The “Jaws” of death? – Rethinking film industry strategy

Steven Spielberg on-set for “Jaws”. The Leviathan gave birth to the summer blockbuster

This past week, Zeitgeist had the pleasure of enjoying a new adaptation of Shakespeare’s “Much Ado about Nothing”. This adaptation was not performed at the theatre but at the cinema. It was not directed by Kenneth Branagh or any other luminary of the legitimate stage, but rather by the quiet, modest, nerdy Joss Whedon, who until a few years ago was best known to millions as the brains behind the cult TV series phenomenon “Buffy the Vampire Slayer” (full disclosure: Zeitgeist worked on the show in his days of youth). Whedon was picked to direct a film released last year that can, without much difficulty, be seen as the apotheosis of the Hollywood film industry; “The Avengers”. A mise-en-abyme of a concept, involving disparate characters, some of whom already have their own fully-fledged franchises, coming together to form another vehicle for future iterations. “The Avengers” became the third-highest grossing film of all time, and it is a thoroughly enjoyable romp. Moreover, to go from directing on such a broad canvas to shooting a film mostly with friends in one’s own home – as with “Much Ado…” – displays an impressive range of creative ingenuity.

Sadly for shareholders and studio executives’ career aspirations, not every film is as sure-fire a hit as “The Avengers”, try though as they might (and do) to replicate the same mercurial ingredients that lead to success. Marvel, which originally conceived of the myriad characters surrounding The Avengers mythology, was bought in 2009 by Disney for $4bn. Disney for all intents and purposes have a steady strategic head on their shareholders. They parted ways with the quixotic Weinstein brothers while welcoming Pixar back into the fold. They were one of the first to concede the inevitability of closed platforms release windows – something Zeitgeist has written about in the past – they are debuting a game-changing platform, Infinity, which might revolutionise the way children interact with the plethora of memorable characters the studio have dreamt up over the years. However, such sound business strategy could not save them from the uber-flop that was 2012’s “John Carter”, which lost the studio $200m. This summer, the rationale for their biggest release has been built on what appears to be sound logic; taking the on- and off-screen talent behind their massively successful “Pirates of the Caribbean” franchise, and bringing them together again for another reboot in the form of “The Lone Ranger”. The New York Times said the film “descends into nerve-racking incoherence”; it has severely underperformed at the box office, after a budget of $250m. Sony’s “After Earth” similarly underperformed, suddenly throwing Will Smith’s bullet-proof reputation for producing hits into jeopardy.

These summer films – “tentpoles” to use the terminology bandied about in Los Angeles – are where the money is made (or not) for studios. As an industry over the past ten years, Zeitgeist has watched as these tentpoles have become more concentrated, more risk-averse and therefore less original, more expensive and more likely either to produce either stratospheric results or spectacular failures. Paramount is an interesting example of a studio that has made itself leaner recently, releasing far fewer films, and relying on franchises to keep the ship afloat. Edtorial Director of Variety Peter Bart seems to think there’s a point when avoiding risk leads to courting entropy. It’s an evolution that has escaped few, yet is was still notable when, last month, famed directors Steven Spielberg and George Lucas spoke out publicly against the way the industry seemed to be headed. Indeed, the atmosphere at studios in Hollywood seems to mimic that of a pre-2008 financial sector; leveraging ever more collateral against assets with significant – and unsustainable – levels of risk. The financial sector uses arcane algorithms and has a large number of Wharton grads whose aim should be to preserve stability and profit. Yet even with all this analysis, they failed to see the gigantic readjustment that was imminent. In the film industry, Relativity Media’s reputation for rigorous predictive models on what will make a film successful is rare enough to have earned it a feature in Vanity Fair. So what hope is there the film industry will change its tune before it is too late? Spielberg pontificates,

“There’s eventually going to be a big meltdown. There’s going to be an implosion where three or four or maybe even a half-dozen of these mega-budgeted movies go crashing into the ground and that’s going to change the paradigm again.”

Instead of correcting course as failures at the box office failed to abate, studios have dug in harder. Said Lucas,

“They’re going for gold, but that isn’t going to work forever. And as a result they’re getting narrower and narrower in their focus. People are going to get tired of it. They’re not going to know how to do anything else.”

