Disrupting the Film Industry Disruptors
Clayton Christensen said that the reason he chose the disk drive industry to illustrate technological disruption in his seminal book “The Innovator’s Dilemma” was because the disk drive industry was the “fruit fly” of the business world — one in which change happened so fast, with industry leadership changing hands more than 2x per decade.
Technological innovation happens in almost all industries. Christensen classified innovation into two major categories — ones that raised the bar for performance (sustaining innovation) and ones that undercut the profitability for the entrenched leaders (disruptive innovation). In general, industry leaders try to satisfy the advancing requirements of their most valuable and profitable customers, the ones with the most sophisticated requirements for performance. Sustaining innovations raise the bar for performance, even as the price per element of functionality drops. Think about Intel’s computer processor offerings over the past 30 years — from the 80386 to Pentium processors to Core I series and Xeon series server processors. Intel’s strategy has consistently involved integration of functionality that previously required other components, allowing them to hold unit prices relatively constant while they raised the stakes for competitors. The only significant challenge has come from ARM, the developers of technology that drives the smartphone industry, along with their hardware partners, chiefly Qualcomm, Samsung, and Apple.
ARM’s innovation is a textbook example of disruptive innovation — a technology that aims low, performing tasks that the industry leader deems too insignificant to bother addressing. By the time the industry leader realizes that they have allowed an upstart competitor to get its nose inside the tent of its core market, it is often too late. Intel’s response, the Atom low power processor, achieved a modest success in Windows tablets and a few smartphones, but has not made a significant impact on the overall market dominated by Android and Apple iOS designs.
Film Industry Innovations
The film industry has seen five major technological upheavals across its 125 year history, three of them sustaining innovations that nonetheless changed the nature of leadership and profitability, and two of them disruptive innovations that have shaken the industry structure to the core.
The film industry itself was a technological disruption of the live theater industry. Entertainment traditionally involved live performances, with actors, musicians, and support crews active with every performance. Motion pictures involved weeks or months of upfront investment by a team of specialize professionals, but the resultant product could be shown again and again by a single projectionist and (in the first two or three decades) a pianist or organist or a small live orchestra.
The first technological shifts were the transition from silent film to talkies in the 1920s, followed by the transition from black & white to color in the late 1930s. Sound-on-film technology was first demonstrated in 1922, and the earliest feature film that featured a synchronized voice track was the Jazz Singer from 1927. By the early 1930s, talkies were a global phenomenon, and Hollywood’s mastery of the technology cemented US leadership in the film industry that continues to this day.
Color motion picture film actually dates back to the early days of the film industry — the earliest patent on additive color dates to 1899, and an additive system was successfully commercialized in 1909. The three-strip Technicolor system was launched in 1932, enabling a broad range of color; the 1939 film “The Wizard of Oz” used this technique quite dramatically to show the scene transition from Dust-bowl Kansas to the fantastic world of Oz.
From a business structure perspective, these innovations drove consolidation of the nascent film industry to a handful of tightly integrated studios that controlled key personnel (writers, directors, producers, actors) and distribution systems, including in some cases brand-controlled theaters.
The 1950s brought the first real technological disruption: television. Where film through the 1940s was treated as a mass market spectacle, television involved a dramatic shift in industry structure and priority. Television offerings were shorter — often 20 to 45 minutes in length. All productions started as black and white offerings until the mid-1960s. Series were small-scale, with a limited number of actors and smaller teams of production staff. Salaries and promotion budgets were much lower for television than for full-length movies. Studios retreated from smaller scale offerings and concentrated on large scale productions where they had a technological advantage, bold panoramic dramas and big budget pictures that featured A-list stars. Nonetheless, studios suffered as attendance and revenues fell; eventually the movie industry learned to coexist with the television industry and use the television medium as a channel of distribution after the first and second theater runs.
The major studio system structure died with the Age of Television. From its ashes rose a new industry structure, led by film distributors. These distributors controlled the marketing budgets and timing associated with film placement in theaters and all subsequent merchandising of the film intellectual property. International distribution rights became as large or larger than US profit streams. Television rebroadcast rights became a significant revenue stream, plus TV broadcasts reinforced the film brands as sequels were written, produced, and shown in theaters a year after the initial film. Some brands went on for 5–10 years or longer, including “Planet of the Apes,” “James Bond,” and “Rocky.”
The invention of home video tapes and digital video discs (DVDs) from the late 1970s reinvigorated the Hollywood distribution industry, and once again the industry consolidated to 7–10 major players that controlled about 80% of the revenue stream for US-sourced films. By the early 2000s, DVD sales dwarfed theatrical revenues. US theatrical box office revenues are about $11 billion and climbing slowly, but this is driven by higher and higher ticket prices against declining numbers of tickets sold. Home video sales and rental revenues peaked in 2006 at $20 billion. Five years later, however, total US home video entertainment rental and sell-through spending had fallen to $14 billion.
The technological disruption that drove the collapse of the DVD industry was the streaming video industry, led by Netflix. Starting as a DVD rental company, Netflix shifted its business strategy away from hard copies shipped to customers through the mail to a global digital streaming service in 2007, a few months after Amazon launched its own video-on-demand service. Priced as a fixed-rate monthly subscription, Netflix rapidly took share away from hard copy DVD purchases and rentals; even low volume viewers found that they would save money by subscribing to Netflix rather than rent or buy and maintain a private library of films.
Within the past 10 years, Netflix has grown to 109 million subscribers (3Q17), and continues to grow its global subscriber base by 20–25% per year, plus 3.6 million DVD customers in the US, a number that is falling by 7–16% per year. Netflix, with a market capitalization of $80 billion, trails only Walt Disney in market value in this industry. Netflix is using an industry leadership strategy, building from strength to strength by investing in its own line of films and series, by expanding into new country markets, and by investing in a server network along with Amazon Web Services to ensure that it can provision its content streams to subscribers with minimal delay and no buffer glitches.
StreamSpace is one of several companies that are using blockchain technologies in an attempt to disrupt the streaming video on demand (SVOD) segment away from Netflix and its major direct competitors, Amazon, and Hulu. Blockchain systems offer greater transparency about film viewing and payment statistics, one of the key drawbacks with the entire film industry. Blockchain systems also have the potential to eliminate the centralized bottlenecks of the top distribution companies, filtering the films that are offered to viewers. So far, most of the films available on blockchain networks are low budget films that few people are interested in seeing, much less paying for, but the number of independent films continues to explode every year, and hundreds of films (up to 5–10% of the total number produced), will surely be of high quality. After all, premier film festivals like Sundance and Toronto see a significant fraction of films, especially the award-winners, acquired for theatrical distribution.
Of course, the most compelling strategy for accomplishing any industry transition, whether a sustaining or disruptive innovation, is to offer compelling content that people want to see. Regardless of the underlying structural benefits, a medium that does not keep people eager to see more will never reach critical mass.