Hollywood’s Digital Blind Spots
Navigating Disruptive Technologies
Movie-making has been a singularly American success story for more than a century and remains one of our few indigenous industries to have continuously wielded such cultural and economic power around the globe. Achieving universal appeal on a similar scale has been elusive for India and China, the other large movie-producing countries in the world. In the 35 years or so since movie distribution moved beyond the theater however, Hollywood’s adoption of new has at many times been slow and rarely strategic. Nevertheless, the entertainment business has in every case not only survived the initially perceived threats from disruptive technologies, but in most cases has also benefited, albeit after significant trials and tribulations.
Clayton Christensen separates new technology-enabled innovations into two categories: “sustaining technologies” that improve the performance of established products in mainstream markets and “disruptive technologies,” which bring to a market a very different value proposition than had been available previously. Disruptive technologies impact the value chain of an industry and often force its reconfiguration. Opportunistically, start-up companies, funded by investors betting on the future, deploy disruptive technologies at the expense of incumbents who are encumbered by legacy and legal constraints.
Notable technology disruptions in the entertainment industry that have been painfully experienced by incumbents include the 50 percent drop in music revenues in five years from their peak in 1999, caused by digital distribution that allowed file-sharing, and easy purchase of singles rather than albums; the 85 percent drop in newspapers’ print classified advertising between 2005 and 2009; and a near 30 percent decline in DVD sales since their peak in 2004. In the current digital age, innovators, such as Amazon, Apple, Netflix, Google, and Hulu Plus, have disrupted the media and entertainment industry by changing how content is accessed by customers and monetized by advertisers.
Blind Spots of Hollywood
A “blind spot” of a driver in a vehicle is an area around the car that cannot be directly observed by the person at the controls. It is only with rear view and side mirrors that the driver can try to overcome the blind spot while driving. The Darwinian principle of “survival of the fittest” does not guarantee success for incumbents in media and entertainment. Blind spots can range from the nature of the disruptive technology itself to paranoia for survival from the perceived threat. Some of these can be avoided and others not.
Disruptive Technologies: Intrinsic Blind Spot. The history of technological progress confirms that the ultimate nature and value of disruptive technologies is seldom realized at inception and it is their imaginative application to an existing industry or business which yields unexpected transformation. The Internet, invented for university academics and scientists to collaborate in a secure and closely-guarded way, has emerged as the ubiquitous means of communication and distribution world-wide. The fundamental nature of disruption itself can be a blind spot.
Shareholder Responsibility: Allocation of Resources. In the modern era, industrial corporations have been built on principles of scientific management. Allocation of resources has been a guiding principle for organizations in which shareholders deploy capital and human resources commensurate with the current revenues of product(s) and service(s). As a result, a business born out of a disruptive innovation receives minimal resources from the corporation. In addition, most often the business characteristics of such an innovation are fraught with lower quality, narrow gross margins, and an excessive number of transactions. Sometimes, even the customer segment being served by the innovation yields a low return on investment. Finally, the significant segment of customers accounting for the ongoing revenues, find the innovation unattractive and even damaging. Clayton Christensen explains, “These companies find it very difficult to invest adequate resources in disruptive technologies—lower margin opportunities that their customers don’t want—until their customers want them.”
B2B Relationship: Devoid of Consumer Interface. The relationship of the Hollywood studio with its trading partners on the distribution side has always been business to business (B2B) and not business to consumer (B2C). Film content is delivered to theatrical exhibitors that have a direct relationship with movie-goers. DVDs are sold by home entertainment companies to retailers and rental services who claim to own the consumers. Television content is delivered to masses by broadcasters and cable TV operators who access households. The resultant disconnect of the studio from the consumer is a major detriment to feeling the pulse of the consumers or reading their minds…
It should also be noted that the products the studios produce, i.e. movies and TV shows, by their very nature, are not as easy to commodify as, say, a box of detergent or a bar of soap. Each film’s perceived value, as gauged by each individual consumer, changes from film to film, its so-called quality determined by many subjective factors having as much to do with difficult-to-quantify aspects of the creative process as it does changeable consumer tastes. This subjectivity, then, is another “blind spot” that can and should be mentioned, especially in regards to the efforts of the studios to reach its customers.
In the digital age, online retail, telecom, and over-the-top services connect directly with the consumers, often claiming to own them and further distancing the content owners in the process. The disintermediation of the content owners caused by the disruptive innovations has created a blind spot to consumer habits and actions.
