Innovation Blog

Cut! Print it!  That’s A Wrap! Business Innovation in the Film Industry

By Shlomo Maital


The entertainment business is hugely important for California’s slumping economy, bringing over $30 b. annually in revenues.  But now, Hollywood is in big trouble.  Movie producing is in big trouble.

Writing in the Washington Post, business columnist Steven Pearlstein noted last year:

“….what entertainment also shares with other sectors is a history of almost unbroken success. Things have been so good for so long, and the companies have been so successful in fending off competitive threats, that it has grown incredibly fat and happy. From superstar actors, their agents and business managers to gaffers and on-set caterers, the money people make is vastly out of proportion to what similarly skilled people make in most other industries. And, even allowing for the process of trial and error inherent in any creative process, its ways of doing business remain stubbornly inefficient.  Now, however, there is a sense that it may all be coming to an end, that the threat this time is real and that the old business models can’t survive. With the rise of legal and illegal downloading, the Internet has already decimated the music business, and it is just beginning to overturn the economic foundations of the movies, television and electronic gaming as well. Financing is drying up, once-sacred expenses are being cut, whole layers of management eliminated and work shifted elsewhere.”

Now, a report in today’s Global New York Times [1] reveals that sharp declines in DVD sales (owing to movie downloads, mostly illegal) have slashed movie revenues.  Producers are scrambling to innovate their business models, as movie studios slash the number of movies they produce, and half the independent movie distributors in the U.S. have folded in the past 2 years.

As with all businesses whose business design quickly became obsolete (it happened to the music business, almost precisely in the same way),  only the nimble will survive.  One of them is Michael Simpson.  He found new ways to arrange financing.  He ‘tweaked’ the order in which tiers of investors get paid.  He embraced streaming and video-on-demand services.

“Some of the most experienced studio producers don’t understand the new environment”,  he notes.   Average age of the 4,200 Producers Guild members is 60.  No wonder they don’t get it.  They live in the glorious past, rather than the innovative risky future.   This is up from only 43,   some 5 years ago.   Younger producers have bailed out.  Older ones failed to keep up with the changing times.

Had movie producers benchmarked music producers and the music business years ago, perhaps they would have been better prepared for the rapid change that the Internet has brought.  The Internet was not a strategic surprise, like Pearl Harbor.  It proclaimed its arrival long in advance.  But very few seemed to have picked up the phone.

[1] Brooks Barnes, “Facing crisis, Hollywood producers turn skills to survival”,  May 24/2010, p. 15.