The Mixed Results of Technological Disruption in Entertainment

April 29, 2020  •  David Pring-Mill

By David Pring-Mill

Disruptive innovation is one aspect of an endless cycle. The newly created or unlocked value isn’t always obvious or fully realized and it may require a gradual process of adoption.

Established companies have a vested interest that may prevent them from recognizing the new value, and even if they do recognize it, their company size could actually work against any new tech adoption or business adaptation. They have more costs to cover and might take a loss during the required transitions and this might even result in the dismissal of senior executives. Smaller startups are thought to be more nimble in this regard, and sometimes their organizational culture is more conducive to risky, bold ideas and creativity.

Proponents of disruption often believe that when the dust settles, consumers derive more benefits, smart entrepreneurs are rewarded, and ultimately, society is better off. It’s harder to argue that when the disruption in question isn’t particularly innovative but is simply a means of shifting risk or reducing pay. In other instances, the intentions are good but the numbers don’t add up or the long-term interests don’t align.

When it comes to disruption in the entertainment industry, there have already been mixed results and casualties.

Source: Image by Steve Buissinne from Pixabay

Failed Streaming Services and the High Demand for Content

HOOQ targeted markets in Singapore, the Philippines, Thailand, India, and Indonesia, with financial backing by WarnerMedia, Sony, and Singtel, a telecom conglomerate based in Singapore. In March, the company filed for voluntary liquidation. The high cost of content and the high amount of competition worked against the company and its multiple pivots, partnerships, and integrations weren’t able to attract sufficient support from consumers in those emerging markets.

PlayStation Vue tried to extend Sony Interactive Entertainment’s success and reputation in gaming to an OTT media service but expensive content and network deals blocked its pathway to success.

Even Netflix, a dominant player, has acknowledged that new streaming services are accelerating the shift from linear TV to the on-demand consumption of entertainment and that is acting as a modest headwind against the company’s own near-term growth. With more companies bidding on particularly desirable content, the costs of content creation or licensing have risen significantly. 

Even with these new threats, Netflix tried to keep everything in perspective for its shareholders: “The upcoming arrival of services like Disney+, Apple TV+, HBO Max, and Peacock is increased competition, but we are all small compared to linear TV.”

Why Crowdfunding Is Often Oversimplified

There have also been some attempts at technological disruption around the financing of independent films and creative projects. Alternative crowdfunding mechanisms are available, as the result of technology, but this pathway can be onerous and it often requires converting existing social capital into financial capital.

This also holds true for the releases: big media dollars still help to solve the problems of discoverability and credibility in a digital landscape that is oversaturated with content.

Consumer Frustrations & Alternative Business Models

Walled gardens, in the form of streaming services or in software and telecommunications, can sometimes frustrate consumers.

Some would-be audiences have suggested that they would prefer to be able to view the specific title that they want to watch, in a one-time transaction, be it a rental or purchase. Media offerings like iTunes offer this ability but they don’t have everything.

Walled gardens can sometimes frustrate consumers. Source: Image by reginasphotos from Pixabay.

Streaming services hope to retain their subscribers and capture a high customer lifetime value, though subscribers could still purchase a subscription, watch the desired content if it happens to be hosted there, and cancel after a month.

“These are the kinds of holes that we’re finding in this new ecosystem,” said Frank Patterson, President of Pinewood Atlanta Studios. “But relatively speaking, it’s so much easier to get access to content. Of course, I came from a time when you literally had to go to the library and rent a film print. And thank goodness, we’re not doing that.”

Then, VHS won the so-called video “format war” and created a new market.

“And when VHS first came out, you couldn’t get anything that was part of film history,” Patterson continued. “But then after a while, these smaller companies emerged and you could get access to everything.”

Patterson suggested that these phases of innovation will likely repeat and, with the advent of Silicon Valley algorithms, streaming services will provide even more personalized library options.

As media companies pioneer new forms of delivery, some gaps remain.

For the time being, other things are left out, too. Most streaming services haven’t figured out a way of tapping into local news and programming.

