Future of filmed entertainment will not be that different from what it is today – in terms of complexity and number of players participating. But, as the pie is large, there are lots of hopeful and agressive firms out there trying to close a prime estate in the white space. This post is by no means a prediction of who would thrive in this market. Rather, it is about identification of the right questions to assess the probabilities of winning from each major perspective in the market. To keep the reading time at a practical level, I will split my thoughts into three parts of meaningful domains: Content Owners, Intermediaries (‘gatekeepers’ or ‘middlemen) and End-user Platforms.

Content Owners (i.e. Studios)

Basic thinking would say that studios should have significant power in the market, but they somehow do not. Today, 9 studios own nearly all of Hollywood content, but we don’t see them exercising strong influence in the market. While there are more, two main reasons shape the limits of studios’ control power:

  • There are no clear, undisputed leader(s) among studios.
  • Studios don’t have strong vertical integration alignment.

The lack of strong leadership means that studios can’t exert power on their customers. Today, those customers seem like the individuals, but they are not. Studios’ customers are mainly:

  • Movie theatres (Cinemark, AMC…)
  • Cable Operators, TV Channels & Networks (Comcast, CBS, TNT…)
  • Retailers (Blockbuster, Wal-mart, Best Buy…)
  • Rental Companies (Netflix, Blockbuster…)
  • Video-on-demand providers (Amazon, Apple, Vudu…)

In simple terms, each of these "customers" are big enough to prevent studios from exerting market power. Any particular studio doesn’t have sufficiently large market share to force its customers for better terms for the studio.

Second item, the lack of vertical integration, puts two other key determinants of the industry at the hands of other strong players. These two determinants are technology and distribution (a.k.a delivery). If a studio could own either:

  • the key technology or
  • the key distribution channel

that majority of the studios uses, that studio would have quite strong market power. But naturally, if a single studio tries to own a highly proprietary technology or distribution channel, simply, other studios would form a consortium to bring a competing standard or distribution channel to the market. That is what we saw with video casettes, DVDs, and Blu-Rays. In the last two of those three, Sony had to give up a lot of control and get many players on board to make sure that other studios would commit to use Sony’s technology. In the distribution market, the studios are even at a worse situation. They rely on a few theatre chains for white screen, a few retailers for dvd sales, a few major players for rentals and some cable companies/TV networks for TV viewings. With the antitrust risks preventing studios from taking collective actions against any of these "few" delivery players, we can conclude that hands of the studios are pretty tied up for their downstream.

This is basically what the market snapshot is as of today. And there is huge expectations, from each player in the market, for the digital age: online delivery. While the name somehow implies that the expectations are about distribution, it is in fact about both distribution and technology. The technology play, for the time being, is focused on Flash or Silverlight (and in some sense Torrent vs. tradtional streaming), and neither of them are not close to being owned by a studio. The distribution part is where we see studios putting their biggest bets. While we see Hulu and Epix under the sponsorship of studios, there are many online distribution players independent of studios (Netflix, MovieLink, Starz, Vudu). While it is also interesting to analyze the online delivery evolution from a technology standpoint, I will prioritize distribution for the time being.

Simply, once the content is properly digitized, the studios will, rationally, try to maximize their reach. So they will try to get their content on every platform possible (TVs, software clients, mobile phones, websites…). But how will they deliver their content to these platforms? That is one of the key questions to analyze. As of today, we can list the following major delivery paths: 1) The ‘gatekeepers’ and 2) ‘owned’ channels.

The gatekeepers are those companies who command certain competitive advantages to act as the intermediary between the platforms and the studios. The platforms are many and diverse:  Game consoles like Xbox, internet-connected TVs of Sony and Samsung, PCs, sophisticated mobile phones such as iPhones and maybe even Kindle some day in the future are the platforms. These platforms are, for reasons I will cover in part 3, probably better-off when they don’t partner with studios directly to serve content. If we assume this last argument holds for now, then we can look at the gatekeepers: Netflix, Roku, Amazon, Apple, Boxee. We frequently read about these companies cutting deals with platforms to deliver content in the recent past (e.g. Netflix, Amazon, Boxee streaming directly to TVs and/or consoles). There are good reasons for all these companies to arise as gatekeepers and I will cover them all in part 2 of this series. For now, let’s see the second option for the studios: ‘owned channels’.

The owned channels represent a significant opportunity for the studios to vertically ‘own’ the distribution channel. Yet, accomplishing that goal is as much challenging as it is rewarding. Hulu is the best example among all, while we hear that Epix is coming up with another model. The reasons why it is such a big opportunity for studios are trivial: First, you cut the middlemen and keep the profits in the house. Second, and more importantly, you name the price. The harder question to answer is whether there is any way to make it work. From one lens, Hulu is a work-around solution to antitrust laws previously preventing studios to act as a single decision maker and own the delivery. Today, with only a few studios on board, another important question is the following: When will the collective power of Hulu-partner studios kick-in and when will the antitrust bells ring? If the former happens without the latter, it might become the biggest win in the media industry. If the latter happens before the former, it will create an unsuccessful experiement for the participating studios, an unhappy entrepreneur and a reputation bummer for a high-profile PE firm. If both happens together, we might see Hulu splitting up into many pieces, somewhat analogous to the Dept. of Justice’s act in 1948, seperating production and distribution again. All in all, from the perspective of content producers, there will be an extremely delicate balance between how much power a studio will have in digital delivery, how acceptable those positions will be for other studios, and how acceptable the collective power of studios will be in the eyes of public and regulators.

Next

In Part 2, I will focus on how the positions of studios are and will be affecting the ‘gatekeepers’ or the ‘middlemen’ of the industry. Some key questions I will ask, and try to answer will be:

  • Who are the ‘middlemen’? How could they evolve?
  • Why do they deserve to exist, i.e. what are their competitive advantages?
  • How likely is convergence in this part of the industry and in what ways the convergence might occur?