Unauthoritative Pronouncements

Kevin Tsujihara, the CEO of Warner Bros. Entertainment, gave a very candid interview with Recode media at their Code/Media event February 18th. Dawn Chmielewski liveblogged, and Peter Kafka conducted the interview.

Tsujihara talks about the decision to tap a digital guy to head the film studio: The changes that are happening in the industry are pretty dramatic. And the DVD business is one that’s undergone a significant amount of change. The whole model is threatened. There are benefits to owning movies, though there are a lot more choices in the world today than 25 years ago.

Incredibly, he highlights that they’re still trying to push hard on UltraViolet. Consumers have roundly rejected this as any kind of solution. Disney, Google, and Apple won’t participate — but sure, let’s prop this sucker up, Weekend at Bernie’s style! It is a farce of a system that has wronged many that dare to use it.

It’s kind of breathtaking when you realize he’s the digital guy.

Tsujihara seems to have a very clear understanding of the ways in which customers, and content providers like Netflix and Amazon, want the studio to move.

There was some pressure from the audience about the amount of work they’re doing for online providers of the content they make, instead of relying on their own online content distribution. This isn’t really that abnormal if you pay attention to all the credits on the things you watch.

For those that aren’t familiar, Warner Bros. makes both television shows, and feature length movies, through separate divisions of the company. Each of The Big Six Studios (Disney, Fox, Universal, Paramount, Sony Pictures, and Warner Bros.) basically act like big companies full of a lot of little companies specializing in making particular kinds of media, or providing services to make media. Some are owned by larger parent companies, like Sony owning Sony Pictures, which owns Columbia Pictures. Paramount is owned by Viacom, which also owns CBS, Nickelodeon, Mtv, etc.

It might seem confusing to an outsider, but these different parts of studios are actually pretty used to working with different parts of other studios to produce, and distribute, media. Buffy the Vampire Slayer, for example, was made by Fox for the WB’s TV network. It happens a lot. Films are usually more self contained, but they will split things like distribution. Films will have weird distribution deals. Like DreamWorks Animation distributing with Fox, or something like 2007’s Beowulf: “Originally, Columbia Pictures was set to distribute the film. However, Steven Bing did not finalize a deal and instead arranged with Paramount Pictures for U.S. distribution and Warner Bros. for international distribution.”

This is pretty bizarre when you think about it. Like if you just turned over a packaged food item and looked at all the fine print for each of the sources.

That Warner Bros., and its’ subsidiaries, would make content for Amazon, or Netflix, instead of their own services and networks is not really that surprising because that’s actually business as usual. Those subsidiaries have to do business, and those companies are willing to do business. The end. What is strange is that Warner Bros. has very weak online services. It’s not like making a TV show for Fox instead of the CW, it’s like making a TV show for Fox, or only showing it only in Ludlow, California.

When a reporter for Bloomberg pushes him on why they haven’t acquired Machinima. (While Machinima isn’t the biggest online “channel” it’s a huge leap over Ludlow.) Kevin replies, “We’re going to have to own some of these platforms and have a real, direct relationship with the audience.”

Excerpt from Dawn Chmielewski:

“I think that everybody’s looking at this and evaluating it,” Tsujihara said of the proliferation of on-demand video services. “And everybody has a different suite of assets. Not everybody has HBO or the Turner Network.” TV viewing, overall, is up. And one could argue that the exposure on on-demand platforms is helping the shows.

Hmm. That seems like he understands, but doesn’t know how to follow through. Much of what Kevin says here is about acknowledging their shortcommings. Worringly, he doesn’t seem to have any action to follow through on. After all, this is 2015, and it’s not like Netflix and Amazon popped out of thin air. Even if we pretend that he shouldn’t have done anything until these companies started winning awards — well, that’s already too late. House of Cards is going into its third, award-winning season on Netflix. Tsujihara has been the CEO of Warner Bros. Entertainment since January of 2013. Where’s the plan?

I can only assume that Kevin’s held back by other, risk-averse elements. WB is not adapting to changing markets that call for investment in on-demand, convenient media.

There’s no better example of the aversion to risk, to change, than Tsujihara wants people to understand the richness of theater experiences, and he thinks people need to be taught the value in owning content (he means discs).