Such artistic ennui in audiences is admittedly sclerotic in its visibility at the moment. “Man of Steel”, another attempt at rebooting a franchise – coming only seven years after the last attempt – is performing admirably, with a position still firmly in the top ten at the US box office after four weeks of release, with over $275m taken domestically. It’s interesting to note that audiences have been happy to embrace the new version so quickly after the last franchise launch failed; though actor James Franco finds it contentious, the same has been true with the “Spider-Man” franchise relaunch.

Is M&A finally out of vogue in the Media and Entertainment sector?

Part of the problem in the industry, some say, is to do with those at the top running the various film studios. In “Curse of the Mogul”, written by lecturers at Columbia University, the authors contend that since 2005 the industry as a whole has underperformed versus the S&P stock index, yet such stocks are still eminently attractive to investors. The reason, the authors say, is that those running the businesses frame the notion of success differently. They argue that it takes a very special type of person (i.e. them) to be able to manage not only different media and the different audiences they reach and the different trends that come out of that, but more importantly (in their eyes) to be able to manage the talent. They asked to be judged on Academy Awards rather than bottom lines. The most striking thing in the book – which Zeitgeist is still reading – is the continual pursuit by said mogul of strategic synergies. This M&A activity excites shareholders but has historically led to minimal returns (think Vivendi or AOL Time Warner), often because what was presented as operational or content-based synergy is actually nothing of the sort. It’s a point Richard Rumelt makes in his excellent book, “Good Strategy / Bad Strategy”. Some companies are beginning to get the idea. Viacom seemed an outlier in 2006 when it divested CBS. Lately, News Corporation has followed a similar tack, albeit under duress after suffering from scandalous revelations about hacking in its news division. A recent article in The Economist states,

“Most shareholders now see that television networks, newspapers, film studios, music labels and other sundry assets add little value by sharing a parent. Their proximity can even hinder performance by distracting management… they have become more assertive and less likely to believe the moguls’ flannel about ‘synergies’.”

So in some ways it was of little surprise that Sony came under the microscope recently as well, part of this larger trend of scrutiny. The company has experienced dark times of late, with shares having plunged 85% over the past 13 years. The departure of Howard Stringer in 2012 coincided with an annual loss of some $6.4bn. Now headed up by Kazuo Hirai, the company has undoubtedly become more focused, with much more being made of their mobile division. Losses have been stemmed, but the company is still floundering, with an annual loss reported in May of $4.6bn. It was only a couple of weeks later that hedge-fun billionaire Dan Loeb – instrumental in getting Marissa Meyer to lead Yahoo – upped his ownership stake in Sony, calling on it to divest its entertainment division in a letter to CEO Hirai. Part of the issue with Sony is a cultural one, where Japan’s ways of working differ strongly from the West’s. This is covered in some detail in a profile with Stringer featured in The New Yorker. In a speech he gave last year, Stringer said, “Japan is a harmonious society which cherishes its social values, including full employment. That leads to conflicts in a world where shareholder value calls for ever greater efficiency”. But Sony’s film division – which includes the James Bond franchise – is performing well; in the year to March 2013 Sony’s film and music businesses produced $905m of operating income, compared with combined losses of $1.9 billion in mobile phones, according to The Economist. It ended 2012 first place among the other film studios in market share. Sony is the last studio to consistently deliver hits across genres, reports The New York Times in an excellent article. The article quotes an anonymous Sony exeuctive, “We may not look like the rest of Hollywood, but that doesn’t mean this isn’t a painstakingly thought-through strategy and a profitable one”. Sadly the strategy behind films like ‘After Earth’ begin to look flimsy when one glances at the box office results. While Hirai and the Sony board concede that have met to discuss the possibility of honouring Mr. Loeb’s suggestion – offering 15-20% of it as an IPO rather than selling it off in full – Mr. Hirai also commented in an interview with CNBC, “We definitely want to make sure we can continue a successful business in the entertainment space. That is for me, first and foremost, the top priority”. In mid-June Loeb sent a second letter, advocating the IPO proposal and saying “Our research has confirmed media reports depicting Entertainment as lacking the discipline an accountability that exist at many of its competitors”. The question is whether selling off its entertainment assets would remove any synergies with other divisions, thus making the divisions left over less profitable, or whether such synergies even existed in the first place. For Loeb, the “most valuable untapped synergies” are still in the studio and music divisions yet after decades as one company they still remain untapped. That point won’t make for pleasant reading at Sony HQ.

