Hollywood Bets It All on Stupid

Nowhere is the continual stupidity of Hollywood more visible than in the LAT's section "the Big Picture" by Patrick Goldstein. Goldstein swallows whole the lunacy that Hollywood is following: trying to make money by producing (mostly) American financed/starring movies designed to appeal to foreign audiences. This is self-evidently stupid policy, because "explosive growth" audiences don't have money, don't respect intellectual property (piracy), don't pay for films, and don't really like "American" content much. Meanwhile it is pretty easy for locals to create their own content.

Hollywood is betting it all on stupid, because they simply cannot make movies that appeal to American audiences. Hollywood can't make films that Americans feel like paying for to see in a theater, so the fantasy of magical thinking is that the studios can make movies for foreigners who will lap up anything and everything.


To see how stupid this is, just look at China. China is filled with film piracy, and just recently the ban on "Westernized" entertainment on TV and movies pulled many programs and films off the air or theaters.

When Chinese leader Hu Jintao recently warned his nation's ruling Communist Party of an imminent risk from the West, he wasn't talking about the United States boosting its military capabilities in East Asia. He was alluding to things such as video games.
"International hostile forces" use thought and culture "to Westernize and split" China, Hu stated in a speech publicized in January in the party magazine Seeking Truth..
At least China's embattled youth can strike back at the West come May when Glorious Mission, a civilian version of the Chinese army's first training simulation game, goes on sale, according to the state-run China Daily newspaper. Co-developed by the People's Liberation Army, the online, first-person shooter game allows players to destroy enemies that resemble U.S. forces.
Glorious Mission and other "serious games" supported by Chinese authorities form one front in Beijing's multi-headed cultural offensive, launched last fall. There's been fighting talk from Hu's likely successor, Xi Jinping.
China's universities are "a key ideological front to equip our youth with the core values of socialism," he told the country's deans last week . Xi, 58, is likely to succeed Hu, 69, as party general secretary this year.
Through massive investment, and countless censors, the Communist Party aims to boost China's "soft power," or cultural influence, abroad and shore up "cultural security" at home by reinforcing state control of the sector and guiding audiences back to "socialist core values." Neither goal will come easily.
...
State censors launch regular crackdowns, sometimes with bizarre targets: Last year, authorities restricted time-travel TV dramas and banned downloading of certain foreign pop songs, including The Backstreet Boys' seemingly non-political 1999 hit I Want It That Way.
In recent weeks, the government has stripped two-thirds of entertainment programs, mostly talent, talk and dating shows, from the schedules of China's popular satellite stations. Citing "excessive entertainment and a trend toward low taste," regulators have forced satellite channels to switch to programs promoting "traditional virtues and socialist core values," the state-run Xinhua News Agency reported.

I don't know about you. But my money is on China exerting more control over entertainment, and basically banning Western stuff out of Hollywood in favor of their own domestic stuff. What does it take to make movies in China? Not much. China does not care about Hollywood, they don't make money off Kung Fu Panda, so guaranteed they'll close that down, dole out their own movie-making patronage, and be happy to run off pirated copies of Kung Fu Panda 10 like hotcakes.

South Korea, Russia, and Brazil all have their own burgeoning film industry, which will assuredly demand protection from Hollywood. Eager to win patronage and screw over foreigners, local leaders will happily oblige. Already foreign film distributors are taking baths, many exiting, because it is hard to make money distributing Hollywood films. So much piracy, so much theft, so many theaters not paying the full amount of admissions they are supposed to pay. After all, law in most of these places doesn't exist. Unless the distributor has paid off the government and has enough juice to get guys with guns to visit the offices of the distributors, reality is that they will get only what the exhibitor feels like paying.

Goldstein swallows whole the following fantasy:

This focus on foreign markets is clearly changing the way studios assemble their feature film slates. Nowhere is this more evident than at Paramount Pictures, Hollywood's market-share leader in 2011 with 19.2% of the overall business. In 2007, when the studio also had the largest share of the market, Paramount did roughly the same amount of business in the U.S. as it did overseas — $1.5 billion domestic versus $1.6 billion international. In 2011, the studio's films grossed $1.9 billion in the U.S. But they made a whopping $3.2 billion overseas.

