Hollywood's Digital Future

Few industries have failed so dismally to adopt to technological change as music. Digital file-sharing à la Napster eviscerated its traditional business model as customers pirated songs off the Web. And music's response? Sue its own customers. The spread of broadband now threatens Hollywood in much the same way, as pirated films begin to make their way to the Net. Hollywood's response? Learning from music's mistakes, the industry is beginning to use digital technology to deliver movies and TV shows on demand to the home as well as to a host of gizmos carried by today's urban nomads. But with some 600,000 copies of films illegally downloaded daily, Hollywood should move even more quickly. Smart kids with fast computers are subverting the industry's business model with each passing hour.

Ego-driven Hollywood isn't used to partnering with other industries, but this time it must. It has to make key decisions on fair use and pricing in the months ahead with consumer-electronics companies, cable operators, and the tech industry. Today, Hollywood sells the same product via different distribution channels in a controlled way. Studios release movies to theaters first. Six months later, they come out on video; six months after that, premium cable. Cash flows predictably. Earnings are considerable. Digital piracy compresses this time frame, undermining the traditional distribution system.

When this happened to music, the industry choked. Tinseltown is being more nimble. Five Hollywood studios began offering movies last November. Others are following suit. Hollywood is also choosing the pricing that consumers prefer: per song or per flick, rather than the monthly subscription the music companies pushed. Hollywood is taking Apple Computer Inc.'s iTunes Music Stores as a model. Apple sells songs from many labels for 99 cents, allowing customers to make copies but not send them to the Net.

Hollywood worked with the cable and consumer-electronics industry on a proposal given to the Federal Communications Commission to allow customers receiving digital cable and satellite service to make unlimited copies of broadcast TV shows, one copy of a cable show, and one copy of a pay-per-view movie burned on a DVD. But Hollywood is at odds with consumer electronics and high-tech manufacturers when it comes to analog TVs, PCs, handheld computers, and other digital devices. Here, the studios are trying to tightly control their entertainment product -- just like the music industry tried to do and failed.

Hollywood is writing its own script for the future. Done right, it could be a surprise box-office hit, like My Big Fat Greek Wedding. Done wrong, it could be a disastrous flop. Remember Ishtar?

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