Game Changer

Two items in the Wall Street Journal on Wednesday, July 29, 2009 together portend a big change in the way entertainment, both movies and "serial entertainment" aka series, are produced, distributed, and watched by US and global consumers. Together they have the potential to shake up Hollywood the way Toyota and Honda did in the late 1970's and early 1980's.

First, the article in Marketplace, B3, "Price War Dividing Grocers into Winners and Losers" has big changes in consumer behavior providing ripple effects in supermarket retail. Now, 1 in 3 consumers (that's one third) buy exclusively items on sale, twice as many as 18 months ago, according to market researcher Information Resources Inc. Or, in other words, from 16.5% 18 months ago to 33% of all shoppers today are buying items only on sale. Safeway, which sought to lure shoppers with upscale stores and high-quality fresh produce, reports same-store sales declined 2%. Result? The stores have lowered prices on thousands of items and run heavy discount price promotions. Retailers with low price reputations (paging Wal-Mart) are posting strong same-store sales increases [same-store sales are sales for stores open at least a year] while others are posting losses. The change in consumer behavior is best summed up by a quote from the article:

At Supervalu, the percentage of items purchased on sale rose four percentage points in the past year and items-per-transaction declined, as cash-strapped shoppers sought out the best deals across a variety of retailers. "If the item is not on sale in our stores, it is far more likely to remain on the shelves," Mr. Herkert said.

This is an earthquake in consumer behavior, and has profound implications for the entertainment industry.


Amazon posted weaker than expected second quarter results due to a decline in sales of books, music, dvds, games, and consoles. Analysts expect a 20% decline in video game sales from June 2009 compared to June 2008. Consumers are cutting back on groceries, and on entertainment even further. People have to eat. They can play the same video game another year longer.

The entertainment industry has long ridden a wave of profitability, based on nearly fifty years of almost uninterrupted economic expansion. When recessions have come, they have been limited in duration and scope. This recession promises to be different. More wide-ranging, and longer lasting. Some economists talk of a "lost decade" as with Japan in the 1990's.

A lot of analysts have described the fractured and niche status entertainment as a function of technology. And doubtless the new technologies: FM radio, the Walkman, the VCR, cable and satellite channels, and the Ipod have contributed to fragmented entertainment and the death of mass culture. But just as important is the ability of wealthy consumers to pay premiums for niche entertainment. For example, to receive Logo, the gay channel from Direct TV, costs $55 a month as part of their package sign-up. That's $660 per year. Even if not many sign up for the package, and it's sliced up many ways per each channel in the package, that's still a considerable sum of money. But the business model rests on enough consumers having both enough cash and economic security to spend the money. Just as the Long Tail hypothesis, which states that there is a lot of money to be made selling lots of "non-hits" such as hard to find CDs or mp3 tracks, books, dvds, and so on, rests on the assumption that there will be enough consumers with both willingness to buy non-hit massively popular items, and the money to purchase them. There have been criticisms here on just how accurate the Long Tail model is (i.e. niche content makes aggregators like e-Bay or Amazon money, and perhaps content creators), but the underlying economic model of "Laissez les bons temps rouler" requires, well, good times rolling.

The fundamental attribute of consumer behavior for every good or service purchased during long-lasting recessions is scarcity. Scarcity of consumer dollars, meaning that purchasing a dvd means forgoing purchase of another. This behavior drives consumers towards known "bang for the buck" entertainment, and of course "free" or advertiser supported (or already purchased DVDs) movies and serials are better than paid ones, within acceptable quality bounds. We already see that behavior in supermarket purchasing.

The second item in the Wall Street Journal was the July 29, Personal Journal, D1 story "Video on Cellphones: the Uncut Version". The story concerns bleeding edge cellphone users with expensive setups (using the Sling Media Slingbox and software for select phones) to view satellite or cable tv on their phones. The hardware alone costs between $200 and $300, plus a monthly service charge. Sling Media claims nearly a million people have signed up for the service for the Iphone. Problems remain with this service, besides the price, including battery drain, and jitter due to network latency (best performance is seen in WiFi hotspots using Wifi instead of the cellular network). Sling Media's Iphone service is limited to WiFi hotspots for just that reason. Still, Nielsen estimates 13 million people this year and last watched video from their mobile phones.

Nielsen estimates only 18% of the nations 270 million cell phones, or 48.6 million, are capable of receiving or playing video. That's still a sizeable number. Apple's basic Iphone 3G is $100 (with a year service plan that has it's own monthly fees). Apple has shown flexibility on the low end of its Ipod and Iphone devices. Their Ipod Shuffle is $80, with 4GB. Other manufacturers like Palm and Nokia are capable of producing low cost video phones as well.

