Hollywood can’t help but take advantage of tech companies

Second in a series. A friend of mine who is a securities lawyer in New York worked on the 1985 sale of 20th Century Fox by Marvin Davis to Rupert Murdoch. He led a group of New York attorneys to Los Angeles where they spent weeks going over contracts for many Fox films. What they found was that with few exceptions there were no contracts. There were signed letters of intent (agreements to agree) for pictures budgeted at $20-$50 million but almost no actual contracts. Effectively business was being done, movies were being made, and huge sums of money were being transferred on a handshake. That’s how Hollywood tends to do business and it doesn’t go down very well with outsiders, so they for the most part remain outside.

Jump to this week’s evolving story about Intel supposedly entering with a bang the TV set-top box business replete with previously unlicensed cable content -- an Over-The-Top virtual cable system. This was expected to be announced, I’m told, at next week’s Consumer Electronics Show in Las Vegas.

Forbes then had a very naive story about how Intel was likely to succeed where others (Apple, Microsoft, Motorola, Netflix, Roku, etc.) had already failed, with Intel’s secret sauce being lots of money (hundreds of millions certainly) to tie-up content.

Yet yesterday Intel made it known there would be no such CES announcement at all and the Wall Street Journal says the problem is content licensing.

I’ll tell you the problem. It’s 1985 all over again and just like my friend the New York lawyer for Rupert Murdoch, Intel is no doubt learning that it is difficult to buy with certainly something that the seller may or may not actually own. Studios and networks are selling and Intel is buying shows they may not even have the right to buy or sell.

Remember how Ted Turner bought MGM then sold the studio but kept the movies so he could play them on WTBS? Something like that.

There’s no business like show business.

Hollywood is a company town that has its own ways of doing business. The rules are just different in Hollywood. Accounting rules are different, certainly. Avatar is the highest-grossing movie in history, sure, but has it made a so-called “net profit?” Nobody knows.

Tax rules are even different for Hollywood.  Personal holding companies are for the most part illegal in America, but not in Hollywood, where they have been around for 50 years and are called loan-out companies.

My point here is that when out-of-towners come to L.A. expecting to take over the entertainment business with money alone, they are generally disappointed. Sony buying Columbia Pictures wasn’t the triumph of Japanese capitalism it was presented to be -- it was a chance for the movie guys to steal from the Japanese.

When technology companies try to do business with the entertainment industry they are nearly always taken advantage of. Hollywood can’t help it. Like Rebecca Rabbit, they’re just drawn that way.

Look at Intel and remember this is the company’s third such effort to get a foothold in the entertainment business, where technology companies tend to be seen as rubes ripe for plucking. Apple and Microsoft are right now trying to do exactly the same thing as Intel and they aren’t succeeding, either. Nor will any of them succeed unless they take a more enlightened approach.

My next column will spell out exactly how this could be done (previous column).

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