Usustainable, Distantly-Sourced, Subsidized

Kevin’s not the only CEO that has problems adapting. Sony’s CEO, Michael Lynton, famously gave an interview in which he said that no one would distribute The Interview for them. Sony Pictures owns more than one content distribution network. I would assume he didn’t consider them for distribution because he didn’t believe in them.

Why would an electronics manufacturer that owns a movie studio, which owns several online video distributors, think his services weren’t up to snuff? Because those services can’t compete. They’re hamstrung by a corporate focus on protecting the current business model. They don’t seriously think they can go toe to toe with Netflix, Apple, or Amazon, but they own all the component pieces. It’s a lack of will.

Apple was roundly criticized for not distributing The Interview at the same time as Google, and Microsoft. Again, where’s the pressure for Sony to do their own distribution? Their chance to prove their services are worthwhile? No?

One reason they’re so timid about online distribution, and shrinking home video sales, is that they can hide the problem.

The studios have been able to cling to the past because municipal, state, provincial, and national tax credits which help remove some of the risk. This used to be filled with DVD money. All that precious home video money has dried up. Instead of realizing there’s a hole in the sinking ship, they stuffed a shirt in it.

There’s also something else to worry about on the horizon, and that’s the online content providers. Amazon and Netflix are content to either make their own content, or get traditional studios to do it for them, but what happens as their popularity increases and the networks and theaters decrease?

I would wager that these internet companies will buy, and restructure, today’s Big Six companies. Sure, that’s just a gut-feeling, but the history of film and TV is full of studios getting bought, sold, merged, and shuttered. That’s why we have six big ones, after all.

Let’s say that WB has a few summer blockbusters flop, maybe some shows don’t pan out. At a certain point, the wealth of the internet savvy companies will be enough that they can snap up a poor studio.

Why would you want a floundering, top-heavy, anti-internet studio? Two reasons: You could actually integrate the production of your shows with the management of the studio and eliminate management overhead. Primarily, the intellectual property that the studios hold is priceless.

IP is priceless because it’s never going to ever expire as long as copyright laws keep getting extended. There are huge libraries of things spanning decades.

Don’t believe this is valuable? Look at Ted Turner’s rise to power in the 80s. He bought up all the film libraries he could so that he would have things to show on the cable networks he owned. He was able to do this because the companies were in financial distress.

Look at Sony too, Sony bought up Columbia Pictures, TriStar and the Lorimar (formerly MGM) lot in Culver City. Sony didn’t make Sony Pictures out of whole cloth. Is it so hard to imagine Sony Pictures Entertainment being sold, whole or in chunks, to finance the ailing parent company? With the TV division being spun off, and now the audio-video business, it’s hard to see a future where they cling to the not-so-bright future of Sony Pictures Entertainment for the corporate synergy they once did.

The tax credits will not be able to spackle-over structural problems forever. Vancouver is running up against problems competing in the race-to-the-bottom for subsidizing production. Even meager tax incentive programs are facing stiff criticism in Florida, Louisiana, and North Carolina.

Net Worth

Clearly the studios are flailing around. They make profits by taking advantage of taxpayers. They have no clear path forward to adapt to the changing demands of the consumer market they face.

What about the internet companies they potentially compete with? The vast majority of internet-based companies aren’t constructed like the studios. Netflix doesn’t have a studio division that makes films for Amazon. Most of them do maintain a library of content that is exclusively available to customers of their services, or through their storefronts. Almost all of these services, and storefronts, are available on a wide variety of platforms. This platform agnostic approach ensures a wide customer base.

Apple and the Old, Simple Way

Apple is a notable exception. Apple sells, and “rents”, access to digital copies of media from traditional media sources. In a way, they are very similar to the Blockbuster of yesteryear. Some alternative providers are available on the Apple TV, but are usually in areas where Apple might not compete directly — like cricket matches on a channel that ONLY shows cricket. I can’t even.

Apple’s at the largest disadvantage if their competitors gain serious traction. Particularly if their competitors purchase one of the big six studios. Apple could buy a studio (all six, really) but they would scare away other content providers, or face enormous regulatory problems. Even today, Apple tailors their content offerings on what The Big Six are making. The streaming services that exist for sports, subscription services, and special “cable anywhere” programming still leave out other storefronts, like Amazon. If anything is purchased on an Apple device, it’s purchased through Apple.

