The Evolution of Hollywood: Navigating an Industry in Flux

Delve into the impact of monopolistic trends and discover insights on the industry's future. Join us in understanding Hollywood's transformation.

Today we will look at the deep consolidation of power in Hollywood, a phenomenon that is gradually depriving the industry of the opportunity to produce exceptional commercial art.

The Future of Hollywood

Recent revelations have shed light on Netflix's evolving content spending habits, signaling an impending era of control and centralization in Hollywood. The key insight from The Information's article suggests a significant shift in the industry:

Netflix has started terminating shows after their second season, even when they remain popular. This decision is rooted in Netflix's understanding that the initial two seasons of a series are crucial for attracting subscribers, while subsequent seasons contribute less to subscriber retention or acquisition.

Additionally, ending a show after the second season translates to cost savings, as showrunners, who oversee production, often negotiate higher pay after two years.

While this move may appear as Netflix becoming more budget-conscious and data-driven, it's fundamentally a strategy of market power exploitation. The company cancels well-received shows, effectively raising prices on subscribers and reducing compensation for creators.

You might wonder how Netflix can implement such a strategy without facing competitive consequences. The answer lies in Netflix's bet that it can avoid significant backlash. This is not just a business strategy but a political gamble, with Netflix executives banking on public tolerance for monopolistic market dynamics.

The Erosion of the Old Hollywood System

The ongoing streaming wars represent a blend of technological advancements and public policy levers that enable corporate concentration and the resultant abuse of market power.

To contextualize this shift, let's harken back to how Hollywood used to operate. Take, for instance, the box office journey of one of the most successful comedy-action family movie franchises of the 1980s, “Back to the Future.”

Back to the Art: Hollywood's Transformative Journey

The success story of “Back to the Future” serves as a captivating illustration of how art defies convention and market norms. This 1985 classic was born out of the creators' previous financial triumph with “Romancing the Stone,” which caught the attention of studio executives who saw potential in the upcoming film.

The movie's initial box office performance, by today's standards, was modest, grossing $11 million on its opening weekend. It pales in comparison to the eventual $385 million it would amass. The storyline, as pointed out by comedian John Mulaney, defies conventional selling tactics. It revolves around a teenager with an inexplicable friendship with a disgraced nuclear scientist. Together, they time-travel to evade terrorists seeking an atomic bomb, leading to peculiar situations involving the teenager and his mother. It's an unconventional plot, to say the least.

Yet, against all odds, it worked. Art, it seems, has no formula, and talented artists can craft exceptional works in unexpected ways. However, “Back to the Future” didn't follow the modern blockbuster model with its massive marketing budgets and simultaneous global releases. Instead, it had a gradual rollout.

The film maintained steady ticket sales for about a month, driven by information circulating among buyers and sellers in the market. Critics, word-of-mouth endorsements, and theater owners played vital roles in disseminating this information. In fact, two months after its release, “Back to the Future” was being shown in more theaters than on its opening weekend.

This rollout strategy may appear unconventional today, where the first weekend dominates and thousands of screens are flooded with marketing-heavy releases. Despite the internet's presence, the flow of information is surprisingly limited in today's industry.

In 1985, theater owners had more autonomy in their content choices and could afford to experiment, gradually introducing popular films. The video industry also operated in a more decentralized manner, with power shared among stars, directors, studios, distributors, theaters, critics, and viewers.

This unique market structure was shaped by past public policy decisions, harkening back to intense battles in the 1930s and 1940s between New Deal antitrust attorneys and studio heads. The culmination was the Paramount Consent Decrees of 1948, which forced studios to divest their theaters and prevented monopolistic practices. This marked the end of the autocratic 'Studio System' and led to the rise of New Hollywood.

A similar decentralization occurred in the television industry, broken apart by Richard Nixon's FCC with the “Fin-syn” rules in 1970. These rules opened up the TV market to third-party producers and resulted in groundbreaking shows like “The Cosby Show” and “Seinfeld.”

Both the Paramount Consent Decrees and the Fin-syn rules aimed to create a three-tiered structure in creative industries: production, distribution, and retailing. This separation minimized conflicts of interest, prioritizing the quality of art. Policy decisions shifted the focus from power-based competition to the celebration of artistry.

