Why Hollywood and Silicon Valley’s relationship is so thorny

We spoke with The Hollywood Reporter contributing editor and attorney Jonathan Handel about the relationship between Hollywood and Silicon Valley and whether their opposing world views can be reconciled.

Jonathan Handel is of-counsel at TroyGould, practicing entertainment, new media and technology law. He  is also a contributing editor at The Hollywood Reporter, where he covers entertainment labor and various other business matters. He is also the author of the recently-published book Hollywood on Strike!, which chronicles the 2007-2009 Hollywood labor disturbances – the Writers Guild strike and Screen Actors Guild stalemate. Jonathan is a graduate of Harvard College and Harvard Law School, and in 2010 served as adjunct professor at UCLA School of Law where he taught a course on entertainment unions and guilds. He can be followed at @jhandel

 

 

WAS THE SOPA / PIPA STRATEGY THE CORRECT ONE GIVEN WHERE THE MUSIC INDUSTRY WENT?

There are several strands to that answer.

Firstly, the strategy was clearly the wrong one because the studios lost. They were unable to get SOPA passed.

Secondly, the industry has yet to come to terms with several factors. One is that not every pirated download represents a lost sale. People are price sensitive and it’s not true that everyone who would consume a product at a zero price point would have consumed the product at $4.99 price point. A lot of people would simply not have been customers. So in terms of the dollar figures that get thrown around for what the annual loss of piracy is, there is a degree of fiction to that.

When the word ‘theft’ is used, it papers over the key difference between the unauthorized taking of a digital copy and the unauthorized taking of a physical copy. If someone shoplifts a DVD, not only have they taken something they did not have the right to, they also denied someone else a right to that copy. That is not true when someone watches a pirated download. They have indeed appropriated something for themselves for what they didn’t have the legal right to do, but they haven’t deprived the studio the ability to sell that screen to other paying customers. People certainly used to joke about sneaking into movies as a right of passage. Nobody talked about throwing them in the pokie. It’s the same thing as watching an unauthorized download. You’re not depriving the movie theater owner of the ability to sell as many seats as they were going to sell anyway. The degree to which priacy actually affects the industry is not truly well determined or well known. I do believe it is significant, but it’s very hard to quantify.

Do you think Hollywood and Silicon Valley can work together or are their world views too diametrically opposed?

I think it will continue to be a very difficult problem. Hollywood can’t live without Silicon Valley’s internet distribution. And Silicon Valley can’t live without Hollywood, the content king. They need each other. But beyond that baseline, the economics of content production are far inferior to content distribution and that will continue to make things difficult. If you want to produce, let’s say, 10 movies, it will generally cost you about 10 times as much as producing one movie. But if you want to distribute 10 times as many streams, it won’t cost you 10 times as much. The cost scales much more slowly for distribution than content creation. Content creation is an industrial process, whereas content distribution has become a post-industrial process. The two industries are joined at the hip and that has created a lot of discomfort, jealously and angst with the studios. They see the Apple’s and Netflix’s getting rich quick.

So could you explain what the sticking point is for getting the content to the consumer?

On the movie side, the rights to the pay-TV Pay-1 Window (which is a few months after the movie is released, rather than 7 or so years), are part of large output deals between the studios and the pay-TV channels (of which there are currently four: HBO, Showtime, Starz, and FX). A large number of those deals expire in 2014 which means that depending on when they expire, there will be a flurry of negotiations in 2013. It’s therefore not surprising for Redbox and Verizon to now announce a venture. It signals that in a year from now we may well see them step up to the plate with a large wad of cash and try to make a deal with the studios. Netflix and Amazon are also in the game and nobody really knows what Apple and Google’s plans are yet. But what you’ve got are about 2-5 deep pocketed companies that will be competing with the existing pay-TV channels for output deals. So you’ll see a lot of action on this front in 2013.

What we saw over the past several years was Netflix specific. Netflix sub-licensed the online streaming rights from Starz which has an output deal with Sony and Disney. Netflix only paid  around $25 million annually, as nobody thought there would be traction. Then suddenly Netflix began getting tons of new members. Two things started to happen: they hit the 25 million viewer cap that was built into the deal for the Disney pictures and therefore they lost access to Disney movies. Then, as we got closer to the deal expiring, it was rumored that Starz was going to want $300 million for a comparable deal. Ultimately, Starz was not going to do this deal with Netflix because they felt Netflix was a competitor. So Netflix no longer has access to that content. Now much of what’s on such streaming services is mostly library content. There are very few new movies available. The content is on iTunes, because they’re running on a different window.

Much of the problem lies in the fact that there’s a fundamental difference between Hollywood and other businesses. Hollywood’s business model is built in a large part on scarcity, on controlling supply, on making content available only through certain mediums during specified windows. The internet’s fundamental ethos is ubiquity, make everything available anywhere anytime. People have smartphones? Let’s see how much stuff we can slam into the phones. Let’s create apps. They want Facebook and Twitter? Let’s try to put them on there. There’s a constant attempt in Silicon Valley to make as much available on as many different platforms as possible. Hollywood very much tries to control where and when the content is available.

 

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