THE BIRTH OF NEW HOLLYWOOD — Part 4: The Missing Link
Updated: Jun 16, 2022
In Part Four of our Four-Part series on New Hollywood, we untangle web3 to reveal how token economies hold the key to linking Hollywood and communities.
“I happily played World of Warcraft during 2007-2010, but one day Blizzard removed the damage component from my beloved warlock's Siphon Life spell. I cried myself to sleep, and on that day I realized what horrors centralized services can bring.”
Vitalik Buterin, Co-Founder, Ethereum
The tech world has been abuzz with the amazing pace of change unfolding across the blockchain, gaming, and XR spaces (hello, Metaverse). A year ago, most people had never heard the term web3 uttered, let alone used to describe a process happening in real-time: the evolution of the internet.
Source: Voltaku Studios, Inc
Silicon Valley hasn’t seen this much capital and talent flood into one zone since the early days of web1 back in the mid-to-late 1990s.
But what does all this talk of Meta-this and Web3-that mean for Hollywood? As it turns out, everything.
Hollywood’s greatest single weakness is its inability to create direct feedback loops with fans. This is exactly the problem web3 solves.
Hollywood’s Black Box
To boil a complex subject down into a simple reduction, it helps to think of major Hollywood studios like venture capital firms. Studios sit between institutional investors interested in project financing opportunities and production companies interested in getting their projects financed and made. The studios then allocate massive resources to marketing and distributing these projects.
Sitting at the center of this value chain is the content itself. Everything revolves around it. Billions of dollars are spent annually in Hollywood on creating, marketing, and distributing content across the globe. As a result, an entire economy of middlemen is incentivized to maximize their slice of this economic pie.
Unfortunately, this system feeds on itself. Competition for talent and IP increases production and marketing costs, which further increases competition for talent and IP. As a result, a vicious cycle of maximizing revenue rather than margins ensues. The inevitable byproduct of this dynamic is the general commodification in storytelling we see emanating from Hollywood today.
And where do audiences sit within this dynamic? They don’t. Audiences are completely excluded from this process. It’s only after a project has been developed, produced, marketed, distributed, and exhibited that audiences accrue value.
This is one major factor why Hollywood is a hit-driven industry: it’s primary focus is on the product, not the consumer.
To be fair, this inward-facing focus on producing products rather than delivering value is not unique to Hollywood. It’s inherent in most industrial economic models. In fact, it’s the fixed hierarchical structures of the Industrial Age itself that gave rise to the centralized organizations we’re so familiar with.
And as the internet was grafted onto these centralized organizations, Kuato-style, a misalignment between the data rich information technology underpinning the internet and the centralized one-way-street funnels of the Industrial Age gave birth to the giant TMT mutants we see today.
Web3 upends this centralized model. The distributed ledger and blockchain technologies of web3 replace the dependency on centralized systems of web2 and instead enable a new peer-to-peer exchange of value to emerge. People with shared interests from all over the world can now coordinate, set up their own networks, and automate the rules that govern transactions. Where web2 sought to build better applications, web3 seeks to build a better internet.
Web3 revolutionizes the backend of the internet and alters how value is owned, delivered, and transacted. From centralized to decentralized. And underpinning this evolution in value exchange is the token economy.
Source: Baran, P. (1964). On Distributed Communications, Memorandum RM-3420-PR.
Token Economics: Beyond NFTs
The current rage in Hollywood is NFTs (non-fungible tokens). This is understandable given the explosive growth in the NFT market over the last year. Production companies see NFTs as a new way of funding content and studios see NFTs as a novel way to diversify revenue streams. On the surface, however, it’s not immediately apparent how Hollywood can effectively leverage the power of this new tokenized economy.
For example, one of the early use cases for NFTs in Hollywood is the Mila Kunis and Ashton Kutcher-led project, Stoner Cats. Stoner Cats is an animated TV series funded by selling a limited number of generative NFT profile pics.
With a star-studded cast including Mila Kunis, Ashton Kutcher, Jane Fonda, Chris Rock, Seth McFarlane, and even Ethereum’s co-founder, Vitalik Buterin, Stoner Cats ticked all the right Hollywood boxes and quickly sold out its initial NFT drop. As of today, the Stoner Cats secondary market NFT trading volume sits at $21MM. But even with a star-studded cast and community access, Stoner Cats trading volume pales in comparison to other collectible NFT projects.
The problem Stoner Cats ran into wasn’t selling out its initial run of NFTs but building on that initial momentum by leveraging web3 network effects. What, exactly, can token holders do with a TV series once they've watched it? Put another way, how does a passive experience continue to accrue value once experienced?
On the other end of the web3 value spectrum is Pixel Vault. In contrast to Stoner Cats, Pixel Vault was a slow burn. It took over a month for Pixel Vault’s first project, Punks Comic, to find its footing. There were no Hollywood stars, no blockchain co-founders attached to it, and no animated series to watch.
