A Hollywood Problem

For over a century, US cultural products have inundated markets around the world. Hollywood benefitted from the size and wealth of its domestic market, which allowed it to cover expensive production budgets with sales and licensing at home. The revenue from global sales was all profit. Without a need to recoup costs abroad, Hollywood could sell titles cheaply and for less than the cost of the cheapest domestic production. A virtuous revenue cycle for the industry followed cementing its dominance in global trade.

???????????The dynamics shifted some by the late 20th century – first for movies, then for television series by the start of the 2000s. The ‘rest of world’, as commonly identified on financial statements, became more and more central in deciding what ideas would be produced in Hollywood as the revenue from these markets grew necessary to cover escalating production costs. American moviegoing slowed, while growth continued in markets abroad. Studios turned increasingly to high spectacle and action blockbusters that ‘travel well.’

More recently streaming services that are US based – but count most subscribers outside of US borders – have played an increasingly central role in the production ecosystem. Their business model also values audiences outside the US. The shift from a primarily domestic to international organization of screen content creation and circulation has been happening for some time, but multi-territory streamers cement its pre-eminence.

???????????The consequences of these market changes are significant for Hollywood. Layoffs and pending strike action now embroil US-based media conglomerates’ business plans. A lot of blame is laid on ‘streamers’, but such a frame overlooks the extent to which core pillars of Hollywood’s dominance have crumbled. A new form of distribution is upending the industry – much as happened to many media industries many times before. But this time, the implications are far more extensive. The entire structure of the global screen industry is being reshaped, and Hollywood’s ‘natural’ advantages have diminished.

???????????The wealth and dominance of Hollywood have been built on conditions no longer in place. The scale of the US domestic market enabled massive revenue from second market sales to local affiliates and then cable channels that supported studios’ ability to make an abundance of titles – intentional overproduction as the economists call it – at comparatively high budgets. That domestic second-market revenue also made a lucky few extraordinarily rich, making the business lucrative for some in a way relatively unparalleled globally.

Few if any other countries had that second market revenue stream, but that stream is now dwindling in the US. Worse yet, Hollywood’s dominance in international sales has diminished as its chokehold on distribution has weakened and productions from elsewhere can more easily find their way into homes globally. Even Americans – long believed a culturally isolationist audience – are interested in stories from elsewhere when easily available.

Crucial sources of Hollywood revenue are evaporating, and launching a streaming service isn’t a solution to that problem, especially if that streaming service continues to develop for an imagined mass audience when fulfilling micro tastes and sensibilities is now part of the imperative. Streaming offers tools for new content strategies not just a new distribution technology. The bottom is falling out on the irrationality of trying to spend a hit into existence, viewers have too many choices for that to work. ?

The new world involves a more globally distributed industry and not one with the margins Hollywood has come to expect as ‘normal.’ New distribution technologies may make it possible for far more content to circulate, but there is not substantially more money in the ecosystem to support content costs. If anything, there is less. There are not ‘more’ advertising dollars just because there are more distribution channels. Rather, many of those ad dollars are moving to other forms of media and entirely out of media. Revenue direct from consumers is also limited. In markets like the US, where dysfunctional market conditions allowed overpriced cable to become the norm, consumers are tapped out and substituting, not paying more. Losing the spoils of the highly abnormal market-failure conditions of US cable/satellite for the last quarter century is another reason this disruption feels particularly sudden and severe in Hollywood.

???????????Those who shake a fist at streamers and look past the enormous structural reconfiguration underway cannot hope to find a solution. The only step forward is to understand the core of what is happening and reshape businesses for the new conditions. It is only going to get more complicated as advances in digital production and AI bring further change to the geography of production and the value of talent. There is no way Hollywood emerges unscathed; it will be diminished in scale.

A glance around the world reveals how industries elsewhere have found sustainability without the structural advantages of the US industry. Sustainability and survival are far more reasonable goals than growth for the next few decades.