The Evolution of Hollywood: A Tale of Market Transformations

The fascinating story of “Back to the Future” and the comedy genre in Hollywood unveils the profound shifts in the entertainment industry's market structure and creative landscape. This transformation began with the film industry's heyday in the 1980s but has since evolved dramatically.

“Back to the Future” was made possible by the creators' successful track record with “Romancing the Stone.” Studio executives, anticipating a hit, eagerly awaited the film's release. However, the movie's opening weekend, by today's standards, was far from remarkable, grossing a modest $11 million. Moreover, the film's plot, as comedian John Mulaney aptly pointed out, was far from conventional and intuitively marketable.

The narrative revolved around a teenager and his enigmatic friendship with a disgraced nuclear scientist. Together, they embarked on a time-traveling adventure to evade terrorists seeking weapons-grade uranium for an atomic bomb, leading to bizarre and comical situations involving the teenager and his own mother. It was a peculiar story, to say the least.

Yet, “Back to the Future” defied expectations and succeeded. This phenomenon exemplifies the unpredictable nature of art, as there is no one-size-fits-all formula for creative success. However, it's important to note that the film did not follow the contemporary blockbuster model, where massive marketing budgets and simultaneous global releases dominate. Instead, its rollout was gradual, with sustained ticket sales over a month.

During this period, information circulated among buyers and sellers, with critics, word-of-mouth endorsements, and theater owners playing essential roles in disseminating this information. The film's demand was such that two months after its initial release, it was screened in even more theaters than on its opening weekend.

This rollout strategy, while unconventional today, was feasible in 1985 when theater owners had more autonomy in their content choices. They could experiment and gradually introduce popular films. The video industry also operated in a decentralized manner, with power shared among various stakeholders, including stars, directors, studios, distributors, theaters, critics, and audiences.

However, this market structure underwent significant changes in the 1980s and 1990s, marked by media company consolidation and the rise of megaplexes. The larger chains expanded rapidly, changing the dynamics of the movie industry. The shift to megaplexes and a more centralized approach to distribution altered the art of moviemaking.

Today, the industry's landscape is vastly different. The first weekend has become the dominant factor, with thousands of screens flooded by marketing-heavy releases during the summertime movie season. There is less room for experimentation and a limited market for unconventional films. Distributors hold significantly more power, and only a handful of studios with strong brands have accumulated massive influence.

In the modern era, a film like “Back to the Future” might still succeed if released as originally conceived. However, it's doubtful that studio executives would greenlight such a project in the first place, given the changing industry dynamics.

The Challenge of Comedy

The impact of market structure changes becomes especially evident in the comedy genre, which lacks significant economies of scale. Despite creative potential, the comedy segment faces challenges in today's Hollywood.

Notably, the last major comedy franchise to launch was “The Hangover” in 2009. While a few others followed, such as “Pitch Perfect” and “21 Jump Street” in 2012, there has been a notable absence of comedy smash hits for nearly a decade.

“The Hangover” experienced a somewhat similar gradual rollout as “Back to the Future,” but even here, it had a more accelerated pace. Maximum reach was achieved in week three, not after a month, and most of the domestic earnings came in the first month.

The scarcity of recent comedy hits is somewhat masked by the phenomenon of “Peak TV,” where streaming services like Netflix and Disney invest heavily in content production. However, this abundance may be deceptive. “Peak TV” could be a bubble that eventually bursts as winners emerge from the competition. Similarly, YouTube has been plagued by copyright disputes, and only a select few creators at the top reap significant rewards.

In essence, without substantial public policy changes, the future of Hollywood appears to align more closely with the sterile movie cineplex than the temporary content surplus on streaming platforms. The industry's trajectory is influenced by shifts in market dynamics and the concentration of power, emphasizing the need for thoughtful policy considerations to support creativity and diversity in entertainment.

Netflix's Impact on the Hollywood Ecosystem: The Danger of Concentration Creep

Netflix has emerged as a dominant force in the entertainment industry, fundamentally altering the dynamics of Hollywood and raising concerns about its long-term impact. One of the most alarming aspects of Netflix's strategy is its deliberate financial loss, which challenges the traditional principles of competition and profit generation.

