End of the world as Hollywood knows it

Facing immense change, the studios appear to have accepted that they can't kill file sharing. At the same time, they seem to be in denial about future revenue streams.

To: Charlize Theron, Hugh Jackman, Seth Rogen, Tina Fey, Steven Spielberg, Michael Mann, every actor, actress, screenwriter, costumer, best boy, cameraman, set designer, makeup artist, and agent--plus anyone else who makes their living in the film industry.
From: Greg Sandoval, CNET media reporter and film fan.
Re: Your livelihood

Cut your spending. Save your money. Many of the revenue streams that have gushed into your industry for decades, some for nearly a century, are about to dry up. This will likely mean a period of belt tightening like you've never seen before.

The end is coming for DVDs, traditional movie rentals, and yes, much of your cable money will likely disappear.

The news isn't entirely bad; you still have iTunes and Netflix--places where people spend money to buy or rent movies. You still have Hulu, Crackle.com , and YouTube , which are generating ad revenue by streaming full-length films and TV shows online. But the reality is that the amount of money that these legal operations generate is far less than the returns your industry is used to making. Unless some dramatic technological breakthrough occurs that can defeat file sharing, then you are staring at checkmate. Your business is headed for the same meat grinder that has chewed up the recorded music sector and print publishing. What will come out the other side is still uncertain but will likely be much smaller.

I'm sure many of you will write this off as the apocalyptic rantings of Silicon Valley propeller heads. But I urge you to pay attention to recent events.

Over the past five days I've been in Los Angeles talking to entertainment attorneys, studio executives, and some of the tech vendors who do business with the studios. I've been covering the sector three years now and I've never seen people in the film industry so dejected. DVD sales are falling, the number of upcoming film releases is expected to drop. Some big shots have even acknowledged the bleak situation in public. The past weekend, at a conference on the USC campus, Disney CEO Bob Iger said the "business model that formed the motion picture business...is changing profoundly before our eyes."

Iger warned that studios must make profound changes, "or you will no longer have a business."

Earlier this month, Francis Ford Coppola, the director of "The Godfather" said at the Beirut Film Festival that "the cinema as we know it is falling apart." He also predicted several of the studios would go out of business.

Of course, not all of your industry's problems were caused by the Web. Hollywood has paid creators handsomely over the years and costs have skyrocketed. Then there's the problem with Blu-ray. Iger noted that consumers aren't upgrading their DVD collections with Blu-ray discs to the degree that the industry had hoped.

But if you're really inclined to wag a finger, there is nothing disrupting your business more than the Internet. The MPAA has worked hard to force file-sharing sites out of business or push them to the Web's fringes. At first, the studios tried to kill file sharing with lawsuits. Then they hired security firms, such as MediaDefender and MediaSentry, which promised to discourage file sharers by blocking or slowing the sharing process. None of that worked.

Maybe that's one reason the MPAA overhauled its "antipiracy" operations three weeks ago. CNET reported on Friday that the studios' trade group decided to change the name of the "antipiracy" unit to "content protection" and fired three leaders, including the MPAA's general counsel.

And now, snatching a pirated film or TV show doesn't require knowledge of torrents. There are scores of sites that stream movies and TV shows over the Web and a viewer doesn't have to actually download the movie to their hard drive. I spoke to someone at the studios last week who said these sites are tougher to fight because they can crop up anywhere and many are based overseas. Often, said the source, "We don't know where they are."

"Hulu may be doing immediate harm to elements of your business, but waiting right behind Hulu in the shadows, are things that do so much more harm."
--Eric Garland, Big Champagne CEO

What is happening is that the consumption of unauthorized content appears to be moving out of dorm rooms and into the living rooms of average Americans. Here is what you're up against:

A 28-year-old woman I'll call Alexandra (she asked for anonymity) grew up in Missouri, graduated from college, attends church every Sunday, and told me that she watches episodes of the hit cable show "Mad Men" at least twice a week at Surfthechannel.com, a site that hosts links to many unauthorized clips. She gleefully said that visitors can find almost any TV show they want and not pay a dime.

Alexandra said a friend told her about Surfthechannel.com a year or two ago and she watches shows there because she doesn't want to pay for a cable subscription, or a TV and because it's so easy.

She explained that she is not a bad person and that "everybody is doing this." She says one of her professors told her "he and his wife sit at home on the weekends and enjoyed movies they downloaded (illegally) off the Web."

I ask her if she has tried Hulu, the popular video site created by News Corp. and NBC Universal. The site offers a few feature films and lots of TV shows free to viewers and pays for them by serving ads. She said she had visited Hulu but added that "there's more of the stuff I want at Surfthechannel.com."

Alexandra's statements about Hulu come at a time when the site's backers are mulling whether to build a pay wall around some of its content. Alexandra and people like her aren't even accepting Hollywood's offer of free content because unauthorized sites offer better selection.

What do you think will happen if Hulu begins charging?

Don't get me wrong. I understand that the returns at Hulu are probably much smaller than what the studios are accustomed to getting. There's also the problem of growing dissatisfaction among the cable operators. How long will they continue to pay big bucks if more of their customers dump their subscriptions in favor of sites such as Hulu? Leaving a business that generated billions for one that makes far less would be hard for anyone.

But the possibility that studio chiefs must consider is what if the money offered by iTunes, Hulu, and Netflix is all that a digitally ravaged media world offers.

Eric Garland, CEO of Big Champagne, a company that tracks file-sharing usage and sells the data to the studios and major record labels said: "Hulu may be doing immediate harm to elements of your business, but waiting right behind Hulu in the shadows, are things that do so much more harm."

 

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