Some consumers have expressed a desire for a subscription to a single video-on-demand service that aggregates everything and distributes revenue behind-the-scenes, based on viewership. The media consumption could be made either finite or infinite, depending on the payment model. That might be one way of reducing search costs for consumers and simplifying or stabilizing their transactions.

There are many different possibilities and many powerful arguments for and against each of those entertainment industry options.

In 2007, Hulu tried a new model with a wide array of initial partners across production, distribution, tech, and advertising. The service still exists but the consortium aspect has partially dissolved. Disney’s acquisition of 21st Century Fox affected Hulu’s ownership. Other companies sold their stakes. Disney now has full operational control.

Still, many consumers simply want to watch the content that they want to watch. Maybe one month, they want to watch “Stranger Things,” which is a Netflix show. And the next, they want to watch “Games of Thrones” on HBO Max. Is there still room for a new central model, or a bundled offer that replicates cable TV by covering multiple streaming platforms?

Matt Abrams, a general partner at Seven Peaks Ventures, said that he doesn’t think the fragmentation can continue, especially if a downturn happens.

“People look to entertainment to maintain sanity, so on and so forth, but at the same time, the charges that we’re starting to rack up, around all these different subscription services, are getting out of hand,” he said.

(To his credit, Abrams pointed this out during a phone call last October, prior to the economic downturn prompted by the current global pandemic.)

He continued, “So I think that there will be forms of consolidation, whether that’s consolidations of the streaming platforms themselves, or just digital consolidations that, to us as consumers, allow us to have one subscription versus five. Or might there be something, you know, akin to what happened in the travel industry. And the example I give there is, look at Orbitz. Orbitz was a case of the majority of the leading airlines coming together and saying, hey, we’re going to create this Orbitz platform to have a common rail system on which we all operate. And we’re going to compete on servicing and offerings elsewhere, but partner over here. So I think there’s a lot left that will happen on that. And I think the consumer will be pushing for it.”

Comparing Hollywood to the News Media

The aggregation of news media content could prove to be a relevant analogy.

Chris Nicholson, a former business journalist who is now the founder and CEO of Pathmind, said that any additional innovation in this area may boil down to incentives. He cited an analogy with the news media.

“If you look at what happened to print, you had a very balkanized content creation landscape, tons of different publications that were accustomed to wielding a near monopoly or a tight little oligopoly on their local markets of information distribution,” he said.

Then, Google and other digital platforms effectively aggregated content and made it more discoverable.

“And that meant that all the ad dollars that had sustained print for so long, walked away from those little monopolistic enterprises and went over to Google,” he said.

Some of those same risks could be applicable to any entertainment industry reconfigurations.

“Aggregators have enormous power. In fact, we live in an age of aggregators, you could say, and the internet has facilitated that,” said Nicholson. He cited writer and analyst Ben Thompson’s “aggregation theory” as being a particularly illuminating framework.

“Hollywood studios can try to enter into some co-opetition scenario where they all pool it on a platform that is, you know, not a tech company they fear… it just hasn’t worked out very well,” said Nicholson. “I think the studios’ incentives lead back to the silos and the balkanization.”

But what about the incentives of consumers? By asking consumers with limited purchasing power to choose between these silos, the studios could inadvertently turn piracy into a more appealing option.

However, the studios might be caught between a rock and a hard place.

“They can give the consumer what they want and everybody can go through Netflix. And then Netflix has enormous power. And it happens to be its own studio,” said Nicholson.

In addition, the co-opetition model might involve too much volatility and instability.

“There’s a saying in Silicon Valley: business partnerships are like two bubbles in the air. They either break apart or the big one absorbs the small one,” said Nicholson.

The different players might end up constantly bickering and looking for an edge, or greater prominence, within the platform.

“It’s like OPEC or the UN. Do we ever expect them to make good decisions together, all those rivals? I don’t think so,” opined Nicholson. “Even if they agreed in theory to do it, I just don’t see it being a healthy business.”

Still, Nicholson admits that there are failings in the current situation.

“It’s just like newspapers,” he said. “They all want to be the go-to spot, ‘come to us for all the content you love.’ But none of them can be, because they only hold a small portion of it.”

