The entertainment industry is in transition. Movie attendance is in a downward trend. Network television ratings continue their dramatic decline. Cable television viewership has plateaued. Broadband consumption has exploded.

There are many factors driving these trends, but the most significant one is that audiences are fed up with the homogenous, low-quality programming they are being provided. At the same time, thanks to the internet, they are discovering that their tastes are not as mainstream as they thought. They are abandoning traditional media to find more offbeat content in independent film, cable television, and broadband content.

Yet the entertainment industry is not responding properly to this migration. In fact, they are moving in the opposite direction than they should.

This mistaken strategy is worsened by a flawed set of systemic business practices. Specifically, traditional media has:
Hollywood’s Last Gasp: Part 1

1) Inefficient manufacturing processes;

2) Inefficient advertising methods;

3) Failed to innovate; and that

4) These flawed processes harms the viability of content, preventing it from achieving maximum ROI.

This series of articles will explore the flaws in traditional media’s content production and suggest avenues that all content providers should explore in order to obtain maximum ROI for their product.

Part 1 will focus on the first of three inefficient manufacturing processes in the Hollywood system: excessive production costs.

One thing drives the current entertainment industry business model: FEAR.

The reason for this fear is that it is impossible to predict the financial success of any piece of content. As Prof. Arthur de Vany states in his book Hollywood Economics, it is possible to predict the box office of any motion picture. However, that prediction will carry a standard deviation of infinity and thus be of no value.

There are so many uncontrollable variables that determine what makes a hit or a flop that Prof. de Vany also concluded that stars are not “bankable”. Production cost and advertising cannot buy an audience.

Thus, fear rules. With fear comes indecisiveness. Everyone wants to protect one’s job, so it is easier to say “no” to an original piece of niche content than to say “yes” to a sequel or franchise with a high awareness rating.

In a misguided effort to reduce the unquantifiable and uncontrollable risks associated with movies, Hollywood’s solution is to spend more money. They mistakenly:

1) Overpay actors who have been “proven” to be bankable.

2) Overpay directors who have had big hits.

3) Overpay writers who have had big hits.

Hollywood pays each entity whatever it demands because only by securing the talents of those who have already had success, can future success be guaranteed – or so the studios believe. There is, however, no correlation between this perception and reality. Indeed, box office success should carry the same warning that a mutual fund prospectus does: “Past performance is not indicative of future results”.

Here’s how things often play out as a result of this mindset. Studios will either acquire a movie script from a writer, or have the writer compose a script from a purchased “pitch”. In the case of feature films, once a script actually makes it to the studio level, the original writer is often replaced by a “rewrite specialist”. These people make mid-six-figures for each draft. By the time the script is approved by the Studio Head, a director joins the project and further expensive rewriting takes place.

The studios thus play right into the hands of the Talent Agents who, recognizing the studio’s desperation and fear, extort the highest pay they can for their clients. This in turn protects each member of the studio hierarchy, allowing them to proclaim, “But the movie couldn’t have been a failure! I hired the best (most expensive) talent!”

In the meantime, highly skilled writers who have had more modest success sit quietly in waiting for employment. With a glut of supply and little demand, the costs of employing these writers would be significantly cheaper.
The same problem exists in television.

Every year, the studios spend hundreds of millions of dollars developing pilots. Several hundred scripts are commissioned. Fifty or sixty are actually produced, with budgets ranging from $3 million to $12 million.

What scripts are commissioned and which are sent to production? Just like feature films, where an inability to predict success leads to a frantic chase to recreate what has already been done, television looks to duplicate last season’s successes. Television, however, fairs even worse.

For example, when Lost premiered in 2004, networks filled their 2005-6 programming slates with science fiction shows (6 in total). They all failed. The same year, Desperate Housewives premiered and it was the season’s big hit.

Not satisfied with trying to chase false trends, studios spend far too much capital on those trends. After receiving an order to produce a pilot, television studios, desperate to maintain sagging viewership, inexplicably turn to high-priced feature film writers and directors to create shows and direct pilots – people who know virtually nothing about television. Yet studios somehow believe audiences will flock to a new show because Spike Lee directed the pilot, and disregard the fact that by overspending on the pilot, they create an expensive baseline that can never be repeated on a weekly basis. Thus, audiences are sold a bill of goods that cannot be reproduced.

When a show does make it to series, decisions regarding which writers to hire for the staff are no longer put in the hands of the showrunners-executive producers. Studios and networks now make these decisions, loading the staffs with high-priced, high-level writer-producers. This strains the budget, fewer writers are hired, and they quickly burn out as the season drags on. This affects quality, and viewers notice.

The results? The 2006-2007 pilot season saw 44 pilots produced by the five major networks. Tens of thousands of man-hours were devoted to pitch meetings, note sessions, scriptwriting, rewriting, casting, production, market research, focus groups, and big up-front presentations. . .and yet only one of these shows was enough of a hit to have any chance of reaching the syndication market (Heroes). This show regularly captures 14% of the overall television viewing audience in its hour. This compares to 1993, when ER regularly pulled 39% of the audience.

So an inability to predict success creates fear. Fear causes Hollywood to throw money at a problem that cannot be solved by capital. And as the results have plainly demonstrated, all that money hasn’t helped ratings one bit.

Next time we’ll examine two other problems that result in Hollywood’s inefficient manufacturing process.

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