Studio Culture and Structure: Constraints for Technology Adoption. Creative story telling has been the core product of Hollywood. In the dogged pursuit of creative production, the business executives often fail to focus on a disruptive technology as an opportunity because it is viewed as a distraction. Corporate executives thrive on understanding their markets and competition. They deploy effective listening posts to follow their customers and build predictive models based on what is known. Minimizing uncertainty in the business outcome is their priority, to which enhancing organizational efficiencies and leveraging disruptive innovations produce blind spots that enlarge over time and threaten the status quo.
Traditional Business Management: Antithesis of Disruptive Innovation. America Inc. has been driven by Michael Porter’s claim that competitive edge can be achieved by any one of the three generic strategies—differentiate market offerings with product leadership where special features justify a premium price; optimize the production system for efficiency to sell at a lower price; and customize an offering by serving just one segment of the market extremely well. None of these strategies is transformational and hence a blind spot is created because disruptions often work from the bottom-up and the new product or service may not be rooted in the old one. Traditional planning simply fails in times of great change. Henry Mintzberg, in his book entitled The Rise and Fall of Strategic Planning, argues that one of traditional strategic planning’s false assumptions generally is that the future can be forecast based on existing environmental conditions. Discontinuity fueled by technological innovations makes forecasting virtually impossible.
Piracy and Cyberattack: Paranoia Justified. Napster, the peer-to-peer (p2p) file-sharing site, virtually destroyed the business of the music labels because of the ensuing piracy. In the movie industry today the loss of revenue due to piracy is estimated to be about $2 billion to $3 billion per year. While the fixed production cost of a movie is millions of dollars, the marginal cost of manufacturing a DVD is only a dollar. The crippling damage to Hollywood is when digital products are perfectly copied at infinitesimally low cost and instantaneously distributed around the world. In addition, the recent hack of Sony Pictures Entertainment is a testimony to how vulnerable an organization is against malicious cyberattacks.
The legal grant of exclusive rights to intellectual property via patents, copyrights, and trademarks, does not confer complete power to control distribution. There is still the issue of enforcement, a problem that has been exacerbated by digital technology and the Internet. This paranoia over piracy and cyber threats deters the studio executives from fully exploiting the value of digital content distribution.
Transformation of Hollywood: A Call to Action!
The strategic intent of Hollywood has to be to recognize the blind spots and avoid them where realistic and practical. Here are some suggestions for avoiding the blind spots and fostering disruptive innovation.
Connect with Billions of Consumers: The New Paradigm. Hollywood studios are trying to transition from B2B to B2C, which is a Herculean task. Flixster and Crackle, the Internet video services owned by Warner Bros. and Sony Pictures, respectively, represent studio attempts to deliver content directly to consumers through fledgling new brands. With smart-phones in the hands of nearly five billion people world-wide by 2017, Hollywood should leverage the opportunity to provide instant access to information and content anytime, anywhere, and on any personal device. In addition, the multiplicative networking effect of peer-to-peer digital communication, enunciated by Bob Metcalf, the co-inventor of Ethernet, has produced a paradigm like never before. Listening to the customers on social media and analyzing big data may surface the hidden treasure.
Digital Makeover of the Monolithic Studio: New Order of the Day. The incessantly increasing production and marketing budgets of films and their high failure rates at the box office have been financially hurting Hollywood, particularly when its cash cow is bleeding due to the drastic decline of DVD sales. Pursuit of blockbuster films at any cost has been the business model of the studio and it needs a Draconian change. Harnessing creative power in the wake of disruptive technologies without strangling its free-spirit is a daunting task. Rather than merely producing tent pole films that hopefully deliver huge box office tallies, it may be wiser to look to new, fresh filmmakers with lower budgets to generate new hits.
Restructure Technology Functions: The New Imperative. In today’s information age, businesses have concluded that data is a competitive asset. In the Hollywood studios, the Chief Technology Officer (CTO) is responsible for deploying technology to enhance the process of storytelling by adopting new production methods. Some of them also have the responsibility to store and secure the intellectual property assets of the studio. The Chief Information Officer (CIO), on the other hand, enables the business units to carry out their management functions with efficiency, timeliness and control. The CTO often reports to the Studio production chief while the CIO to the CFO or COO. The Digital World is blurring the divide between the responsibilities of the CTO and the CIO.
Today the CEOs of Hollywood studios face the unique opportunity to better integrate the efforts of the CMOs, CIOs and CTOs in order to better understand consumers, influence their behavior, introduce new products, optimize advertising investments, better manage their brands, and reinvent their business. In order to synergize the two functions of the CTO and the CIO, consolidating them and granting C-Suite membership is worth considering. Furthermore, the transformational value of Big Data and Analytics is being realized by the stakeholders.
