notes-business-hollywood

So, it seems that one of the previous previous core value adds of the large entertainment companies, distribution, has been obsoleted by technology. I'm told that you can now fairly easily get online, for example, a file containing all the top 10 hit songs on each Billboard list for the entire 1970s. This sort of efficiency obsoletes the need to press, ship, and warehouse CDs.

Not to say that that was their core compentency. A big part of what these companies do is (i) marketing and (ii) advertising, that is, (i) deciding which things might get a lot of people's attention and (ii) spend a bazillion dollars on advertising it. They also sometimes finance things; they pay a lot of money up front for a movie to be made and marketed, taking on the risk that it won't do well. They also sometimes provide other capital, for instance, all the expensive equipment and space needed to actually make a movie or album.

There is a lot of hatred for these companies. They try to rip off their artists with e.g. Hollywood accounting (apparently the guy who did the voice of Darth Vader hasn't gotten any royalties because the big Hollywood companies claim that Star Wars wasn't profitable). They try to put their customers in jail. Their executives are rumored to not be the nicest people. Some of this is probably just the way the numbers work out, a reality that some people don't like (e.g. if you finance risky projects, you have to make a lot off of the winners in order to pay for the losers). But some of it probably isn't. Their image problem is hurting these companies because now, with the internet, customers essentially get to choose whether or not to pay for their products (whether to buy from the distributor or to get stuff free on the internet). In a parallel universe, many customers (rabid fans of musicians at least) would want to support the artists and so would buy legally. But in our universe, these customers know that most of the profit is going to a large, supposedly evil Hollywood company, not to the artist, and they don't want to support that.

So, what should the companies refocus on to solve these problems -- what should they do to earn their keep, if not distribution?

My answer: (a) help out artists with the business side of their operations (a professionaly service, like accountants, or like Amazon drop-shipping), (b) marketing, (c) financing.

I opine that the studios also need to give the end-producers (the artists) more control over the ownership of their work. The old revenue model, where the end-user buys copies of the work, isn't working anymore, so now is a time of business-model ferment in this industry. Rather than pick a new model and bet the farm on it, the studio should be like venture capitalists, letting each end-producer choose the model that is right for them, and investing in a lot of different ones to reduce their risk. With responsibility comes control, and so the studios should let the end-producers keep a substantial part of the equity in their work, e.g. they should pay a larger percentage out in royalties (e.g. not apply Hollywood accounting).

So now this is looking even more like VCs. VCs don't 'help out with the business side' as much as I have in mind, but they do provide advice. VCs don't do advertising per-se, but they do provide connections, which to a B2B companies has a similar function. They certainly provide financing, and their selection of companies is a somewhat similar function to the way that studies do marketing to try and anticipate what people will buy.

Now if you talked to VCs, they'd probably say, a studio does the artists' business for them, and selects artists based on their capacity to produce a good product, rather than their capacity to run a business. We don't do our companies' businesses for them and we do care very much if they are good businessepeople. So what you're proposing is a studio model, not a VC model. And of course if you talked to the studios, they'd probably say, well, yes, that's what we already do; we help the artists with their business, we market them, and we finance them. So what's the problem?

The problem is that the studios say they do that, but no one believes that they actually do (I am very distant from Hollywood so I may be all wrong on this). People seem to think that the studios, rather than assisting the artists with their business for a voluntary fee, interpose themselves between the artists and their market and try to take a cut; the studio isn't perceived as a helpful accountant doing stuff you don't want to do, combined with a bank who gives you money to get started, they are perceived as a shark whom you have to go thru in order to have a (large) business at all. And unlike an accountant or a bank, who gives you clear terms, they are perceived as an adversary who tries to get you to sign up to a contract and then to trick you with things like Hollywood accounting.

This image creates a problem of trust -- if you think the studio is going to use Hollywood accounting against you, it becomes much harder to do business with them. This problem creates an opportunity for a studio that is perceived as more trustworthy. How could you make it more trustworthy?

(a) Standard terms for artists. Similar to the standardized seed financing documents becoming available in Silicon Valley, a studio could offer a standard document, with a set menu of optional clauses, and parameterized numerical terms. This removes the fear on the part of the artists that they are getting a poor deal.

(b) Time limits on control of IP. Say, after 14 years the artists gets back their IP, but they must pay royalties to the STUDIO on future sales. This removes the fear on the part of the artist that some shark is taking their life's work, or that some supposed fraud similar to Hollywood accounting will perpetually screw them over.

(c) Artist participation in governance. The studio is run either as a coop, or as a for-profit corporation, but with a governance process that yields seats on the board to artists, selected by other artists. This increases the perception (and hopefully the reality) that the studio will be fair in their dealings with other artists).

(d) Transparency. The studio opens its books, down to the per-project level, and any entities closely intertwined with it do the same. This removes the fear of Hollywood accounting.

(e) Artist participation in choosing new artists. This promotes the impression that the studio is choosing good content, rather than taking poor content and marketing it heavily so that it sells anyway. Obviously there is a large spectrum of how much involvement the artists should have in this area, and it's an open question where on this spectrum is optimal.

(f) Menu of a la carte services. The studio should break the services it provides into choices such as accounting, marketing, financing, business development, providing capital for production of new works, etc. This enhances the perception that the studio is there to serve the artist, not the other way around, which will both drive artists to sign with the studio, and will drive employees of the studio to align themselves with this business model. This also gives the artist a chance to dip their toes in the water, so to speak, by purchasing some studio services a la carte before 'signing' with them (e.g. transferring a large portion of IP or equity to the studio), and it gives the studio a chance to become aware of new arists (and how well they are doing).