The Samurai Embrace Financial Times May 2, 2006 by Edward Jay Epstein

The Hollywood Economist The numbers behind the industry. One upon a time, the film business was solely about films. In that era, the Hollywood studios made virtually all their money from their share of the admission tickets sold at cinemas. Nowadays, Hollywood's equation is very different. Most people watch films in venues other than theatres, including on their television, computer display, inflight aircraft screens and iPods. It is these venues, not theatres, that now furnish over 85 per cent of the studios’ worldwide revenues. This momentous shift from theatres to homes proceeded from a series of decisions made not in Hollywood or New York, but in Tokyo and Osaka. This reinvention of the film business began in the 1970s with the engineering by Sony and Matsushita of an affordable video cassette recorder. Through a process of ingenious compromises, Sony made its Betamax small enough to fit on top of a TV set and fool-proof enough to be operated by a child. The Hollywood studios led by Universal fought for seven years in the courts to prevent it from reaching the market. If they had prevailed over Sony, the video rental market may never have developed, but, fortunately for the studios, they lost their case in the Supreme Court in 1984. (It was a bittersweet victory for Sony who, in the interim, lost the format war to the even more user-friendly VHS format developed by Matsushita.) The VCR soon became a ubiquitous household appliance, video stores became a part of the urban landscape and the new-found flow of money from video rentals proved to be financial salvation for the very studios that had so bitterly fought the new technology. As a consequence, in deciding what films to make, studios approved projects that had greater potential for huge video rentals. These proved to be special-effects laden disaster and fantasy films that appealed to children and teenagers. Films that did not fit the requisites of video buyers were given a lower priority and, as it turned out, these included dramas, comedies and political exposes intended for an older, more diverse and less-predictable audience. Next, in the mid-1990s, Toshiba and Sony changed the Hollywood equation even more radically by substituting a digital platform “the DVD“ for the video cassette. As with the VCR, this digital future was resisted by most of the Hollywood studios who were concerned that it might kill the video business that had become their golden goose. But now Sony, which owned the Columbia Tristar studio, and Toshiba, which was a part owner (and strategic partner) of the Warner Bros studio, had marshalled enough power in Hollywood to ensure that enough titles would be available for the DVD launch. The combined libraries of these two studios included over 24,000 titles. So, in August 1995, in a conference in Hawaii, Sony and Toshiba (and all the other Japanese manufacturers) agreed on a single format. Even though most of the other major studios did not participate, the DVD roll-out succeeded in transforming films into a retail product. It could be played not only on DVD players, but on personal computers, game consoles, iPods and other digital devices. By 2000, Wal-Mart had become Hollywood's single biggest customer, selling about a third of all DVDs, occasioning top studio executives to journey to Bentonville, Arkansas to find out what ratings, stars, genres and other attributes would help them win strategic placement in Wal-Mart stores. As shelf space became the new name of the game, studios sought to increase their leverage, or throw weight, by buying up independent distributors (and later "mini-majors" to get more titles. As a result, six companies “ Time Warner, Sony, Fox, Viacom, Disney and Universal“ came to dominate not only all the major releases but the entire universe of so-called indie releases. The DVD, with its random access and easy navigation, also opened up for these companies a rich new market: boxed sets of TV series. Not only could they tap their huge TV libraries, but they could invest in original series, such as The Sopranos, Sex and the City and 24, which often proved more profitable than films that opened in theatres. For the growing home audience, the DVD also made films a more interactive experience. Couch potatoes could now change the language of a film, its aspect ratio, rating or ending; watch additional scenes (which in some cases are shot for the DVD) or listen to commentaries by directors, writers and actors, or play a game, music video, or gag reel. With these bonus features driving a large part of DVD sales“ one-third of polled DVD buyers said that they first played the bonus feature“ Hollywood's films became part of a package. The next move by the Japanese electronic giants, which will reach the market later this year, is the high-definition disc. Pioneered by Japanese television in the late 1970s, high definition makes the home the equivalent of a theatre by furnishing film-like images on a large screen. There are two versions, Toshiba's HD-DVD, which is less expensive to manufacture, and Sony's " Blu-Ray", which can hold multiple layers of data. While both render a similar quality image, Sony's version, which is supported by all the Hollywood studios, provides two separate viewing planes. One contains a high-definition film and the other games (or other feature) linked to each scene. The idea is that the audience can leave the film and enter a super-realistic game or vice versa. To take full advantage of this feature, studios will presumably make more action films, which lend themselves to games. Tokyo's technology is not entirely responsible for moving Hollywood's focus from the theatre to the home, bringing independent films under the control of the majors, making mindless amusement-park sequels pre-eminent, or blurring the line between films and games, but it both enabled and made profitable these transitions. By the end of this year, Sony will further push the digital horizon with the launch of its PlayStation 3. Despite its juvenile sounding name, it is a state-of-the-art home server that can connect wirelessly to TV sets, computers, printers and the internet, simultaneously run up to nine different kinds of consumer electronics, play and record high-definition films and render game characters in frighteningly realistic ways. The result will be that the world will soon be watching films, or fragments of them, in a form to which Hollywood will either have to adjust or relinquish a good part of its control over the entertainment economy. It is not that the Japanese set out to change the way the world sees films, it is that Hollywood lacks imagination in seeing and taking control of its own digital destiny. [back to archive] if you have any comments please reply below: your email: