The Perfect Ending: Changes in the Film and TV Industries — Thomas Tull, CEO Legendary Pictures

The Industrialist’s Dilemma — March 10, 2016

As we entered our final class session for the quarter we tackled one last industry dealing with astronomical changes — the movie and television sectors of the media industry. Similar to the payments industry which we explored with Patrick Collison and Charlie Scharf, while the movie and TV industries do not make industrial equipment, they are both confronting digital disruptions throughout the value chain for the delivery of their products to customers.

In our final class we were joined by Thomas Tull, the CEO of Legendary Pictures, which recently announced that it was being purchased by Dalian Wanda Group of China for $3.5 billion. Since founding Legendary in 2003, Thomas has been on an amazing run of producing and financing hit films such as Jurassic World, Godzilla, The Dark Knight, 300, Interstellar and many others. While the media industry has been disrupted on many vectors over the last 15+ years, the changes to the film and TV industries have been accelerating recently through the use of data, new distribution venues and the breaking down of value chains that have been in place for upwards of 75 years.

Frame-breaking change, indeed…

Thomas discussing the business of Legendary Pictures

Marketing Can No Longer Hide Product Deficiencies

One interesting item Thomas shared was how the rise of social media has increased the velocity of feedback on a film when it is released — for better or for worse depending on one’s point of view. As Thomas pointed out, if a movie is not strong, in the days prior to social media, studios could use advertising and trailers to promote a film and hopefully earn a respectable opening week-end gross, regardless of the quality of the movie. Now, however, if a film opens on the East Coast of the United States and people in New York and Boston do not like it, as movie viewers exit theaters at 6 PM on the East Coast and start amplifying their opinions quickly and widely through venues such as Twitter and Facebook, viewers on the West Coast will change their attendance plans immediately on what movies they will watch that evening.

Thomas posited that this has helped reinforce the nature of films becoming “Winner Take All” — in a world where consumers’ behaviors appear to be influenced by the notion of quickly “swiping left” or “swiping right” on what they do/do not like, the stakes are higher for movie makers as the velocity of the business is accelerating and the risk is greater with big budget films — companies either win big or lose big — and they do so quickly.

Bringing The Industrialist’s Dilemma home with Thomas Tull

Disruption Can Happen Anywhere and Everywhere in the Value Chain

Legendary is widely respected for the data analytics they use to help determine ways to market their films and what target audiences might be open to enjoying a new movie — perhaps even unexpectedly. Thomas stated that one part of the movie industry that he strongly believes is not sustainable is the spending of $120-$140 million for the marketing of a single film. He believes the cost is too high and the benefits are too inefficient for this to last in the future.

As big budget movies increasingly dominate box office receipts, both the revenue and profits that each movie generates are paramount — there are increasingly fewer “sleeper films” that generate disproportionate returns. While targeting specific audiences for marketing can help with top-line results (as referenced above), more efficient marketing spending can drop additional dollars directly to the bottom line for studios and producers, thus improving results for all parties.

During the 10 weeks of the course we looked at many ways in which the products of industrial firms are changing, but the disruptions that are happening simultaneously with the delivery of these products (changes in the channel) and the decreased cost of customer acquisition, are turning business models on their head as greatly as are the changes to the new products and services that are being offered to customers.

One thing that makes The Industrialist’s Dilemma so complicated for incumbents is that the changes and attacks that are now impacting these successful, long-standing companies are consistently coming on multiple fronts. Just as we saw with Ford when Mark Fields visited, the changes to the creative and delivery process for entertainment companies are forcing existing studios to address every part of their business simultaneously — content creation, financing, distribution, etc. — all while having to deliver on existing products and promises.

Attacks (from the) Very Large and Very Small

Thomas pointed out that Silicon Valley and Hollywood are figuring out how to do business together in today’s new world order.

As Thomas highlighted, companies such as Facebook, Google, Amazon, Netflix, etc. have large market capitalizations and won’t be “pushed around by anyone” in the existing movie studios. Additionally, smaller players (especially artists) now have the ability to get their products out to larger audiences in ways that were previously not possible through new channels and platforms.

As we saw in the automotive industry with Ford and also in the home automation/HVAC industry with Nest, value chains that have been developed and refined over decades are being shaken to their core with lower barriers to entry than otherwise previously available. In situations where de facto oligopolies developed over time (e.g. movie studios) because they could bring coordination and organization to product delivery, the economic rents are increasingly moving to those parts of the system that consumers value (e.g. talent in movies and TV, and to platforms for the long-tail part of the media business (i.e. YouTube, Facebook, etc.)). Other portions of the value chain (accounting, legal, physical studio lots, etc.), while still required to deliver an end product, will see a decrease in the economic rents they can collect as a more nimble and transparent value chain allows customers to prioritize and pay for those things that matter to them.

The challenge facing all of our industrial incumbents is that they need to quickly and efficiently determine which portions of what they deliver today are components that truly matter to their customers, and to quickly jettison and reduce costs on those parts that don’t. In addition, they need to add new services and capabilities so that they can continue to grow and profit in the future.

During our nine sessions we observed that the best-in-class company we saw during our course was GE, who is now 1/3 smaller than they were just a few years ago, while having a market capitalization that has risen during this time period. Making the hard decisions to cut businesses and shrink in size (“growth through simplification” was a popular expression when I worked at the company) so that a company can focus on higher value-added areas is a tremendously difficult thing for leaders to do; especially when every aspect of one’s business is being attacked by both large and small players from inside and outside of one’s industry.

As the course came to a close, Aaron Levie, Maxwell Wessel and I concluded that our initial hypotheses about the ideas behind The Industrialist’s Dilemma were both widely prevalent and in the consciousness of both the disruptors and the disrupted who came to our classes. And it was also clear that the challenges and opportunities that these companies face are only going to grow in nature over the next decade.

And not all parties facing this dilemma will survive.

Each firm confronting The Industrialist’s Dilemma will require aggressive and new strategies along with near-flawless execution to win in the industrial new world order.

The three of us are looking forward to digging more deeply into this area and continuing our work in understanding what will determine who will be the winners and losers as firms confront The Industrialist’s Dilemma in the future.