Silicon Valley conquers Hollywood, part 3 — think small, not big

The last installment of Robert X. Cringely’s advice for the combatants in the knock-down drag-out Hollywood vs. Silicon Valley battle:

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by Robert X. Cringely

 Some readers of my last column in this series seem to think it was just about the movie business but it wasn’t. It was about the recorded entertainment industry, which includes movies, broadcast and cable television, video games, and derivative works. It’s just that the movie business — like the mainframe computer business — learned these lessons first and so offers fine examples.

Whether from Silicon Valley or Seattle, technology companies see video entertainment as a rich market to be absorbed. How can Hollywood resist? The tech companies have all the money. Between them Amazon, Apple, Google, Intel and Microsoft have $300 billion in cash and no debt — enough capital to buy anything. Apple all by itself could buy the entire entertainment industry, though anti-trust laws might interfere.

Right now these companies are not trying to buy the entertainment industry but to buy access to content and audiences. Their primary goal is disintermediation of cable and broadcast TV networks. The vision held by all is of Americans sitting in our homes buying a la carte videos over the Internet and eating popcorn.

This is unlikely to happen simply because cable companies and TV networks aren’t going to hand over their businesses.  If such a transition does take place, and I think it is only a matter of time before it does, the catalyst won’t be phalanxes of lawyers meeting across conference tables. When the real entertainment revolution happens it will be either because of a total accident or an act of deliberate sabotage.

With accidents so difficult to predict or time, I vote for sabotage.

But sabotage doesn’t come naturally to the minds of big company executives, or at least not executives at the companies I’m naming here. They are hobbled by their sense of scale for one thing. Big companies like to hang with other big companies and tend to see small companies as useless. When elephants dance the grass is trampled. Well it’s time for someone to pay more attention to the grass.

While Silicon Valley has more than enough money to buy Hollywood, Hollywood is unlikely to sell. And even if they sell, it’s unlikely Silicon Valley would get anything truly useful because they’d only be buying a shell. Networks and movie studios don’t typically make anything, they just finance and distribute content.

If you can’t buy Hollywood, then you have to steal it.

What makes Hollywood unique is its continuous output of ideas. When technology companies talk about gaining access to content what they really mean is gaining access to this flow of ideas. For all we might talk about the long tail, what defines Hollywood is new content, not old, with a single hit movie or TV series worth a hundred times as much as something from the library. Intel is having no trouble getting rights to old TV series, for example: it’s the new stuff that’s out of reach.

Amazon and Netflix have bought a few original productions between them but the economics aren’t especially good because they have to pay all the costs against what is so far a limited distribution outlet. These companies need to find a way to control more content for less money.

The trick to stealing Hollywood is interrupting this flow of ideas, not just for a show or two but for allshows, diverting the flow to some new place rather then where it has always gone. Divert the flow for even a couple years and the entire entertainment industry would be changed forever.

What if there were no new shows on CBS?

Here’s where it is useful to understand something about the finances of content production. This $100+ billion business (the U.S. Department of Labor says the U.S. entertainment industry pays $137 billion per year in salaries alone) is driven by cash yet there is very little cash retained in the business. While Apple is sitting on $100+ billion, Disney isn’t, because there’s a tradition of distributing most video revenue in the form of professional fees.

While workers in most industries think in terms of what they make per year, during the heyday of the studio system the currency in Hollywood was always how much any professional made per week. Today the entertainment industry often thinks of what someone makes perday.

The numbers are big, but not that big. George Lucas just sold his life’s work for $4 billion, which would make him a second tier tycoon in Silicon Valley.

The only person to ever extract more cash from Hollywood than George Lucas was Steve Jobs when he sold Pixar. Ironic. eh?

So the Hollywood content creation system is fueled with cash, but the pockets from which that cash comes are not very deep. Every production company — every production company — is two months or less from bankruptcy all the time. They create or die.      

