Building a Better Movie Business

"You can take Hollywood for granted like I did, or you can dismiss it with the contempt we reserve for what we don't understand. It can be understood, too, but only dimly and in flashes. Not half a dozen men have ever been able to keep the whole equation of pictures in their heads."

So says Cecelia Brady, the daughter of a Hollywood mogul in The Last Tycoon, the book F. Scott Fitzgerald left unfinished when he died near Sunset Boulevard in 1940. It's the most famous passage ever written about the business of Hollywood. And it's poetic--but not entirely accurate. It's not that only a few have ever been able to comprehend Hollywood; only a few have ever run it.

In both the Old Hollywood of the '20s, '30s, and '40s, as invented by rags-to-riches Eastern European Jewish immigrants, and the New Hollywood of our day, recast by the CEOs of global conglomerates--Disney, General Electric, News Corp., Sony, Time Warner, and Viacom--hardly more than a handful of moguls at any time have controlled the preeminent forms of entertainment: film and television. They've determined how movies and shows are created, and dictated when, where, and how we can consume them. Want to see a new movie? You have to line up at the multiplex for its 7:15 or 9:30 show, or wait for months until you can buy the DVD or see it on cable. Like a TV show? It airs only on Tuesdays at 8.

That's over, or will be soon: In the New New Hollywood of the digital era, no one will be in control--except, in a way, all of us will be. The oligarchy of the moguls is falling to the democracy of the consumers. A small cadre of corporate chiefs could control the cinemas, the airwaves, and the shelf space in the DVD aisles at Blockbuster and Wal-Mart, but no one can control the Internet. Transmitting video files to consumers over digital broadband connections--whether via cable, phone, satellite, or wireless Wi-Max--changes the whole equation. We'll have smart ways to search for, grab, view, store, organize, and replay what we want--and, often, to modify and share it. We'll get it when, how, and where we want, whether we're watching in our home theaters or on laptops or handheld devices. For the price of taking a family to the movies--plus popcorn and soda--tomorrow we'll buy digital gizmos that can hold and organize thousands of hours of video. We'll be the ones who determine what advertising we'll interact with and when and how. We'll create and disseminate our own video entertainment rather than just consume it. And more artists will be able to give us what appeals to our specific interests rather than to the lowest common denominators of society.

These trends are already well under way, and they'll play out fully over the next 5 to 10 years. They'll create extraordinary opportunities for innovative new players--and for the establishment powers, if they can survive the transition. "There's no question we are searching," says Kevin Tsujihara, president of Warner Bros. Home Entertainment Group. "We are searching for the new platform or the new channel that will drive the profits in the future, but there are so many unknowns . . . What we do know is that the entire model is up for grabs."

The curtain is rising on Hollywood's "third act," and the drama is most stunning when you briefly recall the plot points of the first two. In the Old Hollywood of the '20s through the '40s, the seven studios--Columbia, MGM, Paramount, RKO, 20th Century Fox, Warner Bros., and Universal--exerted awesome control over talent as well as movie theaters. Every week, about two-thirds of all Americans went out to the movies to see . . . well, whatever was playing at the neighborhood movie house. Because the moguls tightly controlled the costs of making films, and since they hardly had to spend on advertising, nearly every release made money, according to Edward Jay Epstein's recent book, The Big Picture.

The Old Hollywood system fell apart in the '50s when the studios were forced to divest the movie houses and let the stars become free agents. The studios' fall was accelerated by the rapid and inexorable rise of television, which decimated the moviegoing audience. But eventually a new Hollywood emerged, and it was as brilliant and astonishing an invention as the original. While RKO didn't survive, the other six major studios were absorbed into six global media-entertainment conglomerates that combined them with TV and cable networks, cable and satellite connections, and video-rental stores. Now, according to Epstein, the oligarchs have a 96% market share of the box-office take. They collect 98% of the national prime-time television advertising dollars. And they have 80% of the subscribers to pay-TV services, including Cinemax, HBO, and Showtime.