Price Point 22: Who is going to win Hollywood in the end?
Consolidation or decentralization
Which of us is going to be having a martini at the Polo Lounge in 2032, finally having prevailed, once and for all, as the winner of Hollywood?
Or not us? Perhaps someone new!
In any case, who is going to win in “the end” — in a long term equilibrium state?
What are the longish run trends and the meta factors that matter?
In the short run, all sorts of randomness can occur, but in the long run the laws of economics take over — moats, product differentiation, and scale.
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THE CLASSICAL ARGUMENT
This is the argument for consolidation.
Making entertainment in itself does not have a major moat. If it did, Netflix and Amazon would not be two of the most important companies in entertainment.
Stand-alone businesses in porous industries attract competition and become unprofitable, or at least their returns typically fail to exceed their cost of capital.
The players who thrive could therefore be expected to be entities with other massive, profitable side businesses to which their entertainment business can direct customers. Media becomes a loss leader.
With respect to the scale and side business, who has that? Walmart. Google. Amazon. Apple. Facebook? Twitter? Alibaba/TaoBao. TenCent. Maybe Flipkart?
So who is holding court in 2032?
At first glance we might think it will be some MBA from Aliba-mazon-mart Inc. meeting with some MBA from William Morris Creative Artists Agency in the metaversal polo lounge discussing their AI’s ideas for next year’s entertainment, which will of course include Predator 30, starring 1984 deepfake Arnold Schwarzenegger and deepfake 2022 The Rock with 1946 Gene Tierney, since after 2025 Hollywood stopped taking risks on new stars and just started recycling and deepfaking the old ones because why take a chance on someone new?
So yes there is this big consolidated future out there conceptually.
THE ALT ARGUMENT
I am going to pitch you an alternative vision of the future where the industry disaggregates instead of consolidates. Peter Thiel famously asks “What important truth do very few people agree with you on?” This is mine.
Owning the content and owning the point of distribution don’t have to go together. Moreover, consolidation leads to certain diseconomies of scale, which create vulnerability. These diseconomies have to do with the nature of the product, which is not a commodity, like metals or paper.
When all content is managed by a few centralized bureaucracies it introduces agency costs and the market becomes less responsive to customers. I have argued previously that major customer groups are under-served by Hollywood and despite the success of a few titles like Avatar and Top Gun, Hollywood has had a rocky few years where we have seen Netflix growth go wobbly in the US, Peacock growth sputter from a low base, Awards shows lose 70% of their audience, and the number of shows people love (rate 8+ on IMDb) decline sharply. Covid hit movies hard but Covid doesn’t on its own explain the recent rate of failure in film. Executives have become more insulated from data and from the market and the environment has become more political, which is not aligned with the whole audience, and which is an indulgence that could only occur in an oligopolistic context. There is a lot you can’t make today that the audience would like, starting with comedies like The Hangover, Tropic Thunder or, if it wasn’t already on TV, South Park. I will leave a deep analysis of this for another day, but I did find Sasha Stone’s recent commentary on these trends insightful.
When the industry stops serving customers well, in economics it is called market failure and that represents opportunity. It leaves customers open to new things.
So think of a supermarket. Ralph’s doesn’t have to, and doesn’t, own Heinz Ketchup. Now think of a farmer’s market. Who owns the farmer’s market itself? Does anyone? In today’s subscription video industry, the market generally owns the key products and the produce. This is proving to be too much of a burden for the P&L’s and it is bad for both the content creators (less upside) and the audience (worse shows).
A Decentralized Service
What about a “farmer’s market” version of Hollywood that maximizes autonomy and power for creators, creates incentives for innovation, and distributes risk and reward somewhat more broadly, aligning the industry well with consumers in a sustainable way? My conjecture, or proposal, is that this is entirely possible and in fact may be inevitable.
Decentralized Back End
Proposal: set up a streaming service that is more like BitTorrent or Uniswap — an open source protocol. Any content owner can upload to it. Let’s call this cprot.io (content protocol).
CProt would store and distribute video, and for that matter audio or text, on global decentralized systems such as Livepeer or Ronin X. I’m going to skip a lot of the technical details here but it would provide all the basic functionality of a media streaming service. A smart contract would divide revenue amongst content uploaders according to a transparent formula.
So Cprot is essentially a nexus of agreements and standards, plus plug ins to services like Livepeer. The content protocol has standards for what content it accepts, but once content is on the service, it is censorship resistant.
Content owners go to CProt and upload their content. As people subscribe and view and content owners get revenues, they also get tokens. Tokens give them votes and allow them to influence the service’s policies.