So here comes an Intel, say, looking to buy or license content for its disruptive virtual cable system. They attempt to acquire content from the very sources they hope to disrupt. “License us your content, oh Syfy Channel, so we can use it to decrease the value of that same content sold to Time Warner Cable.”

Am I the only one who sees something wrong with this picture?

Google has taken a somewhat more clever approach with YouTube financing 100+ professional video channels. But this, too, won’t have much impact on the industry since it doesn’t truly divert the content flow from its traditional destination to a new one. And at $8,000 per hour or less, YouTube budgets aren’t exciting many real players in Hollywood.

You get what you pay for.

If your goal is disruption — and that ought to be the goal here — then disrupt, damn it! Impede the flow of ideas. That means negotiating not with big companies but with small ones. Because the Hollywood content creation ecosystem is based on a cottage industry of tiny production companies where the real work is done. There is no mass production.

I happen to own a tiny production company, NeRDTV, which produces this rag and other stuff. I’ve laughed on this page from time to time at what my company is supposedly worth based on acquisition costs in Silicon Valley. I know my real value is much lower after negotiating with Mark Cuban who at one time  was looking to put some money in this operation.

“It’s a production company,” Cuban said. “No production company is worth more than $2 million.”

And he’s right. By the time you separate the production infrastructure from the content it produces — content that is usually owned by someone else who pays for making it — all that’s left over is about $2 million in residual payments, office furniture, editing equipment, and BMW leases.

There are probably 1000 legitimate production companies in California and 2000 in America overall. If they are worth an average of $2 million each, buying them all would cost $4 billion.

So the cost of installing a valve on the entire content creation process for the $100+ billion U.S. entertainment industry would be $4 billion. Think of it as an option.

Or cut it a different way: $4 billion would buy a controlling share of every TV pilot and every movie in pre-production. Talent follows the money, so they’d all sell out.

This is a classic labor-management squeeze tactic from the early days of the labor movement and it works.

There are no anti-trust issues with buying $2 million companies or early investing in productions. They are beneath the radar at both the U.S. Department of Justice and the Federal Trade Commission. Nobody cares about small companies.

Something like this tactic is occasionally used in what’s called a roll-up, where borrowed or investor money is used to buy a basket of companies that are integrated then eventually sold or taken public. But that can’t happen here because of the sneaky anti-trust requirements. Apple, if it were to try this, would have to do it through a new content division or subsidiary.

Let’s look at a real world example of what I mean.

My little sister started an Internet business selling to consumers copies of jewelry used on TV shows. Her original idea was to go to the studios and networks and cut revenue sharing deals in exchange for exclusive licenses, but the studios and networks wouldn’t even talk to her. The deals were too small, the money not enough, they claimed, to even justify the legal expense. But most importantly they didn’t want to make a mistake and set the wrong precedent. No precedent was better than a bad precedent.

Undeterred, my sister took a different approach very similar to the one I am presenting here. She found that the jewelry used in TV shows typically came from a separate wardrobe budget and each such budget was controlled by a wardrobe mistress. If the wardrobe mistress could get jewelry for free then she wouldn’t have to buy it or rent it with that part of the budget falling to her bottom line. Unspent budget = profit. So my sister cut her deals not with the studios or networks but with the wardrobe mistresses — eventually more than 40 of them. Nearly every U.S. primetime TV show used her jewelry with not a penny going to the networks and it was all perfectly legal.

If Seattle and Silicon Valley make a frontal attack on Hollywood they’ll fail. But if they undermine the current system by bribing the peasants, they’ll succeed for a tenth the money they’d have lost the other way.

Will they follow my advice? Probably not.

Read Part 1
Read Part 2

Silicon Valley conquers Hollywood, part 2 — There’s no business like show business

Yesterday we brought you Part 1 of Robert X. Cringely’s look at showbiz and the tech biz and how they’re each trying to screw the other trying to work together. Time now for Part 2:

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By Robert X. Cringely

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 (OTT) virtual cable system. This was expected to be announced, I’m told, at next week’s Consumer Electronics Show (CES) 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 today Intel made it known there would be no such CES announcement at all and the Wall Street Journal saysthe 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 takeover 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 Jessica 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.

