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Little Guys Could Take Hollywood out of the picture

By David C.  McCourt
July 20 2006
The Financial Times

In the mid-1990s, I bought a Pennsylvania rural telephone company called Commonwealth Telephone. It was a steady, if unexciting, business. But for the first time in decades, it soon began experiencing double-digit growth. Our customers were ordering second lines so they could subscribe to an internet service provider. Selling second lines to customers eager to have an AOL account seemed like a windfall for phone companies whose monopoly model was eroding.

I think of this experience when I see media companies rushing to deliver their content over the internet, iPods and mobile phones. These companies foresee the demise of conventional television and are scrambling to promote any new way of distributing their content. Yet they have been reluctant to promote a new model for creating it.

Phone companies in the 1990s were also infatuated with giving customers more "access". But rather than develop better, faster networks to deliver the internet, or creating a better AOL of their own, they remained focused on offering cheaper dial-up connections to get online. Today, most phone companies are losing access lines; some as many as 8 per cent per year.

The media companies face a similar predicament, but with a twist: by promoting downloadable entertainment, they are unwittingly greasing the skids for emerging rivals. The threat to the content distribution cartel is not from cable television, TiVo or video games but from anyone with a video camera and some creativity. A battle is already under way among applications developers to create the most advanced interactive tools and features to view and manipulate online content. Hollywood pooh-bahs will discover that releasing television and film on the internet is not simply another channel for their studios. It is the path into a competitive world they have never faced.

For Hollywood, the solution is not in expanding distribution into new digital channels but in rethinking its entire business model for content creation. While most US companies are undergoing a revolution in innovation, Hollywood still largely operates on the guild system and centralised decision-making established by the big studios in the 1930s. Technology and a global market for entertainment have made that model obsolete. Companies as diverse as Procter & Gamble, Cisco and Nike operate loose networks of innovation across China and India, using what looks like an open-source model for new products. They post problems to company websites, letting any garage-based innovator offer a solution.

Can Hollywood studios ever embrace such a fragmented, unbundled business model? It may already be happening without the moguls' permission. Robert Rodriguez, who wrote and directed hit films such as Spy Kids and Sin City, recently resigned from the Writers and Directors Guilds of America. He intends making films without the industry middle man. Who can blame him? The cost of professional quality television production equipment has dropped 400 per cent in recent years. Global distribution is the cost of a T-1 connection. Companies will encode video for multiple screens at amateur prices.

"If I need your opinion, I'll give it to you," was one of Sam Goldwyn's legendary acidic quips. The arrogance and top-down mentality of the Goldwyn era still cast a long shadow over the US entertainment industry. In their insular world, no one blinks at production costs exceeding $100m. The way out is to recognise, as the telecommunications industry of the 1990s failed to do, that offering new access channels to customers actually increases opportunities for your competitors. Just as televised network news is scooped by blogs, and classified advertising at newspapers loses out to Craigslist free online advertising, the entertainment business will have to compete with quality "amateur" video produced at a fraction of Hollywood rates.

There is a huge opportunity for those studios that realise that this global trove of entertainment creativity should be captured, not ignored. Today, television over the internet is still perceived as the primary channel for secondary content and a secondary channel for primary content. That equation - indeed, the very distinction between primary and secondary content - is going to disappear. In its place will be entertainment that is cheaper, more personal and more responsive to global customer demand. The future of the entertainment industry will be determined by whether Hollywood competes against this model or champions it.

The writer is chairman and CEO of Granahan McCourt Capital, a private investment firm focused on telecoms and media, and an Emmy Award-winning producer

Copyright The Financial Times Limited 2006

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