Another problem is the changing nature of media consumption habits. Not only are we watching films in different ways over different platforms, we are also doing much else besides, from playing video games, which have successfully transitioned beyond the nerdy clique of yesteryear, to general mobile use and second screening. This transition – and with it a realisation that competition is not likely to come from across regional boarders but from startup platforms – is largely being ignored by the French as they insist on trade talks with the US that centre on the preservation of l’exception culturelle. Such trends are evident in business dealings. The Financial Times this weekend detailed Google’s significant foray into developing content, setting up YouTube Space LA. The project gives free soundstage space to artists who are likely to guarantee eyeballs on YouTube, and lead to advertising revenue for the platform. From the stellar success of the first season of “House of Cards”, to DreamWorks Animation’s original content partnership announced last month, Netflix has become the bête noire for traditional content producers as it shakes up traditional models. We have written before about the IHS Screen Digest data from earlier this year, showing worrying trends for the industry; as predicted, audiences are beginning to favour access over ownership, preferring to rent rather than own, which means less profit for the studio. As much due to a decline in revenue from other platforms as growth in of itself, cinemas are expected to be the major area of profit going forward to 2016 (see above chart). We’ve written before about the power cinema still has. Spielberg and Lucas pick up on this;

“You’re going to end up with fewer theaters, bigger theaters with a lot of nice things. Going to the movies will cost 50 bucks or 100 or 150 bucks, like what Broadway costs today, or a football game. It’ll be an expensive thing… [Films] will sit in the theaters for a year, like a Broadway show does. That will be called the ‘movie’ business.”

In a conversation over Twitter, (excerpts of which are featured above), Cameron Saunders, MD of 20th Century Fox UK told Zeitgeist that “major changes were afoot”. Such potential disruption is by no means unique to the film industry, and should come as a surprise to one. Zeitgeist recently went to see Columbia faculty member Rita McGrath speak at a Harvard Business Review event. In her latest book, “The End of Competitive Advantage”, McGrath discounts the old management consultant attempts at providing sustainable competitive advantages to business. Her assertion is that any advantage is transient, that incumbency and success often lead to entropy, unless there is constant innovation to build on that success. Such a verdict of entropy could well be applied to the film industry. The model has worked well for decades, despite predictions of doom at the advent of television, the VCR, the DVD, et cetera ad nauseum. But fundamental behavioural shifts are now at play, and the way we devise strategies for what content people want to see and how they wish to see it need to be readdressed, quickly. Otherwise all this deliberation will eventually become much ado about nothing.

UPDATE (15/4/13): Of course, context is everything. The New York Times published an interesting article today saying investing in Hollywood is less risky than investing in Silicon Valley, though the returns in the latter are likely to be greater. Neither are seen as reliable.

This issue isn’t going away. We write again about it, here.

Movie Moves

From industry paradigm shifts to Paramount trailers and viral websites…

Zeitgeist has had it’s eye on the UK production company Shine for some time, watching it grow into the powerhouse it is today, all under the stewardship of Elisabeth Murdoch. Elisabeth, married to Matthew Freud of Freud Communications, has seemed to want to keep her distance from the Murdoch dynasty since leaving the fold ten years ago, unlike her brother James, who worked for News Corporation in Asia before taking the helm at Sky in the UK. Indeed, Elisabeth’s husband has – strangely for a man whose career is public relations – made little to no attempt to keep his barbed views of News Corp.’s Fox News to himself, saying he was “shocked and sickened” by the content and bias of the cable network. So it thus came as some surprise to Zeitgeist to learn that a deal was recently completed for Shine to become part of the Murdoch empire for £415m. What this will mean to the independence and creativity of the group remains to be seen. But I suppose if the sustainability-themed Avatar can make it out of the notoriously arch-conservative News Corp leviathan, anything’s possible.

In other news, Netflix has been in the papers again. After announcing it would be partnering with several consumer electronic devices, (Mashable made the analogy of having a Netflix button on your remote control), this week the company announced it was trying to develop a remake of the classic UK TV show House of Cards, with Kevin Spacey starring and David Fincher directing, committing to 26 episodes, “taking it into uncharted territory that would put it in direct competition with HBO and other premium cable channels”, writes Mashable. This will be the first time that the company has commissioned and created its own content, further disrupting models of distribution, which itself is a bit of a house of cards. While Netflix pushes into other companies’ territory, Amazon encroached on Netflix‘s by announcing at the end of last month that they would be offering premium customers access to 5,000 TV shows and movies. Though Reuters points out that moves like these are attempts to “woo” companies like Time Warner and the afore-mentioned News Corp., the reality is more tricky, as the same article points out in the very next paragraph,

Media companies so far are cautious about allowing their content to be used on these types of services because they compete with cable operators that pay a premium to carry TV programs and movies. The fear is that people will drop pricey cable subscriptions — known in the industry as “cord cutting” — in exchange for streaming video offered by Netflix or Amazon for instance.

