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  • Writer's pictureCharles Borland

Hollywood Is In Deep Trouble

Updated: Nov 16, 2023

Hollywood's traditional business model is broken.


Audiences are dwindling. Advertisers are fleeing. Subscribers are churning. Talent is striking. Production costs are rising.


It’s a toxic dynamic that has ramifications not only for the entertainment companies that bankroll and distribute content but also for the producers and talent who create it.


So why, exactly, does Hollywood find itself in such a desperate situation?


The answer: the internet, the iPhone, Netflix, and itself.


External Forces


There’s an entire subfield of economics dedicated to studying the concept that human attention is a scarce commodity. And if multiple players - from social media and gaming platforms (many games are social platforms) to film and television distributors - compete for that scarce resource, then there will, by definition, be winners and losers.


Back in the day (let’s say pre-2010 or so) people’s foremost form of entertainment was good old linear payTV. For Hollywood, payTV was a godsend. Entertainment companies not only supplied content and distributed it through that big box in the living room but also extracted huge revenue via carriage fees.


Carriage fees are payments cable providers pay to TV network owners like Disney to carry the network owners’ bundled linear TV channels like ESPN, A&E, and Nat Geo, etc.


For entertainment companies, these fees - often in the hundreds of millions of dollars - were manna from heaven since they bundled everybody’s money together and dispersed it, pretty much for free, across all the different TV network owners.


In the ‘90s and early ‘00s, the internet wasn’t much of a threat to this dynamic. That’s because in its early form, the internet was in its read-only state. Other than writing a blog on your own personal static site, it was difficult to create and distribute content.


But the promise of what the internet could do was still there. It was always on. It was connected. And it was global.


Enter the iPhone.


By the time it was introduced in 2008, we were already living in the world of MySpace, where people could create and distribute content on a social platform. But what the iPhone did via the app store was take social platforms and put them in your pocket.


Almost overnight, that big box in the living room started to lose its attention luster.


With the introduction of the iPhone and App Store, people realized that an entire entertainment ecosystem fit in their hand. And it was mobile. All your friends were there. It was always on. It was always connected. And it too was global. You could now not only watch your favorite creator but also engage with her, and even become a creator yourself.


Suddenly, creators and influencers could engage directly with their audiences and fans, with no need for a middle man. Sure, the quality level wasn’t as high as what Hollywood produced, but the engagement and direct to consumer feedback loop of social platforms made that value proposition seem not all that important. As a result, attention, especially young people’s attention, started moving away from linear modes of content distribution.


And what follows young people wherever they go? Advertising dollars.

Source: https://twitter.com/SteveRattner


This was all happening at roughly the same time Netflix was already morphing into the streaming giant we see today.


Leveraging interest rates at historically low levels, Netflix went on a debt-fueled original content spending spree with a goal of acquiring, growing, and retaining a global subscriber base.


By scaling early, Netflix not only enjoyed a first-mover advantage with this strategy but also projected that advantage into the minds of subscribers. Similar to Uber’s advantage over Lyft (when you think car service Uber not Lyft pops into your head), Netflix sucks up our mental availability when it comes to streaming. At this point, Netflix is practically a verb.


At first, legacy companies in Hollywood licensed their content to Netflix, generating more passive revenue, but once the trickle of cord cutting became a flood, entertainment companies in Hollywood started launching their own streaming apps.


Suddenly, every entertainment company in Hollywood had their own streaming service and users were forced to subscribe to myriad apps just to keep up with their favorite shows.


But this competition came at a steep cost. By jumping on the streaming bandwagon late, legacy Hollywood companies borrowed at higher rates to fuel their streaming ambitions than did Netflix, putting outsized pressure on their balance sheets.

Source: Barron's


Luckily for these new streaming services, however, the pandemic sent their subscriber numbers skyrocketing.


But these juiced figures masked the rot infecting Hollywood: passive revenue generated from carriage fees helped build out the streaming services, while the streaming services cannibalized payTV by incentivizing people to cut the cord.


Just how bad have things gotten for linear payTV? In July, Broadcast and Cable viewership dipped below 50% for the first time ever.

Source: Nielsen


And since there are now so many streaming services, consumers are increasingly canceling subscriptions once a favorite show is finished. As a result, entertainment companies are forced to spend more money acquiring and retaining subscribers, which means they have to increase subscriber fees, resulting in further churn - all while paying more to service their debt.