If you believe those numbers, let me interest you in an outstanding investment opportunity with John Corzine and MF Global, in European bonds. Does anyone think Paramount ACTUALLY did that amount of business overseas. Or is that just a number "booked" from a distributor, of which they will get something like 30-40%?

Hollywood studios want people to believe (they are called suckers er investors) that they have some magic formula. Don't worry, they say, even though AMERICANS have decided that "the Hangover 2" or "New Year's Eve" can wait till next year as a Redbox or Netflix rental, or streaming, foreigners are stupid, moronic gits who can't tie their own shoes, and will reliably stream into movie houses at full price. Like poor people in India, China, Pakistan, Brazil, and Russia (that's most of the population) will be paying $15 a person (in their local currencies equivalent) to see "Mission Impossible 7" or "Xenu's Revenge" or what have you.

Meanwhile the studios claim, their magic formula involves making movies aimed at hipsters ("Young Adult") and tweens (Justin Bieber's movie) and such. Yep, that's their strategy: stupid foreigners paying full price, and hipsters and Bieber fans.

Does that sound like a plan? Or mutually assisted suicide?

This situation seems to echo the late 1960's and early 70's, when Hollywood could only get people into to see movies like "Towering Inferno" or "Earthquake" or "the Sting" until Star Wars and Jaws came along, and showed how to make movies everyone would enjoy.

Movies are still a MASS medium. To make money off them, lots of people need to enjoy them and pay top dollar to see them. Crummy movies aimed at small slices like tweens or hipsters will never be cheap enough, NEVER to cover Hollywood's fixed costs. Very rapidly now, Hollywood will start to fail. Like GM at the end, there is not enough real payoff to fund their capital needs.

Hollywood's model, like that of Blue States, is one that is self-destructive. As long as there was money being made selling off library/catalog on DVDs, and good times had customers buying, Hollywood could afford the reality that most of their current movies sucked, and badly at that. With little popularity and their few blockbusters requiring hideous amounts of capital, with many failing. Rather than go back to the drawing board, and make movies everyone could enjoy, Hollywood doubled down on stupidity and arrogance, figuring foreigners will bail them out.

Matthew Yglesias on Slate boasts that Hollywood still has more cultural reach than China, while Business Insider notes:

"A recently implemented rule has effectively curbed the ‘excessive entertainment’ trend as two-thirds of the entertainment programs on China's 34 satellite channels have been cut, according to the country's top broadcasting watchdog.  ‘The total number of entertainment shows airing during primetime every week has been reduced to 38 from 126 at the end of 2011, marking a 69 percent plunge as the new rule came into effect on Jan. 1,’ said a statement issued Tuesday (3 January) by the State Administration of Radio, Film and Television (SARFT).
"According to an SARFT directive last October, each of the country's satellite channels would be limited to broadcasting two entertainment programs each week and a maximum of 90 minutes of content defined as entertainment every day during primetime -- 7:30 p.m. to 10 p.m.  The directive also required channels to broadcast at least two hours of news programming. Between 6 p.m. and 11:30 p.m., they must each broadcast at least two 30-minute news programs.
"The restricted programs on the SARFT list include dating shows, talent contests, talk shows as well as emotional stories that were deemed 'excessive entertainment' and of 'low taste.'  However, popular dating shows like ‘If You Are the One,’ produced by Jiangsu Satellite TV, and soap operas, such as ‘Li Yuan Chun,’ presented by Henan Satellite TV, will still be aired during weekend primetime hours, according to the statement.
"It said that the satellite channels have started to broadcast programs that promote traditional virtues and socialist core values.  The newly-added programs among the satellites' revised broadcasting schedules are documentaries as well as cultural and educational programs, it added.  The SARFT believes that the move to cut entertainment programming is crucial in improving cultural services for the public by offering high quality programming."

