Hollywood Report VI: Hollywood Has Survived Every Threat So Far. Will the Internet Be Different?

After years of fighting television, Hollywood now faces the internet. How viewers watch, how film professionals organize, and where the money comes from are all changing. This is Hollywood's new enemy.

Hollywood has long been called "a rejecter of new technology," and now it has another bone stuck in its throat.

At first its conservatism showed in its opposition to sound and its resistance to color film. Those were still the movies' own affairs. Then came television, as we described in the previous installment: the household set, which spread in the 1960s, took away more than 80% of the film audience. People went to the cinema far less often and preferred to stay in the living room.

Things turned out as Richard Maltby describes in Hollywood Cinema: "The most obvious impact of technology is on the distribution system and business model of films... and the interactivity of technology is also encouraging audiences to alter and even control digital films in search of new pleasures."

This eroded the studios' commercial dominance. So when the internet appeared, it was easy to guess that the people who held the film copyrights would keep treating video sites and search companies as enemies.

Then they scrambled to respond. The best-known moves: Fox, Disney and Universal jointly set up the video site Hulu to take on Netflix, and Rupert Murdoch tried to answer the pressure from the internet giants with sheer scale.

Last July he offered US$80 billion for another media giant, Time Warner Inc. Time Warner turned him down.

Seen from a longer historical view, the process is an interesting one. At first only the broadcast networks put the film industry on guard. Then, beyond broadcast TV, came the more competitive cable television. Later came video-on-demand sites such as Netflix and Amazon Prime: compared with cable, viewers pay only a single-digit monthly subscription and, after a simple search, can watch online whenever they like. And that is before counting YouTube.

Hollywood has finally landed in this position: it carelessly let its competitors unite first and grow stronger. That alliance of rivals brought the film industry one crisis after another, and deepened its hostility toward outsiders.

The "outsiders" keep coming. Some are the television people of the East Coast, among them John Malone, founder of Liberty Media. Others come from Silicon Valley in Northern California: they started out in retail or renting out discs, yet produced a fine series like House of Cards, and now they have all vowed to put down roots in Hollywood.

Netflix's original series House of Cards

In the past, old-school Hollywood always regained its composure quickly, adapted, and steered itself back to product differentiation, showing an opportunism driven by economics. The studios knew how to sell the special experience only the big screen can offer. The result was that they stripped out mid-budget production, pushed the industry toward the top of the pyramid, and kept one universal, premium product, the franchise blockbuster, which they then replicated across the world's entertainment markets.

This time may be different.

The audience has changed. Some viewers keep the habits formed in the television era and go to the cinema less and less. Millennials clearly go further: they are what Tim Marx calls "agnostics." "You don't know where these shows came from, and you don't care whether they run 5 minutes, 15 minutes, 30 minutes or an hour. If it's cool, it's cool, and nothing else matters," the baby-boomer television producer said of internet platforms.

Money has noticed the shift too. East West Bank, headquartered in Pasadena in Los Angeles, used to lend to many independent films; now it is working out which financing models suit makers of digital content. Behind this lies a fact no one can ignore: kids are loyal viewers of digital content. Bennett Pozil, the executive vice president who runs the bank's entertainment business, says these kids matter because "before long, they will be the ones buying films, or making the decisions."

Internet platforms have given people more choices. They are still rough, but they are more flexible. People have already embraced the way technology changes how they get information and entertainment. For the film companies, "it's like a pie, and more and more people want a slice," says television writer Tim Dragga, describing what the studios face.

It resembles the early days of cable television: you could pick the channels you liked, and technology let you watch whenever you wanted.

A new term, "binge watching," has gone mainstream as a result. It literally means devouring a show episode after episode, season after season. A Chinese rendering might be "bao kan," "violent watching," modeled on the Chinese phrase for binge eating and drinking, another much-loved modern indulgence. A Netflix survey two years ago found that 61% of respondents already said they binge-watched regularly, and 73% said that long streaming binges made them feel good.

Stars, too, are changing their career paths. When casting television series, Tim Marx found that the "new stars" of YouTube and the micro-video site Vine won distributors over more easily than traditional second- and third-tier stars. Short-video companies including Maker Studios and AwesomenessTV saw this, quickly signed batches of internet celebrities, and took on the role of talent agents. That sets them apart from long-established agencies such as CAA, WME and TA.

These short-video companies, which got their start on YouTube, do more than you might expect.

