Why the Movie Industry Fights New Technology - Until Consumers Force It to Adapt

Radio, television, cable, VCRs, DVDs, Pay-per-view, internet streaming.

Some of the most innovative, socially transformative technologies of all time. What do they have in common? The movie industry has fought them all. Until it started profiting from them.

For a business culture based on creativity and discerning consumer sensibilities, the film industry has, over the course of a century, compiled just about the most woeful record of technology adoption in history. One has to hearken back to the Catholic Church's battles with Galileo to come up with another global institution so fervently opposed to change.

For an industry located just an hour's flight south of Silicon Valley and based on the technologies that distribute content to mass audiences, film has certainly taken a different path. The reasons for its hidebound suspicion of the new seems rooted in its fear of loss as opposed to its embrace of opportunity. Again, for an industry that has mass-marketed hope, this appears counter-intuitive. But experience and a culture based on relationships rather than knowledge may have led the industry to oppose sharing out of concern that the loss of control, primarily of content, will translate into loss of power and revenue.

The irony is that in spite of its dismal track record in predicting the impact of new technologies, it has managed to benefit, eventually, from most of them. One can only wonder what might have happened, given the time value of money, had the initial response been positive rather than negative. JL

Steve Blank reports in his blog (hat tip Barry Ritholtz):

This year the movie industry made $30 billion (1/3 in the U.S.) from box-office revenue. But the total movie industry revenue was $87 billion. Where did the other $57 billion come from?

From sources that the studios at one time claimed would put them out of business: Pay-per view TV, cable and satellite channels, video rentals, DVD sales, online subscriptions and digital downloads.
The Movie Industry and Technology Progress
The music and movie business has been consistently wrong in its claims that new platforms and channels would be the end of its businesses. In each case, the new technology produced a new market far larger than the impact it had on the existing market.

•1920’s – the record business complained about radio. The argument was because radio is free, you can’t compete with free. No one was ever going to buy music again.
•1940’s – movie studios had to divest their distribution channel – they owned over 50% of the movie theaters in the U.S. “It’s all over,” complained the studios. In fact, the number of screens went from 17,000 in 1948 to 38,000 today.
•1950’s – broadcast television was free; the threat was cable television. Studios argued that their free TV content couldn’t compete with paid.
•1970’s – Video Cassette Recorders (VCR’s) were going to be the end of the movie business. The movie businesses and its lobbying arm MPAA fought it with “end of the world” hyperbole. The reality? After the VCR was introduced, studio revenues took off like a rocket. With a new channel of distribution, home movie rentals surpassed movie theater tickets.
•1998 – the MPAA got congress to pass the Digital Millennium Copyright Act (DMCA), making it illegal for you to make a digital copy of a DVD that you actually purchased.
•2000 – Digital Video Recorders (DVR) like TiVo allowing consumer to skip commercials was going to be the end of the TV business. DVR’s reignite interest in TV.
•2006 - broadcasters sued Cablevision (and lost) to prevent the launch of a cloud-based DVR to its customers.
•Today it’s the Internet that’s going to put the studios out of business. Sound familiar?

Why was the movie industry consistently wrong? And why do they continue to fight new technology?

Technology Innovation
The movie industry was born with a single technical standard – 35mm film, and for decades had a single way to distribute its content – movie theaters (which until 1948 the studios owned.) It was 75 years until studios had to deal with technology changing their platform and distribution channel. And when it happened (cable, VCR’s, DVD’s, DVR’s, the Internet,) it was a relentless onslaught. The studios responded by trying to shut down the new technology and/or distribution channels through legislation and the courts.

Regulation/Legislation
But why does the movie business think their solution is in Washington and legislation?

History and success.

In the 1920’s individual states were beginning to censor movies and the federal government was threatening to do so as well. The studios set up their own self censorship and rating system keeping most sex and politics off the screen for 40 years. Never again wanting to be at the losing side of a political battle they created the movie industry’s lobbying arm, MPAA.

By the 1960’s, the MPPA achieved regulatory capture (where an industry co-opts the very people who are regulating it,) when they hired Jack Valenti, who ran the studios’ lobbying efforts for the next 38-years. Ironically, it was Valenti’s skill in hobbling competitive innovation that negated any need for studios to develop agility, vision and technology leadership.

Management of Innovation
The introduction of new technology is always disruptive to existing markets, particularly to content/copyright owners whose sell through well-established distribution channels. The incumbents tend to have short-sighted goals and often fail to recognize that more money can be made on new platforms and new distribution channels.

In an industry facing constant technology shifts the exec staff and boards of the studios have lawyers, MBAs and financial managers, but no management skill in dealing with disruption. So they rely on lobbying ($110 million a year,) lawsuits, campaign contributions (wonder why the President won’t be vetoing SOPA?) and Public Relations.

Ironically, the six major movie studios have a great technology lab in Silicon Valley with projects in streaming rights, Video On Demand, Ultraviolet, etc. But lacking the support from the studio CEOs or boards, the lab languishes in the backwaters of the studios’ strategy. Instead of leading with new technology, the studios lead with litigation, legislation and lobbying. (Imagine if the $110 million/year spent on lobbying went to disruptive innovation.)

Piracy
One of the claims that studios make is that they need legislation to stop piracy. The fact is piracy is rampant in all forms of commerce. Video games and software have been targets since their inception. Grocery and retail stores euphemistically call it shrinkage. Credit card companies call it fraud. But none use regulation as often as the movie studios to solve a business problem. And none are so willing to do collateral damage to other innovative industries (VCRs, DVRs, cloud storage and now the Internet itself.)

The studios don’t even pretend that this legislation benefits consumers. It’s all about protecting short-term profit.

SOPA
When lawyers, MBAs and financial managers run your industry and your lobbyists are ex-Senators, understanding technology and innovation is not one of your core capabilities.

The SOPA bill (and DNS blocking) is what happens when someone with the title of anti-piracy or copyright lawyer has greater clout than your head of new technology. SOPA gives corporations unprecedented power to censor almost any site on the Internet. It’s as if someone shoplifts in your store, SOPA allows the government to shut down your store.

History has shown that time and market forces provide equilibrium in balancing interests, whether the new technology is a video recorder, a personal computer, an MP3 player or now the Net. It’s prudent for courts and congress to exercise caution before restructuring liability theories for the purpose of addressing specific market abuses, despite their apparent present magnitude.

What the music and movie industry should be doing in Washington is promoting legislation to adapt copyright law to new technology — and then leading the transition to the new platforms.

The U.S. State Department has been championing the Internet Freedom initiative across the world. Secretary of State Clinton said, “…when ideas are blocked, information deleted, conversations stifled, and people constrained in their choices, the Internet is diminished for all of us.”

It’s too bad the head of the MPAA – an ex Senator - made a mockery of her words when he wondered “why our online censorship can’t be like China?”

We wonder, “Why can’t the film industry innovate like Silicon Valley?”

Lessons Learned

•Studios are run by financial managers who lack the skills to exploit disruptive innovation
•Studio anti-piracy/copyright lawyers trump their technologists
•Studios have no concern about collateral damage as long as it optimizes their revenue
•Studios $110M/year lobbying and political donations trump consumer objections
•Politicians votes will follow the money unless it will cost them an election