In the past, studios sold content to networks, theaters, and other distribution platforms. The end networks had to make a profit to sustain their operations. This was consistent with the fundamental principle of competition, where combining inputs into a final output should create value, indicating a productive business agent. In this system, better content had a chance to reach the market and sell.

However, Netflix deviates from this rule. Despite claiming accounting profits, it operates at a substantial financial loss, projecting a cash burn of $3.5 billion in a single year. Netflix combines inputs into something of lower value than the original components, which contradicts traditional economic principles. The company's primary goal is not to maximize content viewership, as one might expect, but rather to sell a narrative to Wall Street. Netflix aims to achieve dominant market power by luring users into its streaming services and making it difficult for them to switch to competitors—a phenomenon known as “lock-in.” The company's narrative suggests that it will eventually become a monopoly, enabling it to raise prices and reduce costs, similar to Amazon's strategy.

To maintain this narrative, Netflix prioritizes subscriber growth, resulting in choices that underpay creators and deliver subpar content to existing subscribers. The company can sustain financial losses as long as it can sell its debt and keep its stock price high. This poses an insurmountable challenge to anyone, whether an artist or a major studio, trying to compete with Netflix. Competing with a competitor that can lose money indefinitely makes it impossible to offer superior goods and services. While artists may not immediately perceive this problem due to their ability to sell to Netflix, they will eventually notice as the company's underpayment practices become more evident.

Netflix's concentration of power extends beyond financial practices. The company has gradually reconstructed the vertically integrated studio system, becoming an integrated production and streaming service. Those who wish to distribute through Netflix increasingly operate on Netflix's terms. The platform aggressively promotes content based on its algorithms, dictating what content users see. This mirrors Amazon's strategy of spending heavily on content, even though content represents a small part of its vast business. Both companies engage in long-term predatory pricing plays, a practice that was previously illegal.

This phenomenon, which I term “Concentration Creep,” is spreading across the entertainment industry. Consolidation in one sector leads to consolidation in others. Disney, for example, is emulating Netflix by launching a potentially below-cost streaming service and acquiring Fox's media assets to bolster its market power. Additionally, there are discussions about revisiting the Paramount Consent Decrees, potentially allowing Amazon or Netflix to acquire movie theater chains.

The consequences of this concentration of power in Hollywood are far-reaching. It results in higher prices, reduced pay for artists, a less creative industry, and ultimately, the erosion of the Hollywood ecosystem of storytelling. Furthermore, it poses political and national security concerns. Movies and TV shows are powerful tools for conveying political and geopolitical messages, and with fewer producers, the impact of subsidies from entities like the U.S. military becomes more pronounced. This may discourage artists from criticizing the state or powerful corporations, stifling free expression.

The centralization of power also has global implications, with Hollywood increasingly complying with censorship demands from countries like China. This centralized system jeopardizes the ability to produce critical depictions of governments and actors, mirroring the Studio System's pandering to Nazi Germany in the 1930s.

Addressing these challenges and restructuring the industry is crucial to preserve artistic diversity, creative expression, and free speech in the world of entertainment.

The question of whether Hollywood can be saved is an important and timely one. The entertainment industry is undergoing significant changes, and the concentration of power in a few dominant players, such as Netflix and Amazon, poses challenges to artistic diversity, creativity, and the distribution of content.

The argument that Hollywood can be saved is grounded in the idea that the current trends are not inevitable but are the result of specific policy choices and industry practices. Just as Hollywood evolved from a highly centralized system to a more open and competitive one in the past, there is an opportunity to reshape the industry for the better.

One proposed solution is to restore open markets for content by separating the industry into distinct segments: production, distribution, and retailing. This separation would help prevent vertical integration and concentration of power. Additionally, measures could be taken to ban predatory pricing practices, which can stifle competition and creativity.

The decentralization of chains and studios is another important step toward restoring a more diverse and competitive industry. This could involve breaking up large conglomerates and encouraging smaller, independent studios and theaters to thrive.

Ultimately, the goal is to create a more vibrant and dynamic Hollywood that prioritizes artistic quality and diversity over monopolistic control. While the challenges are significant, history has shown that the industry can adapt and evolve to better serve both creators and audiences.

In summary, Hollywood can be saved by revisiting industry practices, implementing policy changes, and promoting competition and diversity in content creation and distribution. It's a matter of making deliberate choices to shape the future of the entertainment industry.