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Why the movie industry can’t innovate and the result is SOPA

Steve Blank, lecturer, Haas School of Business | January 8, 2012

This year the movie industry made $30 billion (1/3 in the U.S.) from box-office revenue.

But the total movie industry revenue was $87 billion. Where did the other $57 billion come from?

From sources that the studios at one time claimed would put them out of business:Pay-per view TV, cable and satellite channels, video rentals, DVD sales, online subscriptions and digital downloads.

The movie industry and technology progress

The music and movie business has been consistently wrong in its claims that new platforms and channels would be the end of its businesses. In each case, the new technology produced a new market far larger than the impact it had on the existing market.

  • 1920’s – the record business complained about radio. The argument wasbecause radio is free, you can’t compete with free. No one was ever going to buy music again.
  • 1940’s – movie studios had to divest their distribution channel – they owned over 50% of the movie theaters in the U.S. “It’s all over,” complained the studios. In fact, the number of screens went from 17,000 in 1948 to 38,000today.
  • 1950’s – broadcast television was free; the threat was cable television. Studios argued that their free TV content couldn’t compete with paid.
  • 1970’s – Video Cassette Recorders (VCR’s) were going to be the end of the movie business. The movie businesses and its lobbying arm MPAA fought itwith “end of the world” hyperbole. The reality? After the VCR was introduced, studio revenues took off like a rocket.  With a new channel of distribution, home movie rentals surpassed movie theater tickets.
  • 1998 – the MPAA got congress to pass the Digital Millennium Copyright Act(DMCA), making it illegal for you to make a digital copy of a DVD that you actually purchased.
  • 2000 – Digital Video Recorders (DVR) like TiVo allowing consumer to skip commercials was going to be the end of the TV business. DVR’s reignite interest in TV.
  • 2006 – broadcasters sued Cablevision (and lost) to prevent the launch of a cloud-based DVR to its customers.
  • Today it’s the Internet that’s going to put the studios out of business. Sound familiar?
Why was the movie industry consistently wrong? And why do they continue to fight new technology?

Technology innovation

The movie industry was born with a single technical standard – 35mm film, and for decades had a single way to distribute its content – movie theaters (which until 1948 the studios owned.) It was 75 years until studios had to deal with technology changing their platform and distribution channel. And when it happened (cable, VCR’s, DVD’s, DVR’s, the Internet,) it was a relentless onslaught. The studios responded by trying to shut down the new technology and/or distribution channels through legislation and the courts.


But why does the movie business think their solution is in Washington and legislation?

History and success.

In the 1920’s individual states were beginning to censor movies and the federal government was threatening to do so as well. The studios set up their own self censorship and rating system keeping most sex and politics off the screen for 40 years. Never again wanting to be at the losing side of a political battle they created the movie industry’s lobbying arm, MPAA.

By the 1960’s, the MPPA achieved regulatory capture (where an industry co-opts the very people who are regulating it,) when they hired Jack Valenti, who ran the studios’ lobbying efforts for the next 38-years. Ironically, it was Valenti’s skill in hobbling competitive innovation that negated any need for studios to develop agility, vision and technology leadership.

Management of  innovation

The introduction of new technology is always disruptive to existing markets, particularly to content/copyright owners whose sell through well-established distribution channels. The incumbents tend to have short-sighted goals and often fail to recognize that more money can be made on new platforms and new distribution channels.

In an industry facing constant technology shifts the exec staff and boards of the studios have lawyers, MBAs and financial managers, but no management skill in dealing with disruption. So they rely on lobbying ($110 million a year,) lawsuits, campaign contributions (wonder why the President won’t be vetoing SOPA?) and Public Relations.

Ironically, the six major movie studios have a great technology lab in Silicon Valley with projects in streaming rights, Video On Demand, Ultraviolet, etc. But lacking the support from the studio CEOs or boards, the lab languishes in the backwaters of the studios’ strategy.  Instead of leading with new technology, the studios lead with litigation, legislation and lobbying. (Imagine if the $110 million/year spent on lobbyingwent to disruptive innovation.)

One of the claims that studios make is that they need legislation to stop piracy. The fact is piracy is rampant in all forms of commerce. Video games and software have been targets since their inception. Grocery and retail stores euphemistically call it shrinkage. Credit card companies call it fraud.  But none use regulation as often as the movie studios to solve a business problem. And none are so willing to do collateral damage to other innovative industries (VCRs, DVRs, cloud storage and now the Internet itself.)

The studios don’t even pretend that this legislation benefits consumers. It’s all about protecting short-term profit.


When lawyers, MBAs and financial managers run your industry and your lobbyists are ex-Senators, understanding technology and innovation is not one of your core capabilities.