Contrast that with the fatuous stupidity of Yglesias at Slate:

This is one area where the rise of the Chinese manufacturing juggernaut hasn't impaired America's leading role at all. If anything, the reverse as a more prosperous China serves as an increasingly lucrative market for American firms. But Chinese President Hu Jintao is none too happy about it, kicking off the New Year with a magazine article complaining that "[i]nternational forces are trying to Westernize and divide us by using ideology and culture."
The talk coincides with the implementation of a regulation announced in October that aims to clean up Chinese television by restricting networks to offering no more than two "overly entertaining and vulgar" programs per week. That kind of strategy strikes me as unlikely to succeed, but I would welcome more robust efforts by the PRC to strengthen the quantity of cultural outputs that are up to international standards. I really enjoyed Red Cliff, for example, but we just don't see that many Chinese war epics.

PC makes you stupid. And stupidity kills. Even, eventually in Hollywood.

I believe none other than that great philosopher Charlie Sheen called it "Winning."







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Steve Jobs And The End of Apple

Steve Jobs announced his resignation from Apple Computer. Is this the beginning of the end for Apple? Previously , I wrote that Apple is "trapped" in China. Without Jobs, that trap is likely to be sprung, making Apple just another HP, or Dell Computer. A commodity company making a commodity product.


Jobs, besides his design vision (less than appreciated, witness his famous "you're holding it wrong" video about the Iphone antenna screwup) understood what made Apple different. Which was software and hardware integration. Far more than rival products, Apple products "just worked." So they could charge a premium over rivals for making a system that ordinary people could use, mostly, without lots of help and hand-holding. Oh yes, there was the yuppie, SWPL-snob appeal, the trendiness, the design mastery, and the hype. But simply making things work was the core of Apple's success. There were other MP3 music players, and other smartphones before Apple. But none that made using either device so easy.

The danger for Apple is of course, China. Chinese contract manufacturers make almost everything for Apple. With Steve Jobs in place, Apple could cajole, threaten, and flatter China's top political leaders, because Jobs was a crony of Bill Clinton, Al Gore, and Barack Obama. Current or former Presidents and Vice Presidents and thus important. This is why Apple until recently was not the target of widespread gray-market manufacturing and selling. The clone-Apple Stores opening up by pirate retailers, with genuine Apple merchandise, was evidence of Steve Jobs being unable to fulfill this role.

Yes, successor Tim Cook is quite able in wringing inefficiencies and costs out of Apple's supply chain. But that was not the skill-set of Steve Jobs, and what made Apple great. What made Apple great was stuff that just "worked" ... and keeping a flood of copy-cat merchandise out of places like Asia, Europe, Latin America, and North America. Cook lacks the connections and cronyism to top Democratic politicians needed to keep Chinese Contract Manufacturers, many of them connected to their own top political people, from simply running off lots of extra Iphones, Ipods, Mac laptops, and the like, and selling them for their own pure profit.

Really, what's Apple going to do? Sue the cousin of a top Politburo leader? When they flood not just China, but Japan, South Korea, Taiwan, Singapore, and Europe, and the Americas with the exact same kind of Ipod and Iphone made from the exact same factory as those Apple takes delivery of?

All that money is just sitting there, on the table. Apple has margins of around 35%, astonishing for a computer company (the industry average is about 4-8% or so) and in part that depends on there being limited, and Apple-authorized supply of their electronic merchandise. No, Best Buy and Amazon will not sell gray-market merchandise. But Mom and Pop retailer and swap meet and flea market folks will, at far less prices. At least part of the untold story of the DVD collapse in terms of prices has been the easy availability of DVDs from Asia on the semi-black market. The same factories that churn out say, copies of the latest Hollywood blockbuster on contract will inevitably run off millions more for their own sales. "Hostel" producer-director Eli Roth famously discovered copies of his movie on sale in Mexico city for what amounted to twenty-five US cents. They were pirated DVDs of course, but ran just the same. They were no doubt pressed from the very same factory that ran off officially authorized copies for sale in the US.

HP's discontinued tablet, selling at $99, was sold out in a matter of days. That's the price point for things like an Ipad. It is naive and unrealistic to expect Apple's manufacturers to not sell those things for about that price, one way or another. What the hell do they care about Apple's intellectual property? Contracts? Rule of Law? In China the rule is of crony, of power, of connections. And nothing else. The Red Emperors, Princes, and the like do as they please. Steve Jobs when he was healthy was able to delay this process, but even had he not been sick, these contract manufacturers would end up screwing Apple over. In order to make more bucks.