A differentiator, he added, is that newspapers can repeat public information whereas media holders exercise rights over their content. Also, feature-length movies are capital-intensive; that barrier to entry may have saved the studios from declining as fast as they otherwise would.

What MoviePass Did and Didn’t Do

MoviePass™ logo, Source: MoviePass.com

MoviePass, Inc. tried to disrupt the entertainment industry by applying a low-priced subscription business model to the theatrical experience. The startup aimed to solve high ticket prices and infrequent attendance but their new model was widely criticized as being unsustainable and it ultimately failed.

MoviePass appeared to buy into what Gartner defines as “the hype cycle,” which is sometimes a part of disruptive innovation. The startup overestimated the value of the data they were collecting. They also underestimated customer usage of their own service.

MoviePass functioned as an intermediary for moviegoers and paid their full ticket price. They were losing money each time a “subscriber” went to the theaters. It had been thought that the business model might function like a gym membership — people who retain their memberships but rarely show up could function like a subsidy for the more dedicated users. Perhaps unsurprisingly, the relaxing allure of a cineplex inspires more attendance than a demanding piece of exercise equipment.

The company’s burn rate made failure seem inevitable but MoviePass thought that if they could drive a meaningful increase in attendance for the theaters, then the theaters would respect that and respond by selling them ticket stubs at a bulk discount or maybe even cutting them into revenue from concessions. The theaters didn’t see it that way.

In addition, MoviePass frustrated some of its subscribers when it revised its offering and didn’t clearly communicate the new terms. The company has been widely mocked in both Hollywood and Silicon Valley.

“I loved MoviePass because they sent me to see a hundred movies one year, during the one glorious year they were subsidizing my moviegoing,” said Luke Watson, a media and digital innovations consultant.

“I knew it was not going to last because how could it possibly last? But I was happy to take it. I was happy to have Silicon Valley and a bunch of investors, who couldn’t see the forest for the trees, pay for my movie tickets.”

Chris Nicholson replied to a question about MoviePass with an old business joke: “A startup goes to a VC and says, we’re losing money on every transaction but we’ll make up for it in volume.”

He added that this is obviously not sustainable math but companies like Uber have actually won market share by underpricing rides.

“It’s an understandable strategy. A lot of people have done, it doesn’t always work out, and sometimes, they go down in flames,” said Nicholson.

A parting letter to subscribers from Mitch Lowe, MoviePass’s former CEO, touched upon his thought process and the ultimate effects of this attempt at disruption.

He wrote: “In August 2017, MoviePass™ began a transformation of the moviegoing industry by introducing its low monthly price subscription service. Since then, others in the industry have followed our lead. Now, as a result of this transformation, movie lovers throughout the United States have the ability to see movies in theaters using subscription services at prices they can actually afford, albeit with limited choices of theaters using those services. In the course of this industry transformation, MoviePass™ has experienced setbacks and challenges that are well known. Nevertheless, MoviePass™ remained committed to leading and competing in an industry that is resistant to outside competition and change.”

In 2018, AMC Theatres, which has the largest share of the US market, modified its rewards program to include its own monthly-fee based subscription service.

“Now the genie is out of the bottle. It was just really expensive to unleash that genie, for someone else,” commented Watson. “The thing that most people don’t understand about this subscription movie model is that it’s not just about saving money on tickets. It’s about empowering movie fans to try new movies they otherwise wouldn’t try.”

This movie-related saga is actually reminiscent of a scene from a movie, the David Fincher-directed 2010 drama “The Social Network.” The movie’s version of Sean Parker is somewhat egotistically recounting his rise on the tech scene. Parker founded Napster, which enabled peer-to-peer file sharing of digital music files. “I brought down the record companies with Napster…” he says matter-of-factly.

Bristling at this characterization of success, the movie’s version of Eduardo Saverin objects, “Sorry, you didn’t bring down the record companies. They won.”

“In court,” corrects Parker. “Do you want to buy a Tower Records, Eduardo?”

This is part of an ongoing series of articles about major disruptions in the technology, media, and telecom sector. You can read the other, related articles in Quick Insights and check the Whitepapers section for periodic, in-depth analyses. Subscribe for updates here.

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