CProt gives you everything you need for a subscription video service except the front end. On top of this open source system, anyone can build a customer-facing proprietary client including iOS and android apps as well as apps for Roku, Samsung, etc.
Assume we build a proprietary client on top of CProt called A1.xyz. This is what customers actually interact with. A1 can deliver to customers all of the content on cprot and can build the logic of how to present individual titles, what widgets go on the Home Screen, what other media to offer (podcasts? Audiobooks?), etc. A1 can choose to take advantage of cprot’s ad-supported content and functionality or not.
If A1 became too powerful, anyone could simply build A2 and have all the cprot content. The competitive dynamics limit A1’s ability to extract rents from other participants in the decentralized ecosystem.
Users of A1 would receive cprot tokens, giving them influence over cprot policies as well.
In addition, one builds a marketplace where studios, investors and fans can fund media projects. The projects could be anything from people creating brands on TikTok to filmmakers funding their next film.
Other than the benefit of providing capital to projects, there are two additional benefits to a decentralized approach to media financing.
Uncoordinated, globally decentralized investors will be less subject to ideological capture and market failure than centralized bureaucracies.
This should allow creators to retain greater ownership and control.
Note that this is just as relevant in London, Mumbai and Tokyo as it is in LA.
Call the global marketplace Dealflow.
In the system described, risk and reward are broadly distributed across a large, diverse body of investors and creators.
In general, Dealflow becomes a fun NASDAQ for media projects with both securities and NFTs, not totally unlike the Hollywood Stock Exchange was but this time with real money and interests in TikTok brands, movies, music, etc.
Dealflow would offer securities for accredited (Reg D) and non-accredited (Reg A+) investors and would wind up offering a variety of investment opportunities suited to various investors’ risk tolerance.
If this more open and neutral distribution platform existed, — cprot + A1+Dealflow — one might ask whether Paramount would still need money-losing Paramount+ or why Comcast would need Peacock? Why not just put all your content on this shared global platform? Why would each Japanese broadcaster need a separate SVOD service (Hulu Japan, Fuji on Demand, etc.) instead of just throwing all their content onto cprot? For entities like AMC/Sundance/Shudder, a multi-brand platform with universal search would be a big step forward.
Apple, Amazon and Netflix would not contribute in the early stages, because Apple and Amazon’s video businesses serve their other businesses, and because Netflix is the market leader. But it could make sense for others (however, note that A1 success does not require others to abandon their silo SVOD efforts).
The reason I say that the decentralized model may be “inevitable” is that if it systematically produces better outcomes for creators, then it will attract the best creators — and whoever gets the best creators wins in the end. This is the other important way that this business is different from metals or paper. The key assets are people - talent — and they will go where they can get the best deal.
Crowdfunding Case Studies
People are already crowdfunding media projects, but it is fairly laborious. The Chosen is a TV series about a Jesus that has raised over $25MM from fans using Reg A securities. They have had 300MM views to date, The Chosen is going into season 4 and have launched multiple follow on brands.
Calladita is an independent film by Miguel Faus that raised $1.4MM through NFTs. This process worked but they had to set up their own website and legal — this can be much easier.
Who would add shows to A1?
Every studio always wants an incremental show.
Individual producers and filmmakers would go to Dealflow, get financing, produce their show/film, and then add it to A1.
How would A1 keep shows on A1 after a successful first season?
A1 would likely have to trade marketing exposure for commitments.
How does this get rolling?
A few high profile early projects would get Dealflow rolling. Once it is demonstrated that Dealflow is financing projects, the flywheel begins.
Would Dealflow primarily be for up and coming talent?
I wouldn’t say so. The major complaint of top talent today is that they don’t get enough control and upside. They would get more of both on Dealflow.
How does this get really big?
It gets big because some of the underserved groups in America are big and that would likely be an area of focus. It continues to grow because it offers a better deal for talent so they’ll inevitably head over. The maximum size of the service is quite large — and global.
How does this shift power in Hollywood?
Power has never been more consolidated in the hands of a few. This would shift power from the big companies to the artists, producers and their fans and investors. Remember that not very long ago, networks were not allowed to own their TV shows. At that time, there were a lot of medium sized production companies and mini-studios such as MTM, Spelling, Chuck Fries Productions, etc. In a decentralized Hollywood one would expect to see a resurgence of entities like this based around talent or a producer, though studios would still exist and one could also imagine DAOs that specialized in developing a specific sort of content.
Would artists want to deal with the complexity of online financing?
That is what producing partners and managers are for.
So — who will be at the Polo Lounge (or in the metaversal Polo Lounge)?
In the end, it’s not about the consolidated power of two overlords. It’s about distributed power — in a way, we will all be at the Polo Lounge.