It’s a doom loop for these companies. The old payTV model is dying while the new streaming model is a money pit that can't generate enough revenue to offset the revenue decline in linear.

Source: https://twitter.com/SteveRattner


Meanwhile, the writers and actors are on strike. Why is this a big deal? Because production costs are only going to increase.


Internal Issues


So far, I’ve focused mainly on external forces such as substitute offerings (social media platforms) and new entrants (Netflix) affecting Hollywood’s bottom line. But there’s another problem that often gets overlooked by Wall Street analysts: Hollywood’s star-centric system itself.


It is this star system that forms the core incentive structures that drive competition and deal flow in Hollywood. Projects don’t get made unless a star actor, director, or showrunner is attached. And these above-the-line costs are only going to increase once the strikes end.


Meanwhile, production costs in general have been increasing for decades (both film and TV) as new technologies are shoehorned into Hollywood’s antiquated production processes.


For example, by the late 1980s the average cost to release an MPAA-film outpaced the average domestic box office revenue a film generated. This was precisely the time when digital VFX-heavy films came into their own.

Source: Entertainment Industry Economics, 9th Edition, by Harold L. Vogel


As entertainment companies rein in their overall spending on content, it is important to understand that, unless Hollywood realigns its underlying incentive structures, the per-minute/per-unit cost to create content will continue to increase.


As a result, Hollywood will most likely continue to offer more of the same big budget VFX-heavy franchise offerings we’ve grown accustomed to, which means greater competition for talent and bigger marketing spends to ensure the project is a hit.


Which also means more people will continue to flock to where more intimate, more immediate, more immersive, and often more daring content is being created: social media and gaming.


Phoenix Rising?


One remedy I see frequently mentioned is for legacy entertainment companies in Hollywood to once again bundle their offerings into one large streaming offering, akin to a Hulu on steroids, and then spread the wealth across the different players. This concept is essentially an updated and repackaged version of the old payTV model.


Another solution often put forward is for Hollywood to create content based on gaming IP, where hugely popular franchises, characters, and universes are being built.


While gaming and XR may represent the future of entertainment, creating passive video-only content based on gaming IP is, by itself, not sufficient to remedy the myriad problems facing Hollywood.


And while a return to a bundled model may stave off the inevitable for a time, it would not solve the battle for attention issue that is at the root of the problem for Hollywood.


As an industry, Hollywood needs to come to grips with the fact that filmed content is no longer the ‘thing’, it’s the thing that scales the thing: interactive, participatory media, like video games and virtual worlds.


As I mentioned in a previous blog, if you remove the stories and characters from Disneyland, you no longer have a theme park, you have an amusement park. In this sense, long-form narrative content can act as both a bonding mechanism and accelerant for immersive gaming and XR platforms.


We saw this dynamic play out when the release of Netflix's The Witcher drove up demand for the game, Witcher 3: Wild Hunt (see image below), and again when HBO's The Last of Us boosted sales for the game.

Source: Parrot Analytics


At a deeper level, however, Hollywood needs to expand its offerings beyond long-form content only by creating content and experiences for fans where they are, such as social platforms. This means creating short-form mobile-based content pipelines and distribution funnels built for agility, efficiency, speed, and entertainment value rather than prestige.


This was one of many issues Quibi faced. It tried to shoehorn high-quality star-laden projects into a format built for backyard user-generated content (UGC) filmed on an iPhone.


After all, it’s hard to compete with social platforms like TikTok when the whole world is their talent pool.

Source: Scott Galloway


But Hollywood excels at telling stories. And there’s no reason it can’t leverage its world-class talent to tell stories and monetize them in new and exciting ways across entertainment platforms.


By merging real-time virtual production and gaming pipelines, as Voltaku is doing, Hollywood can bond with fans where they are and capture value in a truly scalable and efficient manner.


We are at the dawn of a new era in entertainment. An era that will see a tremendous amount of consolidation and integration between tech, gaming, and filmed entertainment entities, potentially solving many of the issues Hollywood faces on its own.


In that unified Transmedia world - let’s just call it the Metaverse - both the companies that distribute filmed content and the talent that create it need to be ready.

 

Charles Borland is a proud member of SAG-AFTRA


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