In recent weeks, publications as diverse as The Economist (2/23/08) and Wired (March 2008) have voiced the strong opinion that “Hollywood” is making a mistake by fighting digital distribution of their products via the Internet.
According to The Economist: “The rightful successor to the DVD is not Blu-ray or anything else. It is the web.” Wired was more blunt, warning that trying to impose complex digital rights management (DRM) systems in the face of what Hollywood has called “a tidal wave” of illegally duplicated content was misguided: “Locks can make you feel safer, but they won’t keep you from drowning in a tidal wave.”
There is no question that the home-video industry is changing rapidly. Apple now rents and sells movies through its iTunes store, and has also substantially upgraded its Apple TV product, which allows iTunes video content to be viewed directly on any HDTV set and bypass the computer. In addition, Amazon has unveiled its Unbox service, through which it rents and sells movies on its popular Internet storefront; Netflix has joined the fray by adding digital downloads; Hulu is streaming current and archived TV programs to the desktop; and Comcast and other large cable and satellite operators are constantly expanding their on-demand libraries.
The warning signs – or storm clouds for the doomsayers – have begun to indicate that all these changes are adversely affecting Hollywood’s most lucrative stream of revenue. In 2007, US consumer spending on DVDs fell for the first time (see Figure 1). A 2% decline may not seem cataclysmic, but for an industry that is perceived by many to be foundering in its approach to online digital distribution, it may be only the tip of the iceberg.
Figure 1: US consumer home entertainment spending (Source: Digital Entertainment Group (DEG))
Up to now, Hollywood has been able to maximise revenues by establishing a series of exclusive “windows”, starting with theatrical distribution, then the DVD sales and rentals, then subscription television (now including video-ondemand), and finally broadcast network and syndicated television. It is not clear where online digital distribution fits into this value chain. Indeed, Hollywood might well fear that online digital distribution without limitation will shatter the value chain altogether.
However, if Hollywood expends its energy fighting piracy rather than looking for opportunity – as the music industry has done – it seems certain to miss its chance. The problem is that the new business model is by no means obvious.
Indeed, in a world characterised by “post-scarcity economics”, where there appears to be a “tsunami” of content available online, it may well be that content creators will not be able to extract more than the marginal cost of online distribution (which tends to be zero). This view suggests that Hollywood may actually be well advised to fight a holding action and to postpone the day of reckoning as distribution by physical media (even the new Blu-ray HD format) continues to decline.
There is assuredly an even greater downside to this strategy, which is that someone else will work out how to do it, and thus content creators will lose their considerable market power altogether. It is ironic that the music industry is now actually promoting DRM-free music sites such as Amazon as a way to offset Apple’s dominance in the market for legal digital music downloads
When the old business model can no longer be expected to work, it is time to come up with a new one … and for the Hollywood studios time may be running out.