The "Chinese advantage" has always been a trap. Yes, manufacturing costs are far cheaper there, but producing things in China just makes it easier for the factory to run off millions more copies and sell them on their own. Apple post-Steve Jobs is going to be a wonderful example of just how much a trap the Chinese manufacturing cost-advantage really is, and how far a company can fall. When its previously expensive, hip, and trendy stuff gets sold like pirate DVDs.
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China Wins the Future

Lots of people from Thomas Friedman to Barack Obama wish the US were more like China. I thank God every day it is not. Slashdot has a story and comments about a derailment of the high speed bullet train that led to numerous dead and injured, and coaches falling off a bridge. Only a few months too, after Railways Ministry officials expressed concerns that safety standards had been ignored in building the high speed train network. The claim of course was retracted, but undoubtedly true.


Winning the future, Obama's "WTF" slogan (no I am not kidding) requires more than building up pirated technology in a slap-dash manner, cheaply. It means innovation. Which in turn requires … property rights widely respected and widely dispersed. China is again regressing to its Eunuchs-on-command-from-the-Emperor mode. Brilliant men either make a few, poorly understood breakthroughs (gunpowder, magnetic compasses) or copy something else, which then goes stagnant. Since there is no one at a deep-wide level to push technology ever further.

The West did not invent: gunpowder, magnetic compasses, paper money, printing, civil exams, and a lot of other things borrowed from China and India. But what the West did do, far better, was push advances constantly. Relentlessly, generation after generation. So that every twenty years there were newer and better navigation devices, charts, understanding of navigation, time-pieces, calculation log-books, and weapons. Made possible not by people under control of the Emperor, or the Central Party Oligarchy, but by many competing, widely distributed, always on the make ordinary folk trying their best to improve their lot every day.

The West beat the best brains on the planet. The West never had Court Eunuchs to match the Chinese Emperor, or the Ottoman's scholars, or the ones in India. But it did have the Beretta Family, and the Caslon family, and the Caxton family, and the Wright family, and many more. All building on the work of others, to constantly improve technology to their own advantage. China has nothing like it.

There are many talented people in China. But their innovations, their designs, will go nowhere for their own advantage. No one is going to invent anything for the glory of the Emperor, or Central Party Committee, and the advantage of Red Princelings. Instead that lack of ability to better one's own self except by examination and rising in the Emperor's (or Central Party Committee) service means a mind-bending bureaucracy stifling anything other than stealing some other culture's advances.

That's not winning the future. More like heading for a crash, as the ability to work smarter with resources diminishes. As Jim Chanos famously observed, the USSR grew tremendously from 1946 up through the late 1970's. Then productivity hit a wall. All the cement had been poured. All the villages electrified. All the people taught to read. All the highways built. All the peasants sent to technical school. And productivity fell, year after year, in accelerating fashion. Because fundamentally, people won't work hard for anyone but themselves. Slaves may fear the whip, but avoid any serious work for their masters. Meanwhile the genius of Napoleon, a former peasant himself, was to make French peasants small landholders. Give a man a piece of property, no matter how mean, and a chance at a family of his own he can improve, no matter how small, and he'll fight to the death for it.

If you wonder how Napoleon managed all those victories, against so many, for so long, before luck ran out, that's how.

The US has many faults, but it is not China. And for that I thank God.
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China's Weaknesses

The Wall Street Journal pointed out some uncomfortable truths about China's oil vulnerabilities. China became the biggest importer of crude oil from Saudi Arabia in 2009, surpassing the US. Most of China's crude comes from Saudi Arabia:

The Middle East provides 2.9 million barrels of oil a day to China, more than half its total imports, and Saudi Arabia alone accounts for about 1.1 million barrels a day.

Chinese officials say they want to boost trade with Saudi Arabia by about 50% to $60 billion by 2015, further increasing Beijing's dependence on the kingdom.

China realizes its vulnerability, and has been doing what it can, mostly increased military spending and overt political alliances with Saudi Arabia, to decrease its vulnerability by gaining power. China's aircraft carrier program is aimed directly at gaining naval power and dominance over the Gulf, to assure the oil keeps flowing.

"Asia has been something of a bystander in the Middle East and importantly, in the case of China, an increasingly anxious bystander," said Andrew Shearer, director of studies at Australia's Lowy Institute for International Policy.