…And that column will be here at TVWriter™ tomorrow!

Silicon Valley conquers Hollywood 2013 — Setting the scene

We at TVWriter™ have been big fans of geek writer Robert X. Cringely since the days when that name first appeared in InfoWorld magazine, and we currently follow Cringely.Com avidly.

Several writers have written under this pseudonym, and we have a sneaking suspicion that our favorite user of that name wasn’t the man currently using it. (That would be whomever gave delighted nerd readers “Pammy.”) We know we’re being a bit opaque here, but a thorough discussion of the Robert X. Cringely monicker would take pages and, most likely, have nothing to do with television or television writing.

The following article, however, is the first of a 3 part discussion of how showbiz and the tech biz work, both together and apart, and is as insightful as all get-out. So our thanks to Cringe as we urge everyone interested in knowing more about how Hollywood works to dig in:

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by Robert X. Cringely

I wrote here nearly a year ago that there would be no more annual lists of predictions and I’m sticking to that. I’m trying to retire, remember? The ads are gone, you might notice, and with them my income. But I’m not out the door quite yet and have time for a series of columns on what I think will be an important trend in 2013 — the battle for Hollywood and home entertainment.

The players here, with some of them coming and some of them going, are Amazon and Apple and Cisco and Google and Intel and Microsoft and maybe a few more. The battleground comes down to platforms and content and will, by 2015 at the latest, determine where home entertainment is headed in America and the world for the rest of the century. The winners and losers are not at all clear to me yet, though I have a strong sense of what the battle will be like.

Why fight for Hollywood? Because making our spreadsheets recalculate faster is no longer enough to inspire new generations of computer hardware. Because Silicon Valley has come to appreciate continuing income streams from subscription services. Because there are legacy players in the TV industry who are easily seen as vulnerable.

Notice I didn’t include Facebook in my list of combatants. Facebook will need the next two years to consolidate its existing businesses before it can even begin to think about Hollywood. Facebook will miss this cycle completely.

Another company I didn’t mention is Netflix. Though this pioneer of video streaming has been around since the 1990s it feels to me more like a acquisition candidate in this battle than a conqueror. Same for TiVO and even Roku: too small.

Still, it’s in Netflix-style Over-the-Top (OTT) streaming content where we’ll see lots of action that will eventually come at some expense to the incumbent cable companies. Some of these will choose sides, like Comcast isapparently doing with Intel, while others may be acquired or just fade away.

Look at both Motorola Mobility (Google) and Cisco trying to get out of their cable box businesses. This does not bode well for their customers, the cable systems.

Content comes down to TV, sports, and movies, with the big attraction of 2012 being sports because of its resistance to piracy.  Sports means large live audiences that are unwilling to wait for a torrent to deliver the Big Game two days later. CNN always does well with advertisers when there is a war or a disaster, but sports figuratively is a pre-scheduled war or disaster complete with cheerleaders and good lighting, which is why ESPN is worth more than CNN, MSNBC, and FoxNews put together.

Video games have peaked as a business. It was a great ride but the days of the $60 video game title are limited as mobile, casual, and social gaming take over. This has Microsoft, for one, scrambling hard to make its xBox game console into something like a TV network. Nintendo and Sony are not significant players in this space even though Sony thinks it is.  They, too, have peaked, which is surprising given Sony owns a major movie studio.

The dominant video platform or platforms will be determined by the content they carry, so we are going to be seeing lots of money going to Hollywood from Seattle and Silicon Valley, enriching networks and studios alike. Alas, I doubt that this effort, which is well underway, will show any clear winners simply because the major tech companies are going about it so stupidly.

I’ll explain tomorrow or the next day the right way for technology companies to conquer Hollywood.

Don’t worry. TVWriter™ will bring you “tomorrow’s” column, um, tomorrow. Hang tight!