This Could Be a Beautiful Friendship

San Jose Mercury News, December 18, 2005

- Scott Kirsner

Hollywood is hoping, like a child tracking the daily transits of the U.P.S. truck, that Peter Jackson's remake of "King Kong" will deliver a giant Christmas gift to the movie business. With box office revenues down about half a billion dollars for the year so far, relative to 2004, movie studios and theater owners are dreaming of a December miracle. If "The Chronicles of Narnia," "The Producers," and "King Kong" do boffo business, that'll assuage Hollywood's fears about the perils of piracy, consumers' changing entertainment habits, and the digital cinema revolution.

But those perils aren't going to simply melt away like the Wicked Witch of the West in the final reel of "The Wizard of Oz." Piracy cost the movie industry $3.5 billion last year, according to the Motion Picture Association of America - and that sum is climbing. Consumers now spend nearly 200 hours a year using the Internet, compared to 13 hours in a movie theater, according to the investment firm Veronis Suhler. Sales and rentals of DVDs aren't as brisk as they once were, and studios worry that new digital cinema equipment, once installed in thousands of theaters, will increase the intensity of competition for screen time, since the digital gear will be capable of showing Brazilian soccer matches, live Madonna concerts, or the season finales of popular TV shows - not just "Spider-Man 3" and similar studio fare.

While movie moguls in southern California are popping Pepcids and worrying that their connection to their audience is dissolving, companies in northern California are devising new technologies and services - from TiVo to Netflix to Open Media Network to Apple's iTunes Music Store - that deliver content in a new way. The divergent goals and perspectives of the dominant industries of northern and southern California (high-tech and motion pictures) have led to friction - and a few wary alliances.

The mantra of the south, for the past 100 years, has been "You'll take it when we give it to you, and you'll like it." Movies are released in a succession of "windows" devised by the studios and their business partners to extract maximum revenue, from the theatrical run to DVD to broadcast television.

The north's rallying cry, at least since the arrival of the Web in the 1990s, has been "What you want, how you want it, when you want it." Northern California companies are busy creating innovative new ways to deliver entertainment, on consumers' terms. Sometimes, this innovation can seem to Hollywood like a dangerous free-for-all, as when the peer-to-peer file-sharing services Napster and Grokster rose to popularity. But in shaping the future of entertainment, Hollywood may be dependent on Silicon Valley - and vice versa.

So why can't the north and south just learn to get along, producing and delivering content in harmony, in a way that appeals to consumers?

- A wide cultural gulf

In part, the gulf between Silicon Valley and Tinseltown can be chalked up to dramatically different cultures. The culture of the Valley thrives on change, experimentation, and openness. Creative destruction - one generation of outmoded old companies giving way to another - is expected. And not only are many of the Valley's companies built on open technology standards and open source software, but the campuses themselves are open - so much so that a recent rumor had it that Yahoo employees were sneaking into the cafeteria at Google's Mountain View headquarters to enjoy a free lunch.

In Hollywood, movie sets are said to be "closed" when the cameras are ready to roll. It's easier to get a green-light to make a sequel than an original. Hollywood is a strong union town; Silicon Valley isn't. Traditions are celebrated - on the Disney lot sits the original building where Walt drew his early cartoons - and anything that presents a change to existing business models or ways of making movies generates anxiety.

"Everyone loves to swear they'll do new things and change," the trade paper Variety recently quoted an anonymous studio chief as saying. "But in the end, it's just like New Year's resolutions."

But while studio execs may forget their resolutions if box office revenues perk up in 2006, there are big risks in ignoring the ways that consumers' demands - and the technologies in their homes -- are evolving.

Earlier this year, an Associated Press-AOL poll found that 73 percent of adults prefer to watch movies at home, while only 22 percent said they'd rather be in a theater. Analyst firm The Yankee Group predicts that nearly 60 million U.S. homes will have high-definition television sets by 2008. Microsoft and Silicon Valley companies such as Akimbo are selling devices to link the Internet with TVs, allowing downloaded video to be viewed in the living room. Those new technologies will further expand the already vast array of home entertainment options - and perhaps further erode the desire to schlep to a theater, search for parking, and shush fellow patrons at a Friday night flick.

And the global trade in pirated movies shows no signs of slowing, despite the "Just Say No to Piracy" ad made recently by Governor Arnold Schwarzenegger and Jackie Chan, intended to air in China. But some movie "pirates" are otherwise law-abiding citizens trying to get copies of movies before they're released on DVDs. It's illegal, yes, but it might also be regarded as a message from consumers: we prefer instant gratification to being forced to wait three to six months before a new film shows up on DVD.

At a conference last summer in Palo Alto, the technology entrepreneur-turned-movie mogul Mark Cuban said, "You can't stop [piracy.] You're wasting your time. Put the money into the movie, rather than spending it to stop piracy." Cuban plans next year to experiment with releasing several films simultaneously in a chain of theaters he owns and in multiple other formats: DVDs, on high-definition cable channels he controls, and perhaps even on USB "keychain" drives intended for use with laptop computers.