Build Company Platform: Open and Collaborative. While the pundits assert that excellence in products drives business success, the impact of distribution may have a greater impact. It has been prophesied that “People need simple, secure, powerful, integrated and user-friendly ways to create, consume, purchase, share and manage their content. They need to connect with others—easily and often. For all these reasons, they need a platform.” The most widely-used platforms, rooted in technology, embrace third party collaboration to enable an intense relationship between customers, suppliers, and the community at large. A corporation’s relationship with the consumer is one-way whereas it is back-and-forth with consumers and suppliers when you have a platform. For example, the Amazon platform has capitalized on giving consumers a voice where they can rate products and services. This resultant feedback impacts both Amazon’s offerings and consumer’s choices, building and strengthening more brand loyalty.
Foster Consumer-Pull Marketing: Build to Last. The remarkable ability of Hollywood to launch brands that achieve global prominence in a matter of days has not diminished but its traditional strategy of marketing to push its message to a broad spectrum of consumers is expensive and often ineffective in the digital marketplace. Paul Downes and Larry Nunes have rightly asserted that today, “Marketing is led not from above, but by the users themselves, who drive much of the buzz (and customer service) through social networks, review sites, microblogging platforms, and other information sharing tools.”
Digital media is so pervasive that consumers have access to information any time on any personal device and at any place they want. Gone are the days when studios alone pushed messages about content, products, and services. Rather, an intimate understanding of the consumer holds the secret for transformation of the industry by creating a new business model in which user experience is enriched and long-term customer engagement is fostered over the product life. A CMO cannot abdicate his responsibility of marketing to the informed and connected consumer instead of leveraging it.
Dig Deeper & Reach Out: Consider Intrinsic Value and Not Negative Impact. In order to avoid the Innovator’s Dilemma, Christensen urges incumbents “to watch for disruptive technologies in the form of lower-quality substitutes that enter the market first by picking off the least-profitable customers and then, as the technology improves, moving up to become competitive with market leaders.” When BitTorrent was viewed as a threat to the music industry in 2001, Hollywood failed to see that the protocol invented for peer-to-peer file sharing to enable the distribution of large amounts of data over the Internet was a disruptive innovation to be leveraged. Distracted by the legal effort to thwart imminent piracy of music, the true value of the technology went unnoticed. A deeper, fundamental understanding of the disruptive technology has to overcome the fear of severe damage to an incumbent.
Hollywood has begun to overcome several of its blind spots and is slowly embracing disruptive innovations to transform it. The entertainment industry is at a historical point of inflection in its supply chain from conception to production, post-production, distribution, marketing, and delivery to consumers. The death of distance and time, a result of technology, has reduced the impediments to growth of Hollywood’s digital content but the challenge to connect with consumers directly still remains.
The words of Google execs Eric Schmidt and Jonathan Rosenberg urge us to advance: “The Internet has decimated traditional media business models, but new ones have and will continue to emerge in their place. The result will be a much bigger, more fragmented, and chaotic market for creators and endless choices for consumers…. Find the geeks, find the stuff, and that’s when you’ll find the technical insights you need to drive success. The Internet Century brims with pyramids yet unbuilt.”
 Porter, Michael E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press.
 Christensen, Clayton M. (2000). The Innovator’s Dilemma. New York: Harper Business Essentials.
 Mintzberg, Henry. (1994). The Rise and Fall of Strategic Planning. New York: Free Press.
 Faughnder, Ryan, & Zeitchik, Steven (Feb 7, 2015). “Sony faces creative uncertainty as Pascal prepares to exit.” Los Angeles Times. Access at http://www.latimes.com/entertainment/envelope/cotown/la-et-ct-sony-movies-20150207-story.html
 Downes, Larry & Nunes, Paul. (2014). Big Bang Disruption: Strategy in the Age of Devastating Innovation. New York: Portfolio/Penguin.
 Schmidt, Eric & Rosenberg, Jonathan. (2014). Google: How Google Works. New York: Grand Central Publishing.
About the Author(s)
Devendra Mishra, Executive Director and Founder, Hollywood IT Society (HITS), is an adjunct professor of Strategy, Information Systems and Decision Sciences at the Graziadio School of Business and Management. He is the co-founder and chief strategist of the Media and Entertainment Services Alliance (MESA) and the founder and executive director of the Hollywood Information Technology Society (HITS). An internationally recognized authority on supply chain management, he established Supply Chain Academies for the industries of Entertainment (ESCA), Consumer Electronics (CESCA), Video Game (GameSupply) and Biotechnology (BSMA). Formerly, he was the CEO of Stan Lee Media; President and Chief Executive Officer of International Multifoods' wholly owned specialty distribution subsidiary VSA; President of Worldwide New Media, Distribution Services and New Ventures at Technicolor; President and Chief Operating Officer of LIVE Entertainment; and, Vice President of manufacturing and distribution of RCA-Ariola Records world-wide.