That anxiety comes from the economic implications of possible major disruption to energy supplies coming through the Persian Gulf's Strait of Hormuz and Beijing's unease that the calls for democratic change sweeping across the Middle East will set an unwelcome precedent at home. According to Mr. Shearer, the U.S. still has the military capability to intervene if the flow of oil from the region was threatened.
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In an extreme scenario, U.S. troops could seize control of oil installations in the region, leaving China and most of Asia dependent on the goodwill of Washington to guarantee their supplies. In such circumstances, "the oil would follow the gray naval ships" of U.S. forces in the Persian Gulf, Mr. Shearer said.

China may be racing to catch up. It has increased defense spending by almost 13% and is developing its own aircraft carriers. But its ability to project power beyond the South China Sea remains limited. Beijing sent one of its latest and most powerful warships, the Xuzhou, to help evacuate its nationals from the fighting raging in Libya, but this effort was dwarfed by the rapid U.S. navy buildup off the North African coast. "China has naval aspirations but they're still a long way from realizing that," said Mr. Shearer.

China remains hobbled by a fiscal system that is a mess. As the WSJ reports:

More important, the banks were relieved of their bad loans by what Messrs. Howie and Walter accurately describe as "accounting legerdemain."
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In 1998, the People's Bank of China—the state's central bank—reduced the Big Four's reserve requirement. This freed up reserves for the banks to acquire a special-purpose treasury bond issued by the Ministry of Finance. The loan proceeds were then used to recapitalize the banks. Beijing also created asset-management companies to buy the nonperforming loans from the banks at face value. In exchange, these repositories of toxic credit issued notes to the banks. (When these notes became due in 2009, they were extended for another decade.)

For the financial magicians' next trick, in 2005, other nonperforming loans were put into a "co-managed account" with the Ministry of Finance, which in return issued IOUs to the banks that were to be repaid through a combination of loan recoveries, bank dividends, sale of bank shares and tax receipts from the banks. To make matters even more convoluted, in 2009 the banks started acquiring large stakes in the asset-management companies that were still sitting on nonperforming loans from the previous decade.

As noted in the article (the review of "Red Capitalism" by Carl E. Walter and Frasier J.T. Howie), what this has done is given Chinese banks a guaranteed spread, between borrowing costs (artificially low) and what they charge for borrowing (high), but at the cost of artificially low rates on Chinese consumer bank accounts, aka "financial repression." Chinese have to save, save, and save, because they get in effect negative real returns on savings accounts. This accounts for all sorts of destructive bubbles in real estate, and the like. Empty apartments in Shanghai and elsewhere that Chinese families have purchased as investments, desperate for returns. Household deposits have financed the industrial banking system and export driven economy. Making Chinese domestic consumer consumption a joke (and a bad one on Western companies betting on it).

Bad loans are routinely hidden, and the various local, provincial, and special district liabilities for bad loans, often connected to White Elephant projects like high speed trains that will never recoup their investment costs, is probably on several orders of magnitude larger than the US state/local/county levels of indebtedness.

China is a formidable country with many advantages, but they are not world-beating supermen with no flaws. Their interior remains dirt poor and functionally illiterate. They have massive ethnic/racial/religious tension and separatism. [Tibet and XianXing Uighurs and Hui Muslims on the coast.] China has huge gaps between rich and poor, massive gender imbalance (roughly 30-40 million young men will never marry.) China is hideously vulnerable not just on its own sake for oil, but cheap Chinese goods rapidly increase in price if oil increases, by trans-Pacific transportation alone. Let alone cost of production. And as noted, its financial system is a shaky house of cards continually propped up, driven by insolvent State Owned Enterprises that must be continued to keep employment up (and the social safety net which is tied directly to employment, including schooling and welfare.)

China has been lucky, propping up its broken financial system. Betting on luck forever is not a wise move. It may well be that Japan's earthquake exposes China's weakness, as Japanese companies pull back from Chinese investment to focus on reconstruction at home and Japanese led export growth (to pay for reconstruction). Japan is highly indebted, aging, and with very little growth domestically. The only way for Japan to reasonably pay for reconstruction is export-led economic growth, in direct competition with China.
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