The SOPA bill (and DNS blocking) is what happens when someone with the title of anti-piracy or copyright lawyer has greater clout than your head of new technology. SOPA gives corporations unprecedented power to censor almost any site on the Internet. It’s as if someone shoplifts in your store, SOPA allows the government to shut down your store.

History has shown that time and market forces provide equilibrium in balancing interests, whether the new technology is a video recorder, a personal computer, an MP3 player or now the Net. It’s prudent for courts and congress to exercise caution before restructuring liability theories for the purpose of addressing specific market abuses, despite their apparent present magnitude.

What the music and movie industry should be doing in Washington is promoting legislation to adapt copyright law to new technology — and then leading the transition to the new platforms.

The U.S. State Department has been championing the Internet Freedom initiativeacross the world. Secretary of State Clinton said, “…when ideas are blocked, information deleted, conversations stifled, and people constrained in their choices, the Internet is diminished for all of us.”

It’s too bad the head of the MPAA – an ex Senator – made a mockery of her words when he wondered “why our online censorship can’t be like China?”

We wonder, “Why can’t the film industry innovate like Silicon Valley?”

Lessons learned

  • Studios are run by financial managers who lack the skills to exploit disruptive innovation
  • Studio anti-piracy/copyright lawyers trump their technologists
  • Studios have no concern about collateral damage as long as it optimizes their revenue
  • Studios $110M/year lobbying and political donations trump consumer objections
  • Politicians votes will follow the money unless it will cost them an election

Comments to “Why the movie industry can’t innovate and the result is SOPA

  1. The concern I have is the steadily denigrating quality of Hollywood output. Previously when the studios were complaining about new technology killing their goose with the golden egg; they had quality content to back up their justifications.

    Now all we have are remakes, reboots and sequels.

    I wonder if it is finally time to put the Hollywood system under the bus and encourege original film making thru digital channels…

  2. @Ellen, to accuse Cal of being bought and paid for by Google is laughable — talk about red herrings. Is your real name Chris Dodd, or do you just write for him?

  3. Very interesting your comment on a current topic and with many edges and depth. However, I dare to make a nevertheless on it. Do not be that more than a preview of the companies on the internet there is a lobby of certain sectors to put one foot in the internet market with the support of the Government and certain economic sectors to make that one benefit more than others, to reshuffle interests, rather than balancing them.? Best regards.

  4. Don’t you think you should disclose your institution’s close ties to Google? After all, they are the biggest anti-SOPA lobbyist out there and profit mightily from maintaining the status quo with regard to piracy.

    Piracy today is driven by the monetization of stolen content and Google earns a great deal of revenue via this black market business model. Google is first in line when it comes to protecting its patents and trademarks. Somehow those are laws worth paying attention to while copyright is better ignored? You claim Hollywood is all about protecting its millions…what about Google and other (legit) U.S. companies that earn revenue via the piracy food chain? Much of the “innovation” Silicon Valley depends on starts with the “innovations” of content creators. As Robert Levine (author of Free Ride) points out “This is not a conflict between content creators and the public, but rather one between creators and the companies that support them on one hand and those that make money from their work without paying them on the other.”

    The time for reasonable action is long overdue. The internet is not sacred, nor should it be above the law. Government has long stepped in to regulate commerce. Just as legit commerce has moved online, so too has the illicit kind. If left un-checked the diversity and quality of content will suffer. Time for piracy profiteers to be held accountable.

    Here’s some reading for you: “Explaining Piracy’s Profit Pyramid”:
    and Googlenocchio? What a Tangled Web They Weave:

    t’s easy to throw red herrings around in the hope they will ricochet around the web and obscure the reality of what’s happening online. One can only hope that we can move past the inflammatory rhetoric and find a path to tackle this problem once and for all.

    • Piracy is not the problem. The net was created to share, that was the purpose. So why try to fight against the current and not find a better model. I still believe that instead of fighting sites like cuevana or seriesyonkis, the real owners of the copyrights of the contents that are available for free on the web should buy the sites like cuevana or series yonkies and deliver free content paid by advertising. They have proven to be successful and also they make money from advertising. Think it again, it is really wrong (in so many ways) to believe that the unauthorized distribution of contents will stop just because some new legislation. Here in America prohibit or make some ilegal never stop people from doing anything, (remember when the alcohol was prohibited?). So instead of trying to only sell contents to people (content that could be found for free on the web, or even shared by a friend on an email) why not sell people (audience) to advertisers??. Internet is a really great to distribute contents, it was created to be that way. It makes the world small and connect the people.
      Why do we have to wait until a movie or a new episode of a popular tv sitcom is delivered on our countries? They still see each country as a separate market, when the internet creates a unique market willing and demanding content, right now, without delays. Netflix is successful, Spotify is proving to be successful… Why fight agains their own potential clients???

      A change of this dimension will be difficult, but not impossible. Piracy will not stop by using severe legislation… The history proves that.

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