They aren’t hurting because they have over 600 billion iTunes accounts. To really hammer home the point that UltraViolet doesn’t fix anything, let’s point out that they saw 30% growth last year to 21 million accounts which is less than 0.001833333% of the number of iTunes accounts. iTunes, as a storefront, isn’t in any danger as long as they still have things to sell, and they will outlast any studio controlled effort, like UltraViolet, which doesn’t exert any kind of leverage over their business.

Apple doesn’t use ad platforms for the iTunes video store, and doesn’t pursue user-generated content at all. They are quite satisfied to host several services that do that alongside their rentals, and sales. They don’t provide any system to convert purchases, though they do allow studios to issue codes that can be redeemed in their store, and they don’t offer anything like iTunes Match for movies since Apple never pushed people to rip their own discs, I doubt we would ever see something like that at this point.

Their last major revision to living room hardware was over two years ago. Rumors have circulated, from time to time, that Apple is going to release a full television set, but that they’re holding back because they don’t have content deals in place. The fact that this hasn’t materialized in years, and that Kevin Tsujihara doesn’t want to go on record as being involved in any kind of deal with Apple, should only serve to reinforce that Apple’s success is closely wedded to the status quo.

Amazon and Netflix

Both companies are pushing hard to create video content for streaming, subscription services. The studios wouldn’t let them stream the good stuff, so they had to make their own good stuff. Studios have no real response to this, other than handling the production of some of the shows.

Exclusivity is the name of the game here. It doesn’t matter if you subscribe to a competitor as long as you absolutely have to subscribe to them too. What we might end up with is a system of providers we subscribe to instead of cable TV packages. The providers becoming their own “bundles” with good stuff, and filler.

Indeed they are similar to many on-demand premium cable channels. They have a rotating library of available films on hand, and some of their own videos.

They are more comfortable with making TV shows than they are with feature-length blockbusters. It’s hard to recoup the amount of money you’d need to justify the risk of a big-budget film. Eventually, they might make their own $200 million, VFX bonanzas, but there just isn’t the same incentive.

The Changing Adscape of YouTube

YouTube, the biggest online video service, has its roots in amateurish videos and clips of user-uploaded studio content. They’ve moved away from that, towards more polished products. They’ve repositioned themselves with experiments with financing their own “channels”, licensed music with Vevo, movies purchased through the Google Play Store, and content produced by individuals or small teams. With the exception of movies, the real goal here is to make YouTube a destination for people to go see advertisements. There are no services offered to people uploading to YouTube to allow for direct payment, like the Google Play Store, so everything is financed by ads.

The studios don’t fully understand advertising. They understand a deal for a project. Product placement agreements that result in immediate payments and are permanently intertwined with the media. They don’t offer advertisers the ability to dynamically alter the advertising in an existing work. If you watch Paramount Pictures’ Transformers movies you’re “treated” to GM cars for the Autobots. A cable channel showing Transformers will insert ad breaks and show commercials they’ve bought and sold themselves. The studio has no control over that, but they license the content to the cable channels knowing it will happen.

YouTube’s ads are kind of like the TV model in that regard, but YouTube isn’t paying YouTubers (they live underground, and make a great puree) an upfront sum of money like networks pay studios. They can monetize each ad being loaded, and dynamically alter what kind of ad is served based conditions that are absolutely impossible for a cable network to match. YouTube doesn’t expose itself to the risk of buying a show and selling ads for the show. They don’t pay Tyler Oakley a sum of money for a season of work and then they renegotiate his contract. The risk in making the videos is entirely on the YouTuber, not on YouTube.

YouTubers negotiate their own ad placement in their videos to maximize this revenue, but YouTube is cracking down on this. Imagine the FX Network telling Michael Bay, and Paramount, to remove all the GM logos or they won’t broadcast their movie, and that they won’t pay for the rights up front. They’ll just send them money as commercials are viewed, and tracked. It’s kind of mind-bending to think about how different these business models are, even in situations of video advertising and product placement.

