The trick to stealing Hollywood is...

Third in a series. Some readers of my last column in this series seem to think it was just about the movie business but it wasn’t. It was about the recorded entertainment industry, which includes movies, broadcast and cable television, video games, and derivative works. It’s just that the movie business, like the mainframe computer business, learned these lessons first and so offers fine examples.

Whether from Silicon Valley or Seattle, technology companies see video entertainment as a rich market to be absorbed. How can Hollywood resist? The tech companies have all the money. Between them Amazon, Apple, Google, Intel and Microsoft have $300 billion in cash and no debt -- enough capital to buy anything. Apple all by itself could buy the entire entertainment industry, though antitrust laws might interfere.

Right now these companies are not trying to buy the entertainment industry but to buy access to content and audiences. Their primary goal is disintermediation of cable and broadcast TV networks. The vision held by all is of Americans sitting in our homes buying a la carte videos over the Internet and eating popcorn.

This is unlikely to happen simply because cable companies and TV networks aren’t going to hand over their businesses.  If such a transition does take place, and I think it is only a matter of time before it does, the catalyst won’t be phalanxes of lawyers meeting across conference tables. When the real entertainment revolution happens it will be either because of a total accident or an act of deliberate sabotage.

Sabotage is the Way

With accidents so difficult to predict or time, I vote for sabotage.

But sabotage doesn’t come naturally to the minds of big company executives, or at least not executives at the companies I’m naming here. They are hobbled by their sense of scale for one thing. Big companies like to hang with other big companies and tend to see small companies as useless. When elephants dance the grass is trampled. Well it’s time for someone to pay more attention to the grass.

While Silicon Valley has more than enough money to buy Hollywood, Hollywood is unlikely to sell. And even if they sell, it’s unlikely Silicon Valley would get anything truly useful because they’d only be buying a shell. Networks and movie studios don’t typically make anything, they just finance and distribute content.

If you can’t buy Hollywood, then you have to steal it.

What makes Hollywood unique is its continuous output of ideas. When technology companies talk about gaining access to content what they really mean is gaining access to this flow of ideas. For all we might talk about the long tail, what defines Hollywood is new content, not old, with a single hit movie or TV series worth a hundred times as much as something from the library. Intel has no trouble getting rights to old TV series, for example: it’s the new stuff that’s out of reach.

Amazon and Netflix have bought a few original productions between them but the economics aren’t especially good because they have to pay all the costs against what is so far a limited distribution outlet. These companies need to find a way to control more content for less money.

The trick to stealing Hollywood is interrupting this flow of ideas, not just for a show or two but for all shows, diverting the flow to some new place rather then where it has always gone. Divert the flow for even a couple years and the entire entertainment industry would be changed forever.

What if there were no new shows on CBS?

Two Months from Bankruptcy

Here’s where it is useful to understand something about the finances of content production. This $100+ billion business (the U.S. Department of Labor says the U.S. entertainment industry pays $137 billion per year in salaries alone) is driven by cash yet there is very little cash retained in the business. While Apple is sitting on $100+ billion, Disney isn’t, because there’s a tradition of distributing most video revenue in the form of professional fees.

While workers in most industries think in terms of what they make per year, during the heyday of the studio system the currency in Hollywood was always how much any professional made per week. Today the entertainment industry often thinks of what someone makes per day.

The numbers are big, but not that big. George Lucas just sold his life’s work for $4 billion, which would make him a second-tier tycoon in Silicon Valley.

The only person to ever extract more cash from Hollywood than George Lucas was Steve Jobs when he sold Pixar. Ironic. eh?

So the Hollywood content creation system is fueled with cash, but the pockets from which that cash comes are not very deep. Every production company -- every production company -- is two months or less from bankruptcy all the time. They create or die.      

So here comes an Intel, say, looking to buy or license content for its disruptive virtual cable system. They attempt to acquire content from the very sources they hope to disrupt. "License us your content, oh Syfy Channel, so we can use it to decrease the value of that same content sold to Time Warner Cable".

Am I the only one who sees something wrong with this picture?

Big Business is Small

Google has taken a somewhat more clever approach with YouTube financing 100+ professional video channels. But this, too, won’t have much impact on the industry since it doesn’t truly divert the content flow from its traditional destination to a new one. And at $8,000 per hour or less, YouTube budgets aren’t exciting many real players in Hollywood.

You get what you pay for.

If your goal is disruption -- and that ought to be the goal here -- then disrupt, damn it! Impede the flow of ideas. That means negotiating not with big companies but with small ones. Because the Hollywood content creation ecosystem is based on a cottage industry of tiny production companies where the real work is done. There is no mass production.

I happen to own a tiny production company, NeRDTV, which produces this rag and other stuff. I’ve laughed on this page from time to time at what my company is supposedly worth based on acquisition costs in Silicon Valley. I know my real value is much lower after negotiating with Mark Cuban, who at one time  looked to put some money in this operation.

"It’s a production company" Cuban says. "No production company is worth more than $2 million".

Yours for Just $4 billion

And he’s right. By the time you separate the production infrastructure from the content it produces -- content that is usually owned by someone else who pays for making it -- all that’s left over is about $2 million in residual payments, office furniture, editing equipment and BMW leases.

There are probably 1,000 legitimate production companies in California and 2,000 in America overall. If they are worth an average of $2 million each, buying them all would cost $4 billion.

So the cost of installing a valve on the entire content creation process for the $100+ billion U.S. entertainment industry would be $4 billion. Think of it as an option.

Or cut it a different way: $4 billion would buy a controlling share of every TV pilot and every movie in pre-production. Talent follows the money, so they’d all sell out.

This is a classic labor-management squeeze tactic from the early days of the labor movement, and it works.

Bribe the Peasants

There are no antitrust issues with buying $2 million companies or early investing in productions. They are beneath the radar at both the U.S. Department of Justice or the Federal Trade Commission. Nobody cares about small companies.

Something like this tactic is occasionally used in what’s called a roll-up, where borrowed or investor money is used to buy a basket of companies that are integrated then eventually sold or taken public. But that can’t happen here because of the sneaky antitrust requirements. Apple, if it were to try this, would have to do it through a new content division or subsidiary.

Let’s look at a real world example of what I mean.

My little sister started an Internet business selling to consumers copies of jewelry used on TV shows. Her original idea was to go to the studios and networks and cut revenue sharing deals in exchange for exclusive licenses, but the studios and networks wouldn’t even talk to her. The deals were too small, the money not enough, they claimed, to even justify the legal expense. But most importantly they didn’t want to make a mistake and set the wrong precedent. No precedent was better than a bad precedent.

Undeterred, my sister took a different approach very similar to the one I am presenting here. She found that the jewelry used in TV shows typically comes from a separate wardrobe budget and each such budget is controlled by a wardrobe mistress. If the wardrobe mistress could get jewelry for free then she wouldn’t have to buy it or rent it with that part of the budget falling to her bottom line. Unspent budget = profit. So my sister cut her deals not with the studios or networks but with the wardrobe mistresses — eventually more than 40 of them. Nearly every U.S. primetime TV show uses her jewelry with not a penny going to the networks and it was all perfectly legal.

If Seattle and Silicon Valley make a frontal attack on Hollywood they’ll fail. But if they undermine the current system by bribing the peasants, they’ll succeed for a tenth the money they’d have lost the other way.

Will they follow my advice? Probably not.

Reprinted with Permission

Photo Credit: FotoYakov/Shutterstock

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