New-Media Distribution Giving Hollywood a Makeover

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By JONATHAN HANDEL

California’s economy is at war with itself. It’s a struggle between Los Angeles and Silicon Valley or, more precisely, between content and technology. The outcome may determine the future of the entertainment industry, with significant implications for the L.A. economy.

The problem is this: Content is becoming a commodity. In contrast, consider Silicon Valley. Distribution used to be the exclusive province of Hollywood movie theaters, television networks, home video, among others but no longer. Instead, Northern California is the locus of many of the new distribution technologies, and the ascendancy of those technologies has come at the expense of content.

There is little doubt that traditional content is in trouble. Domestic theatrical box office has scarcely increased over the last seven years (with the notable exception of the first half of this year), while admissions (the number of tickets sold) have dropped somewhat. The home video business is declining dramatically. Also troubled are the network television business, the music industry, the newspaper business (including, of course, the Los Angeles Times), TV news, and book and magazine publishing (including the entertainment trades). People do still consume media the old-fashioned way but fewer and fewer do so every day, and the trend is particularly significant among younger people.

Why is traditional content losing its vigor? The answer goes deeper than and the problem predates the current recession. There are six related reasons for the devaluation of content.

The first relates to supply and demand. Demand for entertainment stays relatively constant because demand is largely a function of both cost and consumers’ limited leisure time. In contrast, supply such as user-generated content, or UGC, and pirated content has grown enormously in the last decade.

The second reason: the loss of physical form. It just seems natural, in general, to value a physical thing more highly than something intangible. The third factor is the culture of piracy, which requires little explanation. The fourth is that acquiring content is increasingly frictionless. When it is easier to get something it loses perceived value.

The fifth reason is that most new-media business models are ad supported. If there is no cost to the user, why should consumers see the content as valuable? Finally, UGC and pirated content tend to appear more quickly and in greater quantity on new Web sites and devices, whereas traditional media companies are slow to adopt these new technologies for fear of cannibalizing existing revenue and offending distribution partners.


Media migration

All these developments have led to a migration away from paid media. Even where new media does make money for creators and companies, that money is much less than it used to be. The result: As UGC has become more diverse, professional content has become less so. In addition, while online outlets thrive, bookstores, music stores and newspapers disappear and so do their employees, taking with them a depth of knowledge not often replicated online. Both UGC and paid professional content have value. The problem is that, unfortunately, there does not seem to be room for both unlimited quantities of the former and a wide selection of the latter.

In contrast to the stagnation and decline of the content industries, the technology business is marked by innovation. Silicon Valley, in particular, is noted for constant change (although the recession has, probably temporarily, put a damper on this). Change in Silicon Valley is break-neck in Los Angeles, not so much. That’s difficult for Hollywood to deal with.

The entertainment industry has responded through brute-force lawsuits, legislation, competitive business responses, and restructuring of business models (often to the detriment of the unions). However, these responses from Hollywood, as well as from other content industries, have been belated, and often ineffectual.

What next? Hollywood seems sure to survive the challenge posed by the technology industry. However, whether Hollywood will thrive rather than just survive is a harder question.

If the studios continue to lose their grip on distribution, they will be left with content creation as their core business. That is a problem because, fundamentally, the economics of content creation are inferior to those of distribution. The former is an industrial process, painstaking and manual. The latter, in the digital age, is post-industrial and automated.

The fundamental questions are these: Are we willing to let newspapers disappear, blockbuster movies succumb to piracy, and novels be confined to self-publishing? And are we condemned to undergo a period of turmoil and dissolution of existing models of content creation while awaiting the hoped-for time that new ones gain traction? We may not have any choice. UGC is here to stay, and so is piracy.

The problems are complex, and the solutions unclear. However, we can take heart: Content may be under siege, but it has not lost the war.


Jonathan Handel practices entertainment and new-media law at TroyGould in Century City. He blogs at www.jhandel.com and the Huffington Post, among other outlets. This is adapted from a 40-page article, “Uneasy Lies the Head That Wears the Crown: Why Content’s Kingdom Is Slipping Away,” available at TroyGould.com.

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