How Hollywood can avoid the fate of the music industry

Memo

To: The next head of the Motion Picture Association of America (to be opened upon arrival)
From: Chris Anderson
Subject: How Hollywood can avoid the fate of the music industry

Wired

January 2004

Congratulations on your new job - and on having the courage to take it. You arrive at a historic moment, with big shoes to fill and a tough challenge ahead. Jack Valenti's 37-year reign was a remarkable exercise in the use of political power to protect an industry. But it came at a cost. The film industry has treated as a threat any disruptive new technology that might change the way movies are distributed and consumed, lobbying vigorously for legal safeguards. Valenti did this all too well; the result of his skill on the Hill is an industry that instinctively hides behind the skirt of Washington and the courts.

All this needs to change. The implosion of the music industry is demonstrating the price of getting it wrong. Nobody wants that to happen to Hollywood, but there are troubling similarities - not least a history of ham-handed industry actions and executives in denial. You've still got a little time to figure this out, but a lot less than your advisers are telling you. Allow me to offer some independent advice.

First, the good news. In the piracy wars, movies have some inherent advantages over music. From the start, films emerged in the digital world locked up with encryption - it's too hard for the average user to get past the built-in copy protection and rip a DVD. CDs (which date to the 1980s) are open to all.

Another advantage is that unlike music labels, movie studios are not hated by consumer and artist alike. Labels are seen (not entirely unfairly) as gouging consumers, screwing musicians, and otherwise failing to earn their middleman markup. But the value of studios is clear. Movies are huge, expensive endeavors that can't be made in a garage or on a bedroom mixing board. Consumers are happier paying $10 for a special-effects extravaganza or an epic drama than they are $16 for a glorified mix tape. And while the music industry takes every format change as an opportunity to charge more for the same product, DVDs offer real extra value in bonus materials and ease of use. Customers who feel they're getting their money's worth are less likely to turn into pirates.

Movie fans who do choose the black flag need a high tolerance for frustration. Even after compression, an average-size film is about 40 times bigger than an average-size album. Downloading can be a multihour experience. Broadband connections aren't getting any faster, so trading movie files is restricted to the very patient. Not to mention that unlike an MP3, the quality usually sucks.

Last, movies may never be downloaded as often as music, because the two are consumed so differently. In general, movies aren't replayed again and again. We don't rearrange the scenes or build playlists of our favorite car chases. And watching them is not an offhand activity, like listening to your iPod while driving or jogging. There's simply less incentive for typical consumers to load a hard drive full of films and copy it from machine to machine.

Now the bad news: You're at risk of alienating your customers like the music industry did. The do-not-record "broadcast flag" that the TV industry just pushed through the FCC will introduce new restrictions on programming, none of which benefit consumers. Proposed legislation that throws anyone caught with a prerelease movie on their hard drive into prison for three years is the sort of disproportionate response that gives the RIAA a bad name. The notorious Digital Millennium Copyright Act is Hollywood's fault. And extending copyright protection year after year so that the film and television archives stay shut isn't just bad law, it's depriving Americans of their cultural history.

On top of that, technology is making it easier for those who want to trade movies. Napster was only half of the problem for the music biz; the arrival of cheap CD burners in PCs was just as bad. Today, music-burning is at least as big as file-trading. Now the same forces are at work in video. DVD recorders have dropped below the key $200 price point, which is just where the CD-R boom started. Get ready for a wave of homemade DVDs (the software for cracking their encryption is out there).

Online file-trading is going to get worse, too. Finally, on the wide-open Internet, the Napster for movies has been born. It's called BitTorrent, and because it can pull a single film from dozens of computers simultaneously (reassembling the pieces on a user's PC), it's incredibly fast. More important, it turns the economics of file-trading on its head. The most popular files download the fastest and make the lowest demands on the host servers (because there are more computers to download from, and the load is balanced among them). The usual barrier to sharing, say, a prerelease of Return of the King - the fear that greedy downloaders will swamp your PC - is greatly diminished. Huge hard drives are getting so cheap that digital video libraries will soon be commonplace.

The bottom line: The widespread assumption that Hollywood has plenty of time to avoid a music industry-style train wreck may be wrong. What once seemed like a five- or ten-year buffer now looks more like two or three years. Consider yourself warned.

So what should you do? Start by accepting that new technology means a new way of doing business. People will trade more movies, and new releases will leak out. It may never get as bad as music, yet it will certainly get worse than it is today. But look at it another way: The same forces are spontaneously building the best distribution network you can imagine.

Already, Bollywood studios are paying Kazaa to distribute their films, reaching audiences they could never find otherwise. This could be a model for Hollywood. The multiplex has distorted the economics of your industry, driving out independent cinemas and pushing the studios to mass-market, big-budget blockbusters. But there's a huge market for smaller, cheaper films, only it's spread out and can rarely fill a big mall screen. Reach them with digital distribution, both as Netflix is doing with rental DVDs by mail, and through smart commercial peer-to-peer file-trading services.

And don't fight the technology. People want their digital media the way they want it: every way imaginable. If you triple-wrap movies with digital rights management, or demand that anything that plays video conform to some gnarly DRM standard, you'll just force people underground. Make it easy for consumers to do what they want legally, even if that means a determined minority will probably steal. That's OK, because you'll more than make up for it with the flexible markets that digital media creates. More carrot, less stick - be the anti-Valenti!

Don't make the mistake the music folks did and charge the same price for a product regardless of the true cost of delivering it. It costs a lot less to deliver an album on iTunes than it does to package a CD and ship it to a store. So why shouldn't the consumer share in those savings? Same goes for movies. Think $5 for a downloadable film - unlimited use.

Consumers have an innate sense of fairness: If you offer a good product at a good price, they'll pay. But if you treat consumers like criminals or overcharge them, they'll turn to the dark side.

We've seen it happen - but it doesn't have to happen again. Consumers will love you if you do the right thing. But don't do it just because it's right. Do it because it's good business.

Chris Anderson (canderson@wiredmag.com) is Wired's editor in chief.