Yet, spread across a diverse slate of NFT projects, Pixel Vault’s lifetime transaction volume sits in excess of $275MM. And it just completed a $100MM funding round.
It should come as no surprise then that the Pixel Vault team focused its sights squarely on delivering value for its community.
To support this vision, the PV team designed a truly innovative token economy that incentivizes certain behaviors to achieve desired outcomes. This is called mechanism design, a specialized field within economics and game theory.
Also referred to as 'reverse game theory', mechanism design is the underlying behavioral logic that drives cryptoeconomic systems. By first defining a desired outcome, the designer then works backward to create incentives that nudge the player toward that outcome.
The Pixel Vault team did a remarkable job of designing a gamified token economy around static IP that rewarded the community for the choices it made. The results speak for themselves and portend a major upheaval in both how value is delivered and how stories are told.
Gaming: The Heart of the Matter
Twenty years ago the video game industry began its pivot from a games-as-a-product model to a games-as-a-service model. At the time, games were almost exclusively developed and distributed like movies: in secret with huge marketing spends. Now, most games are released and continuously updated over time. These games are sometimes referred to as Living Games, or games that live in a state of permanent beta.
The result, as Joost van Dreunen astutely points out, is that “large game companies have started to treat games less like commodities and more like assets that increase in value over time.”
Large game companies started focusing on delivering value instead of just producing products and the resulting increase in revenue has been stunning.
By migrating along the game publishing spectrum, from centralized to distributed to decentralized, we can see how blockchain games, although in their infancy, represent a massive realignment in value exchange from its predecessors.
Service-based games, while a leap forward from product-based games, are still walled gardens. The data captured on the player and the assets won by the player are both owned by the publisher.
With blockchain-based games, the digital assets earned by the player are owned by the player via fungible (ERC-20), semi-fungible (ERC-1155), or non-fungible (ERC-721) tokens. These assets can then be ported (standards and protocols permitting) to other games, virtual worlds, and even into the physical economy, via play-to-earn games.
This realignment in asset ownership is revolutionary. And this revolution goes well beyond the current frothy, speculative collectible NFT market and paves the way for a much deeper, broader, and more stable emerging economy: the Virtual Economy.
The virtual economy is the economic engine that will underpin the Metaverse, and it is blockchain and distributed ledger technology that will, ultimately, underpin the virtual economy as we migrate from web2 to web3.
Can Hollywood Pivot?
As we migrate into a web3 world, the industry as a whole needs to think beyond simply producing great stories and seek to incorporate new ways of delivering value for communities. To accomplish this, Hollywood entities should incorporate robust token economies rather than simply sell NFTs to fund the cost of a production.
This may sound simple but it’s actually a monumental lift. Reimagining the Hollywood value chain means upending a century’s worth of incentive structures built on and tied to the legacy production process and star-system.
This is akin to the automotive industry pivoting from fossil fuels to plug-ins. It's not easy, but it is necessary.
Risks & Gut Checks
Here are some points to consider and navigate as we journey, clear-eyed, into a web3 world:
Is decentralized truly decentralized? DAOs are the dream but humanity’s default setting is centralized, can web3 actually deliver on its promise and buck this embedded trait?
Web3 is currently dominated by crypto exchange platforms such as Binance, Coinbase, Gemini, and Uniswap, which means the space is dominated by investors and traders rather than businesses. Unless and until web3 migrates from a speculation-based economy to a business-based economy, expect things to remain bubbly.
Regulations. Crypto will be regulated. The question is, to what extent and in what form? In other words, will regulations help centralized authorities or decentralized ecosystems?
Carbon footprint. The proof-of-work consensus mechanism provides security but comes at a high environmental cost. A technology that bills itself as the future can't be futuristic and carry a heavy carbon footprint.
Fraud. The speculative nature of the current iteration of web3 attracts fraudsters, rug pullers, and all kinds of degens. Can a business-based economy bring some much-needed stability to web3? Will crypto culture welcome it?
Security. The blockchain itself is secure (according to mathier people than yours truly) but the platforms that operate on it may not be. Buyer beware.
Scalability. The third vertex in the blockchain trilemma. Is it possible to scale to Visa-like transaction volumes and remain secure? And remain decentralized?
Our goal with the Birth of New Hollywood series is to shed light on the challenges and the opportunities faced by Hollywood both now and in the years ahead.
Studios, like Voltaku, that are built on real-time technologies, agile principles, and web3 protocols represent the future of entertainment. These are Metaverse-native cross-platform storytelling engines that span filmmaking, VR/AR, gaming, and web3.
These entities have the ability to create direct feedback loops with audiences and build robust token economies around IP, communities, and technology. They can create interoperable 3D assets once and deploy them across platforms and ecosystems. And they are open source and transparent, paving the way for a truly democratized creator economy.
Voltaku is the tip of the Hollywood spear venturing into this cross-platform world and we welcome the opportunity to collaborate with other like-minded companies, projects, and creatives. Let's build the future of storytelling together, free from the funnels and walls that stifle both innovation and creativity.