordable DVDs would do that job just as well, and a tax on DVD drives or computers would solve any problem the studios might have with P2P sharing.

The elephant in the room is this: Seats don't watch movies. Peoples' eyes do. And movie fans can use their eyes even if they're not in a scarce and expensive movie seat.

If you can make a good movie really cheap, the Internet will let you distribute it free to many more people than you could ever get into all the movie theaters in the world for a weekend. And if you can make a good movie really cheap, you don't need to get paid very much to make a profit.

This means you can take a chance the Hollywood studios can't take. If you can make a movie really cheap, and distribute it for free, you can afford a flop. If people don't like the movie, you're out a few bucks but you don't have to sell ten thousand pounds of crystal meth to pay your creditors. But if people really love it, you can make a lot of money. And you can make money lots of ways - you can charge for downloads, you can charge for DVDs, you can charge for posters, you can charge for action figures. You can even charge distributors to show your movie in a real theater, because you've already proved that there's an audience.

Wanna know a secret?

You can make a good movie really cheap.

Just ask Robert Rodriguez. (And he did it back when it was still pretty hard; you're much better off. You can buy your own HD camcorder for less than $1,000. Not chicken feed, but not close to $100 million. You'll need a good script and good actors, of course, but hey - nobody promised you a rose garden.)

The Hollywood studios know this.

It frightens them.

It should.

Someone's going to come along and create a New Studio. It's going to have a new business model that lets creative people make a decent living making good, cheap movies. It's going to trust its audience to pay for quality films. It's going to grow its fan base by distributing entire movies on the Internet with no DRM, just as Radiohead distributed music on the Internet with no DRM. And if the old Hollywood studios try to compete against it with DRM-encumbered movies that shrink their fan base while the New Studio grows its fan base, the Hollywood studios are going to die.

Mike Masnick at Techdirt has already explained the theory of how to make money selling free goods. I won't try to summarize Mike's Grand Unified Theory of the Economics of Free because I want you to read the real thing. But I do want to agree publicly with what I think is his most important point:

"Saying you can't compete with free is the same as saying you can't compete period."

I'm going to try to apply Mike's theory to the movie industry by posting a business plan for the New Studio. I'll do it in chapters. I hope you like it. I hope you use it. I'm waiting to see your movies.

Maybe you don't believe it can be done; fair enough. But if you don't think you can compete and make money by selling people things they could get for free, I want to ask you one question.

When was the last time you bought a bottle of water?

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Blogger Harwick Family said...

Thought provoking, Bob. The barriers to entry on making a movie are fewer given the falling price of technology. The barriers to entry to distribute the movie are falling due to the internet. All that is left for the sea change to occur is people getting comfortable with getting their movies on the web. The closer we get to full integration of the TV, Internet and Computer, the closer we are to the sea change happening. Not sure it will take us until 2012.

January 28, 2008 10:13 PM  
Blogger Crosbie Fitch said...

Another thing that's left to do is to find a way to enable large web based audiences to fund such movie production.

Say, a quid per movie from each person who'd like to see it made?

As you know the bulk of the work is in thinking up the domain name. e.g. quidmovies.com. Inevitably, there's a wee bit of coding to do too, but that won't take very long.


January 29, 2008 3:58 AM  
Blogger Silona said...

Those last two paragraphs AMAZING

when was the last time you bought a bottle of water?

February 13, 2008 11:01 AM  
Blogger J. Robinson Wheeler said...

I've already been implementing this scheme, to the point of having already made one movie for such a low cost it was essentially free, and made its cost back after selling a few hundred DVDs via a website. The next step, to where I am connected to other filmmakers in order to act as a mini-studio that is regularly producing movies or episodic videos -- that hasn't happened yet. But I've been talking and thinking about this since the early 1990s, before the technology made it feasible.

I'm in Austin; maybe we'll meet and talk some day.

February 13, 2008 3:30 PM  
Blogger Bob said...

I'd love to talk to you, jrw. You can send me flicrkmail if you have a flickr account, or contact me via my employer: www.burtongroup.com

February 13, 2008 9:47 PM  
Blogger La-Mirada-del-Caminante said...

Bob, this makes fascinating reading. Your thesis is strategically sound and full of logics. I would love to be able to use it in my own lectures on Marketing. Might I?

BTW, "The Wanderer's Gaze" (La Mirada del Caminante) identity hides your Spanish friend Alberto Conde and his photography pre-conditioned and prejudiced eyes.

February 18, 2008 3:59 PM  
Blogger Bob said...


You're totally free and welcome to use anything here in your lectures! Thanks for reading!

February 18, 2008 11:43 PM  
Blogger La-Mirada-del-Caminante said...

Many thanks, Bob.

Of course, I'll quote the author of these thoughts...

February 18, 2008 11:50 PM  
Blogger Unknown said...

Hi, Bob - I'd like to catch up. Would you please contact me at gerry_hackett@yahoo.com if you would too?

Thanks, Gerry

February 20, 2008 9:44 PM  
Blogger David said...

I don't normally read the IBM Systems Journal, but the latest edition is on Service Science, Management and Engineering. The first article explains the difference between product-dominant logic and service-dominant logic, which leads me to a question I have been playing with for a while. Where does the music or movie really exist? Is music a product or a service?

In product-dominant logic, the product is created away from the consumer, who diminishes its value through consumption. Since the value created is in the product, ownership of the product is the key control point. Our education and thoughts on economy have been based on this idea since the Industrial Revolution. DRM is founded in the notion that control of the media is control of the value.

The disruption that began with digital renditions of music is the loss of control over the media ownership and presumed value creation. Service-dominant logic says that value is created in the interaction with the customer, and in fact, co-created with the customer. So, the music does not exist until it hits my ears and my brain. I don't want to own the file, I want to own the experience of the music.

The shift that needs to occur is a new business model that awards money at the point value is created. For music, that's the point at which I listen to it. iTunes has come closest to achieving this.

The longer companies try to tighten their grip with DRM rather than try to find a new service based business model, the more value will slip between their fingers.


March 04, 2008 3:44 PM  
Blogger David said...

Wired has this article today on the hunter RIAA becoming the hunted.

March 07, 2008 9:24 AM  
Blogger David said...

OK, so now the music corporations are in such dire financial straights that they need $5 am month from everyone who connect to the internet? Hmmm..
Bob, you are in Austin ... can't you go to SXSW and straighten these guys out?


March 13, 2008 9:24 AM  
Blogger MadMax said...

Great article Bob!
When are you going to post the business plan for the New Studio?
If you could let me know that would be great. You can contact me at max@madmaxmusictv.com
Many thanks.

February 05, 2009 3:03 AM  
Blogger Cynthia said...

You are channeling Napster. He came up with the brilliant idea that if you let people hear the music they are interested in, they will become interested in a wider variety of music than if they are only allowed to hear the crap the radio stations have chosen for reasons that have nothing to do with quality.
For his genius, Napster was almost jailed, had his name stolen, and the music industry thought it had confiscated his idea. But the brilliant idea has grown, morphed and spread quietly like a fairy ring.

April 19, 2010 10:06 AM  

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