The New Hollywood Studios

We knew it was only a matter of time before the Hollywood Studios hegemony would give way to the new media titans, but I think few saw that the path of their demise would come from the successor to Pong.

At the E3 Media & Business Summit in Los Angeles, Sony and Microsoft each announced strategies to expand motion picture distribution directly to the consumer using their videogame stations. In the case of Microsoft, the Xbox 360 will stream Netflix’ on demand movies and television shows directly from the console. Xbox owners will be required to have a Netflix account beginning at $9.90 per month and subscribe to Microsoft’s owners "gold" membership, at $50 annually.

Sony, which has maintained a Hollywood studio strategy since it acquired Columbia Pictures in 1989, has entered the market with a non-subscription model. Rental content will range from $2.99 to $5.99 while purchased content will cost $9.99 to $14.99. In addition, Sony’s films and televisions can be transferred to a PSP (PlayStation Portable), allowing the PlayStation to compete with Apple’s iPhone and iPod touch.

Apple’s iTunes store and line up of video and audio players make it another viable Hollywood contender. Netflix, Nintendo, and Amazon remain potential rivals to Sony, Apple, and Microsoft. In each case, these companies maximize strategies emphasizing reintermediation – creating necessary interaction between the company and the consumer.

Hollywood has been losing market share and relevance in this battle because it has no relationship with its consumers. Fox has developed a strong editorial brand under Rupert Murdoch’s ownership, but the brand bears no relationship to its movie studios. Warner Bros., Paramount, and Universal all suffer from the same lack of brand or distribution relationship. Disney remains the exception. The tiniest of the old Hollywood Studios, Disney has struggled, but returned time and again to its focused, family entertainment shepparded by Mickey Mouse and Company. Warner Bros. never understood the importance of Bugs Bunny. The franchises of Harry Potter, Batman, and Superman will continue to drive ticket sales, but they don’t define the company or tell the audience anything about a Warner Bros. film.

Since focusing on content is a difficult strategy for developing a brand, the core relationship between Hollywood and the consumer will be the distribution strategy. Netflix use of social networking builds a strong audience base, and to the extent that consumers can rely on the recommendations, it will have an important place in the living room. The arrangement with Microsoft nicely benefits both companies, increasing Netflix reach and allowing Microsoft up from the kid’s basement or out of the office and into the living room as well.

Apple’s strategy begins with children when they are in school, introducing them to their proprietary brand of computers. It has added a brilliantly integrated technology platform and proprietary content store. Together, these steps represent the most effectively integrated approach to reintermediation, contrasting its business plan with the commodity-based PC computer manufacturers.

The new Hollywood will be reluctant to become studios, but as the need for high quality and expensive content continues, they will have the funds available to assure that expensive content and tent pole entertainment brands are developed. They may have learned from Sony that companies should not embrace Hollywood, but they will also have learned from Sony that Hollywood is essential to their strategy.

The curtain on the latest saga is about to rise. Who knew what Pong would bring?

Reintermediation – Rethinking Disintermediation

In Philip Evans and Thomas Wurster bestselling book, Blown to Bits (Harvard Business Press 1999), the authors documented how the Internet’s informational flow fundamentally reshaped the relationships between consumers and retailers. (I’ve previously written how this phenomenon affects professional service companies and business market niches.) Described as “disintermediation,” they postulated that the inverse relationship between the richness and reach of content was eliminated by the extremely low transaction costs associated with providing consumers highly rich content through digital media. The Internet eliminated the need for middlemen to provide expertise. The book anticipated and highlighted the erosion of intermediary service providers, and its projections have largely proven correct.

Over the past two years, companies such as Apple, Amazon, Netflix, Google and Second Life have looked beyond the physical distribution of their products to identify opportunities to expand both richness and reach, significantly increasing the relevance of these companies to their customers. In each case, these companies have adopted reintermediation strategies, focused on creating an essential role for the business beyond serving as a source of the product of service. Reintermediation strategy utilizes contracting strategies, consumer data information, and structural business approaches to encourage additional steps in the consumer transaction which build an ongoing relationship between the enterprise and the consumer.

While reintermediation is predominantly a business strategy designed to overcome the pressures of Internet commoditization and digital piracy, the practice will have significant influence on privacy policy, intellectual property law, and contracting practice.

The most recent example of Google’s reintermediation strategy called Lively, a beta 3D virtual environment platform. Although behind Second Life, Google has a history of catching up. Moreover, the platform’s browser-based approach will allow it to insinuate itself into small and large application – putting Google between the consumer and the advertiser in a host of new environments.

Given the ubiquity of Google, consumers tend to think of it as a utility rather an advertising platform. Just like “free” broadcast television, however, Google’s strategy is simple: Be the first choice for consumer interaction and sell that interaction to advertisers. Google’s tools are not free; they are advertiser supported. Under this business model, the extension into virtual worlds represents a natural extension of its reintermediation strategy. And given the strategy, the extension into virtual worlds will grow, expand, and move from a curiosity to an essential tool because Google cannot afford to allow any other advertising company to gain a foothold.

Is Making Available Enough

Late last month, I joined a group of law professors led by University of Minnesota professor Tom Cotter in submitting an amicus brief in the copyright case of Capitol v. Thomas. The brief describes us as “scholars at American law schools who teach and write about intellectual property law in general and copyright law in particular,” support Thomas’ position. Because the case was heard in Minnesota, representatives from Hamline University School of Law and William Mitchell College of Law joined Professor Cotter in the brief.

The Duluth case was nationally known because of the jury verdict of $220,000 to the RIAA The defendant, Jammie Thomas, was found guilty of willful copyright infringement and charged $9,250 each for 24 songs she downloaded and made available online.

The case was reheard because a number of jurisdictions are asking whether the existence of MP3 files on a computer drive made available for others as a source of uploading is copyright infringement. The Wired Blog covers it well. The brief explains that copyright law does not recognize the making available for copying a separate act of copyright infringment. To be liable for copying, a party must copy.

But the anti-RIAA public should not see this as a route against the music industry. In a civil lawsuit, where the standard for proof requires that it is more probable than not that the defendant is guilty, the evidence provided by a computer drive filled with MP3 files which has been made available to bittorrent or other peer-to-peer software networks may well be sufficient evidence for a jury to reasonably conclude that the owner of the computer copied files to the drive and other copied files from the drive - all without the purchase of lawful copies.

Two years ago, this controversy did not exist because the presence of the MP3 files was itself evidence of copying. Now that MP3 files can be readily purchased, having a computer filled with the files simply reflects that you are a music fan.

The recommendation provides a modest correction in the evidentiary issues surrounding copyright infringment.

Own It - The IP & Entrepreneurship Blog

Own It - The IP Entrepreneurship Blog focuses primarily on the themes developed in Jon M. Garon, Own It - the Law & Business Guide to Launching a New Business through Innovation, Exclusivity and Relevance. The blog also includes more general topics of innovation, intellectual property, and entrepreneurship policy.