CGP Grey (not a real name) makes his living creating YouTube videos. He talks to Brady Haran on their podcast Hello Internet. Their YouTube channels select a topic and makes a presentation describing it to viewers. Ads are shown and they get a cut of those ads from YouTube. In several episodes of Hello Internet the guys have discussed problems they see looming on the horizon. A recent episode is about musician Zoë Keating being pressured by YouTube into a new, onerous contract, and what it could mean for all of them. Grey makes the case that YouTube is not only the largest game in town, it is the only game in town. No one else has an ad supported platform for small, independent producers.

The other day, CGP Grey took to twitter to voice his concerns over another YouTube policy change, a crackdown on brand-sponsored videos.

The change is about videos made specifically for the sponsor (as opposed to videos with sponsors) but thin-end-of-the-wedge and all that.

— @cgpgrey

Services like Vimeo, where I host videos like my demo reel, are better at showcasing creative works that don’t rely on advertising. Short films, student projects, reels —you know, artsy-fartsy stuff. The relationship is also different in that you pay Vimeo to host your videos, and viewers don’t pay, or see ads.

Snapchat, Niche, and Vessel

Other, smaller services have spotted a unique chance to use video-sharing services to create short-form videos with very minimal overhead. Like YouTube, they are relying on advertising, but many of these entertaining videos are ads. People had the brilliant idea of making ads so clever that they are the complete content package.

This is revolutionary, in a stomach-churning kind of way. Young people can leverage their social graphs to push paid endorsements on their friends, and they love it because gosh-darn it, the ads are fun.

The concept isn’t completely alien. There are people that watch The Super Bowl just for the advertisements. In that situation, there’s actual pressure on companies, and advertisers, to use a finite amount of time to do something that isn’t completely lazy. It’s still a risky proposition though, and still uses large, up-front costs. What if it was just a couple millenials and a medicine ball and then you could just pay as you go? Great. Done.

Snapchat, a company that I despise with every fiber of my being, has “invented” channels. They didn’t invent channels, or old-media partnering with new-media, but millenial tech bloggers are so enamored by the company that it is only obvious to human beings. This Discover tab experiments with getting studios to produce small, sharable content for the desirable demographics.

The biggest problem Snapchat’s logic is with the ghost of webisodes. People forget about webisodes, for good reason, because they didn’t work. The theory was that for less money, and effort, and talent, they could make short shows for the web and profit off of all the money they were saving by not really trying. This didn’t pan out.

Snapchat doesn’t seem to have solved the problem of webisodes, they’ve just siloed webisodes into their exclusive service instead of the webisodes being available on individual, stodgy, buggy, corporate sites. Will collecting all this mediocrity work? Doubtful. The 30 Rock jokes about webisodes are available to view on a variety of content and platforms, the webisodes Warner Bros. made for Breyers Ice Cream, and starring Jane Krakowski, are not available.

Niche, is a company purchased last week by Twitter, looks like the fever dream of a coke-addled business executive. It’s a middle man to partner brands with people that have large social media followings on various services, like Vine. It’s like Uber, but for Vines. (Jumps out of window.)

Vessel, a new startup by a former Hulu executive, is positioning themselves differently from the others in that users pay for early access to “premium” content. I’m very skeptical of the viability of this service. People are reluctant to pay for access to things, and it wouldn’t solve the situation for YouTubers because they rely on people sharing their videos. This windowing concept is akin to a paywall. I’m also skeptical this will solve the film industry’s problems. From Jason Abbruzzese’s Mashable post on Vessel:

“The way I think the film business is going to evolve in the next 10 to 15 years… Let’s say the tenth Star Wars that comes out… I think that will be available on day one on your computer for probably $55 for a one time view,” Kilar said.

Rich, white guy’s gonna rich-white-guy.

It’s a Trap!

Selecting a service is, in and of itself, a problem. When a studio, or independent producer, aligns with a particular service, they are aligning with a single “storefront” to handle their business. Cheering for the next startup, is cheering for the next incumbent. Diversity of stores and sources helps people producing videos hold leverage over stores. Look at the film industry, which we all laugh at, their eggs are not in one basket. They’re in a bunch of stupid baskets, but hey it’s better than one basket. They’re misusing that leverage to cling to a business that’s shrinking instead of growing, but c’est la vie.

Maybe we’ll get lucky and we’ll all pay for a monthly subscription to apps that show different silos of webisodes about brands that allow us to connect with product narratives.