At the end of last year, AwesomenessTV spent three months making Expelled, a low-budget film for fans, and got it into theaters with all the trappings of a real release. Apart from a cast made up entirely of internet personalities signed to Awesomeness, Expelled looks no different from the big movies the studios make and distribute.

The one difference is that the "window" (the gap between a film's release on different channels) has shrunk. On the third day after its theatrical release, you could find it for US$9.90 on Apple's and Google's app stores and on Amazon Prime.

Netflix, Amazon and Apple TV, which recently announced its own original-content plans, all intend to make films. Ultimately they all want to escape the grip theatrical distribution holds on a film's overall profit. Netflix is the boldest: it has said publicly that its original films will open in theaters and on digital platforms at the same time.

"If it's not a big movie, people will watch it on Netflix and iTunes," says director Mark Roseman. "It used to be straight to video" (the many films made directly for home video before the 1990s). "Now that model has become straight to digital." Either way, it all happens outside the theaters.

Franklin Leonard calls this "a post-theatrical effort." Leonard founded the screenplay site The Black List, and he found that the internet can not only offer new distribution channels but also reshape Hollywood's outdated industry chain. Ten years ago this former assistant at a talent agency started The Black List, a ranking of original screenplays, and the website of the same name is now famous in Hollywood. Like the new breed of "talent agency," it shows another way the internet is remaking Hollywood: it jumps the barriers the studios have built over the past several decades. Screenwriters can upload their work straight to The Black List, where more than 2,500 film professionals can choose from it.

The screenplay site The Black List

As the barriers fall, Hollywood's ecosystem is changing too. For instance, traditional film critics matter less. They used to be among the few invited to preview screenings, paid by media companies to deliver authoritative verdicts on films. But "authority" itself is fading in importance, since anyone can post an opinion of a film online. Before his death, the Pulitzer Prize-winning critic Roger Ebert founded an open review site bearing his name, now run by his wife. Every day it carries a good number of long reviews, most of them by unknown writers.

The film review site RogerEbert.com

So, on the internet, more efficient companies have replaced old ones. Some jobs disappear; new jobs and new possibilities appear. As before, Hollywood may hope to regain control through differentiated products and eventually make technology its partner. But plainly this is also eating into its overall market share.

The film industry is still growing, but as a share of the whole entertainment industry it is probably on a steadily shrinking curve.

In 2014, box-office revenue made up only 43% of Hollywood's total entertainment business.

Movies are no longer as cool as people once thought; the coolest thing now is something like YouTube. That is not hard to understand. YouTube has enough short videos to fill every spare moment, its content production is democratic, and its videos are easy and cheap to get. And this enemy, which got there first, is still trying to refine how it makes content. In January, Alex Carloss, head of YouTube's original programming, said YouTube would give its stars more money for original content in 2015.

Three years ago, with a similar "US$200 million plan," YouTube said its original channels were entirely unlike Hollywood productions. This time YouTube wants to set itself apart from video sites such as Netflix and Amazon, which make content in the conventional, step-by-step way. A Wall Street report last year showed that YouTube's market value had already overtaken Netflix's.

Seeing promise in this business model, Facebook and Vessel are catching up fast. Maker Studios is encouraging the stars it has signed, who rose on YouTube, not to confine themselves to YouTube. "You have to be good at promoting content across every kind of platform," says Peggie of Maker Studios' client development department. Her job is to bring in business for these internet stars and raise their profiles, doing all she can to keep them from being one-hit wonders.

In the short run Peggie has nothing to worry about: advertisers, like teenage viewers, are still caught up in the craze. The ones who should worry are the traditional Hollywood studios. If even teenagers leave, a film industry that keeps shedding low-margin business and crowding toward the top of the pyramid may really face what Epstein, Spielberg and others have warned of: the total failure of a single summer blockbuster could cost Hollywood its whole future.

The good news may still lie in Richard S. Tedlow's prediction: if Hollywood understands that it is in the entertainment business, it can still be saved. Whatever happens, the world is becoming ever more entertainment-driven, and Hollywood's market is still there. Whether it can seize the chance is another question.

The worst case is this: opportunism no longer favors it, and when technology arrives this time it cannot, as it did every time before, flip from defense to offense with ease and turn technology into a weapon it can use.

In the next installment, we will try to answer this question: behind Hollywood's deepest crisis, which parts of the industry chain remain irreplaceable? In them, perhaps, we can glimpse its future.