Why Content’s Kingdom is Slipping Away

Jun 9, 2009

Content and technology are locked in a struggle whose outcome may determine the future of the entertainment industry. The problem is this: Content is becoming a commodity. In contrast, although distribution used to be the exclusive province of Hollywood — movie theaters, television networks, home video, among others — this is no longer true. Instead, new distribution technologies have arisen, and the ascendancy of those technologies has come at the expense of content.

There is little doubt that traditional content is in trouble, and this is true across a range of distribution platforms and content types. Domestic theatrical box office has scarcely increased over the last seven years (with the notable exception of the first half of this year), while admissions have dropped somewhat. In other words, a shrinking customer base has had to pay ever higher ticket prices to keep revenues at an essentially steady state. The home-video business is declining dramatically. Similarly troubled is the network-television business, which is the traditionally higher-revenue side of television. Yet another problem for Hollywood is its inefficient cost structure. As a result of these factors and the difficult economy, the film and television industries are running scared.

Other traditional content industries are in trouble as well. The music industry is in shambles, the newspaper business is panicking, television news finds its viewership shrinking and aging, and book and magazine publishers are in tough shape as well. Even the film criticism business is in trouble, as are the entertainment trades.

People do still consume media the old-fashioned way — but fewer and fewer do so every day, and the trend is particularly significant among younger people. Why is traditional content losing its vigor? The answer goes deeper than — and the problem predates — the current recession. There are six related reasons for the devaluation of content.

The first relates to supply and demand. Demand for entertainment stays relatively constant because demand is largely a function of both cost and consumer’s limited leisure time. In contrast, supply — in the form of both user-generated content (UGC) and pirated content (as well an array of popular video games) — has grown enormously in the last decade.

The second reason the loss of physical form. It just seems natural, in general, to value a physical thing more highly than something intangible. The third factor is the culture of piracy, which requires little explanation. The fourth is that acquiring content is increasingly frictionless. When it is easier to get something it loses perceived value. The fifth reason is that most new media business models are ad-supported. If there is no cost to the user, why should consumers see the content as valuable? Furthermore, if some content is free, why not all of it?

The final reason is more complex: the nature of market forces in the technology industry. Computers, Web services and consumer electronic devices are more valuable when more content is available. In turn, these products make content more usable by providing new distribution channels. Traditional media companies are slow to adopt these new technologies for fear of cannibalizing existing revenue and offending powerful distribution partners. In contrast, nonprofessionals, long denied access to distribution, rush to use the new technologies, as do pirates. As a result, technological innovation reduces the market share of paid professional content, and increases the market share of UGC and pirated content. More content of the latter sort in turn stokes demand for the new technological devices and services themselves—a circular effect that damages Hollywood.

All these developments have led to a migration away from paid media. UGC is often (though not always) a flawed or poor substitute for professional content or traditional media — but that is little comfort to the professionals or those who seek professional content, since new, competitive goods nonetheless acquire market share at the expense of established product. Even where new media does make money for creators and companies, that money is much less than it used to be. The result: As UGC has become more diverse, professional content has become less so.

Some commentators welcome the rise of more easily distributable content with little or no reservation, including content copied and distributed without permission. “Information wants to be free,” they say. There are, however, costs to UGC, as the above discussion indicates. Furthermore, the proliferation of UGC blurs distinctions in quality, particularly in news and information, where some objective standards should remain. Another concern is that the proliferation of niche sources for news leads to self-selection — liberals read the Huffington Post, while conservatives read the Drudge Report — and thus to reinforcement of existing biases. A shared national conversation begins to fade as mass audiences splinter.

Another problem is the effect that Internet channels of commerce have on their brick-and-mortar counterparts. While online outlets thrive, bookstores, music stores and newspapers disappear — and so do their employees, taking with them a depth of knowledge not often replicated online.

All of these factors have led at least one prominent commentator to dismiss UGC as “an endless digital forest of mediocrity,” while other commentators shed few tears for the dethroning of professional content. The truth is more nuanced than this false dichotomy: Both forms of content have value. The problem is that, unfortunately, there does not seem to be room for both unlimited quantities of UGC and a wide selection of paid professional content. It’s a dilemma with no easy answers.

In contrast to the stagnation and decline of the content industries, the technology business is marked by innovation although the recession has, probably temporarily, put a damper on this. Hollywood has always depended on technology, of course, but it has often misunderstood and mistrusted it. No matter the challenges Hollywood faced in the past, today’s are even harder because the pace of change has quickened dramatically. Change in the technology business is breakneck — in Hollywood, not so much.

The entertainment industry has responded through brute-force lawsuits, legislation, competitive business responses (such as Hulu), and internal restructuring of business models (including in new media, somewhat to the detriment of the unions). However, all of these responses from Hollywood, as well as from other content industries, have been belated.

What next? Hollywood seems sure to survive the challenge posed by the technology industry. Whether Hollywood will thrive — rather than just survive — is a harder question. If the studios continue to lose their grip on distribution and become vertically de-integrated and disintermediated from their own distribution channels, they will be left with content creation as their core business. That is a problem because, fundamentally, the economics of content creation are inferior to those of distribution. The former is an industrial process, painstaking and manual. The latter, in the digital age, is post-industrial and automated.

Some commentators contend that the solution to the dilemmas faced by professional content creators is to simply accept that even paid content will eventually become free and ad-supported. The idea that this business model is sufficient is nonetheless flawed. In particular, this theory fails to explain how corporate entities can make enough money to continue operations as they do today. The fundamental questions are these: Are we willing to let newspapers disappear, blockbuster movies succumb to piracy and novels be confined to self-publishing? And are we condemned to undergo a period of turmoil and dissolution of existing models of content creation while awaiting the hoped-for time that new ones gain traction? We may not have any choice. UGC is here to stay, and so is piracy. The problems are complex, and the solutions unclear. We can, however, take heart: Content may be under siege, but it has not lost the war.

Jonathan Handel practices entertainment and new media law at TroyGould in Los Angeles. He can be reached at 310-789-1201 and jhandel@troygould.com. He blogs at jhandel.com and the Huffington Post, among other outlets, and is the author of the short book How to Write LOIs and Term Sheets. This blog article is adapted from a 40-page law journal article.

One Comment

  1. Well… distribution will be rather pointless if there is no content to distribute.

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