I had a conversation in 2007 with a partner at one of the biggest venture capital firms in Silicon Valley, and I realize now it was the exact moment I should have known the entertainment business was in existential trouble.
I was telling him about a television pilot I had produced and how great it was (of course) and how disappointing it was that the network I produced it for hadn’t ordered more episodes. What I was trying to convey was that show business and the world of venture capital weren’t all that different. They are both businesses in which one or two hits pay for a dozen or more fizzles—and you never know which ones are going to be which.
He shook his head. “You should’ve gone to the actors and the writers involved and said, ‘Hey, let’s all do this show for, like, nothing. Get some investors together, do it for no money up-front, put it up on the Web. And if it hits, everyone gets a piece of the back end.’”
“But I get a piece of the back end anyway,” I said. “Plus fees up-front.”
And then I explained the glorious way show business worked. How studios paid writers like me to sit around devising TV shows, and how together we’d go to the various networks and try to get one of them to agree to make a pilot out of my idea, and then if the pilot worked, we’d make 20 more episodes, and if those worked, we’d run for five years (at least) and the reruns would start appearing and everyone involved would be showered with gold. My job, I said, is really about coming up with risky projects that have a shot at going very, very big. I get paid, I told him, to swing for the fence.
He thought for a minute and shrugged. “That,” he said to me, “is what all of this”—and he gestured to the window overlooking Sand Hill Road, the famous Silicon Valley avenue that’s lined with venture capital firms—“what all of this is about to disrupt.”
He was right, but not in the way he or anyone might have expected.
I spoke to that venture capitalist during the Hollywood writers’ strike in 2007. That was 16 years ago. Also 16 years ago: Netflix announced that it was moving into streaming video. Sixteen years ago, in other words, it seemed entirely plausible that Silicon Valley was going to disrupt Hollywood.
What actually happened was the reverse. Hollywood chaos disrupted Silicon Valley.
Netflix built a fast-growing streaming-video business by licensing shows from existing studios. The biggest shows on Netflix were reruns of Friends and The Office, as well as various iterations of the Law & Order universe. Netflix sensibly feared that the minute these licensing deals expired, the studios would take their shows back and build streaming businesses of their own around them. So Netflix used its popularity on Wall Street to raise pots of money to make its own shows so that when those existing licenses ended, it would have a library of shows of its own to rely on. And that did happen.
But it turns out Netflix was wrong when its poohbahs assumed studios would stop licensing television shows and movies to their service. Their suppliers just sold Netflix different shows, and Netflix’s reach helped make them hits again. This summer, for instance, the most popular show on Netflix is Suits, a legal comedy-drama that appeared on the USA Network in 2011. But for a decade, Netflix had committed itself to the “we make stuff” strategy, and in so doing, turned into a worst-of-both-worlds behemoth: a studio and a network.
Why is that bad? Because studios and networks have wildly different jobs to do, and you can’t do both at once at all well. Netflix executives should have read a brilliantly unreadable book published in 2003 by the economic Arthur De Vany called Hollywood Economics: How Extreme Uncertainty Shapes the Film Industry.
De Vany argued that whenever studios and networks try to hedge their bets—by spending a lot of money on marketing, say, or paying a lot for a star-driven cast—they are spending scarce resources on things that don’t actually have a positive effect on their bottom lines. The opportunity costs they incur mean they aren’t focusing on what is best for them. Rather than waste dollars on massive ad campaigns, De Vany demonstrated, studios and producers should spend their money on more—making more projects, more movies, more TV shows, more swings for the fence.
Now, for their part, the businesses that present to the public the work made by studios and producers—networks and exhibitors—ought to do whatever they can to ensure they have the widest selection of shows and titles around. In other words, producers need as many at-bats as possible to succeed. What networks need to succeed is the ability to provide choice to their customers.
In fact, there used to be federal regulations that required studios and networks to stick to their knitting. Studios were not allowed to own television networks, and television networks were not allowed to have a financial interest in the shows on their schedules. That system, called Fin-Syn, died in the 1990s. But over the course of the two decades when it was the governing rule in television, studios focused on generating content and the networks concentrated on figuring out how to supply their viewers with what the viewers wanted.
When this regulatory wall was torn down, the distinctions between suppliers and distributors began to blur—to the detriment of both. A network now had a vested interest in using its platform to feature not the best show for any given time slot, but a show made by its own production arm. Rather than follow the De Vany formula—more from the producers and choice for the distributors—they now worked in a system without any rules or guardrails.
Netflix could indeed have disrupted this mess by applying the De Vany rules and becoming the most powerful network the world had ever seen. But instead Netflix decided to become a studio also. This was a crazy Silicon Valley screw-up—and one Silicon Valley’s own governing philosophy should have prevented. After all, for two decades, the Valley preached the gospel of decentralized, distributed enterprise. “In the future, you won’t need a car,” said the minds behind Uber and Lyft. “You don’t need to rent an office,” said the entrepreneurs behind WeWork. There wasn’t an industry that people in Silicon Valley didn’t approach with disruptive zeal. We heard it all the time—this or that business was “Uber for…” some ossified sector ready for a shakeup and an app.
Then look what happened when the Valley went into show business. My industry is essentially a constellation of small entities grouping together to make a movie or television show—a temporary connection between talent, money, facilities, and someone with an audience to serve—then moving on to the next project at the next studio for the next network. It was Uber before Uber, WeWork before WeWork.
But when Netflix came to town, what did its leaders do? They built a vertically integrated old-timey movie studio, something along the lines of Famous Lasky Players from the 1920s at the dawn of show business, with producers and theater owners under one roof. They raised money from credulous Wall Street investors and turned showbiz into Ford, GM, and Chrysler, circa 1972.
This is actually a very old story. Rational, intelligent people look at Hollywood, with its eccentric characters and indulgent egos and barely legal financials, and they think, I can fix this! And then a few months later, after a few glittery movie premieres and the smell of the night-blooming jasmine, Hollywood fixes them. And in the process of being fixed, the Valley disruptors may have destroyed this hand-hewn business that has been making its own way chaotically—but kind of efficiently—for a century.
Photo: AP Photo/Richard Drew
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