Hollywood's feelings toward Silicon Valley over the past quarter century, since the emergence of the personal computer, have run the gamut, from complete disinterest to distrust. It wasn't initially clear that personal computers would have a role in delivering entertainment, and even after the Web arrived, the quality of moving images couldn't compare to even an ancient color TV topped with a rusty pair of rabbit ears. But once consumers started using their Net-connected PCs to download TV shows and blockbusters they hadn't purchased, the movie industry leapt to attention. Studio chiefs started swearing that they wouldn't fall victim to the same fate as their brethren in the music business.

But it was easier to file lawsuits against file-sharing services such as Grokster than it was to change established ways of doing business and create new ways for consumers to buy and experience movies. Movielink, a joint venture created by the studios to offer movies that can be legally downloaded over the Internet, offers about 1200 titles at the same time as they appear on DVD, compared to Netflix's catalog of 50,000 titles. And there's still no way to legally download movies while they're still in theaters.

- Tentative alliances

Despite the air of suspicion, Northern California tech companies have hashed out a few tentative partnerships with southern California content producers.

This fall, Apple began selling television shows produced by Disney on its iTunes Music Store, for viewing on PCs or the company's new video-capable iPod, at $1.99 each. (No full-length feature films are on offer yet, although earlier this month, NBC joined in to supply a selection of its own TV shows.) San Francisco's Dolby Laboratories worked with Disney to outfit 84 movie theaters with digital cinema systems that allowed the studio to show a 3-D version of last month's "Chicken Little," and enabled theater owners to charge a premium ticket price. Theaters that showed the digital 3-D version brought in more than twice the revenue than those that showed "Chicken Little" in the standard 2-D version.

Santa Clara chipmaker Intel Corp. and actor Morgan Freeman have joined forces to start Clickstar Inc., which has vague plans to sell movies over the Net while they're still in theaters, beginning next year. (Theater owners can be expected to rebel, since they feel that any changes to release windows will undermine their business.)

These baby steps are commendable, but they're accompanied by concerns that online distribution and tinkering with release windows could threaten existing revenue streams from movie tickets, DVD sales, pay-per-view TV, and other channels.

While Hollywood worries about disrupting established businesses, Silicon Valley companies are frustrated that their neighbors to the south aren't willing to move faster. In October, Netflix delayed its plans to launch an online movie download service, in the works for years, because of problems obtaining permission from Hollywood studios. Netflix CEO Reed Hastings told Wall Street analysts that the company would keep working on the technology so that Netflix "will be ready to launch when the content climate begins to thaw."

At the same conference where Mark Cuban spoke out on movie piracy, former Netscape executive Mike Homer expressed his frustration with media executives. Homer is a founder of Open Media Network, a non-profit company that is building an online hub for video. Asked what business he'd be in if he wasn't running technology companies, Homer said he'd be producing content. "You get frustrated with the innovation and the creativity of any traditional media producer - and their unwillingness to play," Homer griped to the audience at AlwaysOn 2005.

But with the exception of a few companies (Pixar and Lucasfilm among them), northern California isn't going to become a bastion of content creation overnight, just as southern California can't be expected to suddenly start cranking out new ideas in content delivery.

- A fourth gold rush

It might be said that California has experienced three successive gold rushes: one in the middle of the 19th century, fueled by the glittery natural resource; one in the first half of the 20th century, fueled by celluloid fantasies; and one at the transition between the 20th and 21st century, fueled by the Web. As the technologies used to deliver entertainment continue to rapidly mutate - as the Net is connected to the TV in the living room, and as a fleet of satellites begin delivering digital content to the neighborhood multiplex - we may be in the early days of a fourth California gold rush. This one will require strong bonds between north and south, taking advantage of the north's technical ingenuity and the south's unbridled creativity.

Rather than circling each other like the Jets and Sharks at a rumble, Silicon Valley and Hollywood ought to consider themselves allies in reinventing the entertainment industry, introducing new, legal ways for people to enjoy content at home, on the go, or in the theater.

Without that kind of collaboration, the south seems to have more at stake, as its connection to the audience continues to wither. Disney just reported a $313 million loss in its movie and DVD business for its fiscal fourth quarter. Sony Pictures made "Stealth" for $138 million, one of the biggest flops in history. Warner Brothers laid off 400 employees in November. And just last week, DreamWorks SKG gave up its mission of remaining independent and sold itself to Paramount.

Interestingly, the movie upon which Hollywood is pinning its hopes for a reversal of fortune, "King Kong," has been made three different times: in 1933, with Fay Wray as the damsel in distress; in 1976, with Jessica Lange; and in 2005, with Naomi Watts.

The first time, the movie industry had just adopted the much-feared technology of talking pictures, which helped the movies solidify their place as the world's dominant form of entertainment. The second time, the videocassette recorder had been invented, but hadn't yet begun appearing in American living rooms. That technology, which Hollywood initially greeted with lawsuits, eventually helped the studios grow their businesses by allowing them to sell and rent copies of their films to consumers. The third time around, "Kong" again presents an opportunity to view a technological revolution with fear or enthusiasm - and an opportunity for an alliance between north and south.