It's highly likely that some manufacturer will produce cheap, sub $100 video-capable phones. It might be Apple, it might be Nokia, it might be someone else. Perhaps even Sony. But suddenly, the phone becomes a way to play not just music, which many phones can now do, but video. Which will change the way video is viewed and distributed the way the Ipod and Itunes changed the music business.

Of course convenience will matter too. Many consumers will purchase from Amazon's mp3 downloads since they lack Digital Rights Management, making use over multiple computers and Ipods easier, but Itunes still predominates as a means to manage Ipods and media. Some estimates place Amazon at around 8% of all music downloads in 2008 while Amazon claims to be #2 behind Itunes in downloads.

Of course, video Ipods have been around since 2005, and the Archos and other players had video before that. But then the Diamond Rio and Saehan (Korea) devices came out in 1998, but did not really catch on until the first Ipod in October 2001. A lag of nearly three years, and in boom times as well. It's certain that during a recession, most of the 270 million phones will be replaced only as needed. But it's certainly probable that a basic phone with adequate video capacity could be marketed at prices even cash strapped consumers will pay, and at screen sizes that make video viewing comfortable enough. After all, CD and records and even cassette tapes have superior audio quality compared to mp3s (which samples only part of the digital audio file), and consumers like listening to mp3s on Ipods just fine over expensive stereo systems.

What cheap video phones will do, particularly coupled with a convenient service or software for transferring video to phones, is allow people to watch video entertainment whenever and wherever they want. Much like the MP3, Ipod, and Itunes did that for music. This will not happen all at once, in a "big bang" any more than the changes in the music industry happened all at once in 1998 or 2001. But it will happen.

What this means, if most people consume video entertainment, apart from live sports and other band-width hogging video streams, from a stored file on their video phone, is that distribution will no longer require huge sums of capital. To get movies into theaters, apart from major marketing efforts costing between $30-40 million, prints (or pirating friendly digital copies) must be sent to theaters. Even with digital files, this is a major pain and can require expensive courier services or leased fiber optic lines for high-speed transfer. To get a tv series into a cable or broadcast network also implies a lot of capital, not just for the series to be made but the overhead for the network.

The new Itunes-like distribution model also changes consumer behavior. One study of an un-named UK music service claimed that 80% of all music tracks sold no copies over a one year period. Most of Amazon's sales in music downloads comes from popular acts, and then just a few popular songs. The same holds true for Itunes.

Which means, given scarce consumer dollars, it's winner take all. A sale of an episode of a serial, or movie, means no sale for a competitor as consumers have to choose. The way around this of course, given quite likely the difficulty of streaming video content over even the most advanced 3G cell phone network, and the clumsiness of using WiFi hotspots, is to make content "free" but advertiser supported.

With the ads "unstrippable."

Many, many consumers have stopped listening to radio, and use their Ipods to play music. The music changed from being played over the radio, for free, to downloaded at modest prices. Particularly with compressed video files, low cost or no-cost video entertainment is probably the wave of the future. With "ads" consisting of massive product placement. Not just products or services, but companies playing a major role. Such as Federal Express in "Cast Away."

In the near future, it's not at all implausible, that consumers could download free adventures in a serial format of an investigator working for Farmer's Insurance, or a Doctor for a hospital group, or an airline pilot flying for United. The ad being part of the plot itself. Obviously in that case, the more artful and entertaining efforts will crowd out the blatantly bad ones. But nothing beats "free." Which leads to another effect, long term. Price cuts for DVDs and other forms of video entertainment (downloads). Hollywood has long tried to keep price floors on DVD and other ways of viewing movies and tv series, and it's likely that advertisers seeking to create more potent ads can undercut not just Television broadcasting (both cable and over the air) but also studio movies.

None of this will happen overnight, but it will happen. If I had to bet, I'd bet on Apple delivering a "recession beater" Iphone with a price point of around $50, with decent video capabilities, and content creators rushing to provide first cheap content for such a phone, and then "free" content with product placement as described above. Because the market for an always-around video phone plus existing Video Ipods will be irresistible.

That in turn will mean lower margins for everyone in Hollywood. Stars will still make obscene amounts of money, but the margins will be thinner, and the ability to bank on a few mega-profit movies like the Transformers series will be impacted. Since a lower margin means less vanity projects that will lose money (such as "Milk" which probably lost money with a marketing budget of around $30 million and only partial revenue from both foreign box office -- rule of thumb is half the gross revenue goes to the studio -- and similar numbers domestically outside the seventy-five percent kept by the studio in the opening weekend) can be effectively carried by the big budget films that make money. Even Hollywood, it seems, will run out of other people's money eventually.