Yesterday it was reported that Paramount will release a film on DVD and on the peer-to-peer service BitTorrent at the same time, with the latter platform supposedly functioning to incentivise people to then buy the DVD. Might a ten-minute teaser have been better than releasing the entire film? Such a teaser is being provided at the moment by Warner Bros., which recently developed iPad apps for both Dark Knight and Inception, providing the first five minutes of the film for free.

Ten days ago, Facebook announced that it would be getting into the film-rental game, as reported by the FT. This is a broader stroke for Facebook in an effort to create a benevolent ‘walled garden’; an area for users to navigate the web, communicate with who they want and angage in the services they want, without ever having to leave the Facebook environment. Zeitgeist never thought they’d be mentioning the recently-released Chalet Girl on this blog, but Variety reports the film has made an interesting marketing move of releasing an interactive trailer on Facebook, where users have the option of “like”ing the trailer at various points. Peter Buckingham, head of distribution and exhibition at the UK Film Council, sagely points out the novelty of such an exercise for film marketers; “The film industry really has not woken up to how important metadata is”.

There are exceptions, however. This past week saw the release of a trailer for an eagerly-anticipated (by nerds) summer film, directed by JJ Abrams of Star Trek and Lost fame and exec-produced by Steven Spielberg – Super 8. And what is the best way to reach said nerds? Why, firstly by providing a super-nerdy website that doles out microscopic kernels of plot information on the film under the guise of hacking into a computer from the late 1970s, and secondly by releasing said trailer on Twitter (see top image). As Zeitgeist has said before, know your audience.

Window shopping at Chanel

Great, recent activation and eCRM examples from the esteemed fashion house.

On Friday, Zeitgeist returned (mentally) from lunch to find a message from Chanel in their inbox. The message directs the user to a microsite of sorts, Window World. The name and idea plays on the surreal notion of the models as mere mannequins (usually of course the reverse is the case, a crude verisimilitude that shoppers seem to take in their stride) and a section of the site takes the user through what feels like a labyrinthine party, filled with mannequins as models and models as mannequins. Other than aesthetic discombobulation, there is signposted a pdf download with product information for every item featured including the item code, but naturally not mentioning anything as vulgar as prices. Complementing this is a video shot by the house’s creative director – Karl Lagerfeld, whom Zeitgeist saw speak at the end of last year – emphasising the eeriness of the concept. Clicking on the video will take you to the YouTube page, where there is ample evidence – in the form of myriad comments – of dissatisfaction with the video, and what it says of the fashion industry by proxy. Fortunately for Chanel, most of those on YouTube are not the brand’s target audience.

Indeed, to elaborate, CNN recently reported that 6% of shoppers drive 70% of luxury goods purchases, so its a very targeted niche that brands like Chanel must hit, (and succeed in so doing, time and again). Zeitgeist has reported before on how important it is that brands be seen in the right places; Louis Vuitton luggage in a McDonald’s is a no-no. Chanel have done an excellent job of being seen in the right places; whether it’s hosting surfing parties for Laird Hamilton, or, more recently, opening a pop-up shop in a tony ski resort. The ‘Chalet de Pierre’ is open until April, an ‘ephemeral’ boutique in the heart of beautiful Courchevel. The Chanel website has some select imagery of the store, which is the perfect place to pick up a pair of Chanel skis. Such marketing activity is exciting and well-executed, but curious, given that any time the brand Chanel, and Lagerfeld in particular, speak publicly, they rarely acknowledge any such efforts.

Right place, right time delivers Fedex viral gold

How great timing can accidently help you become part of a mini viral sensation.

With the news in the UK pretty much exclusively focussing on how the cold weather has brought most of northern Europe brought to a standstill, Zeitgeist was reassured to see that the snow and ice are playing havoc in the US too.

This CNN clip of cars balletically skidding down a hill in Spokane, Washington and into each other has found its way onto a number of popular websites.

As the out of control cars smash into each other a FedEx van appears and chooses a route that doesn’t involve climbing a hill of ice and manages to continue its journey onwards to deliver Christmas presents.

The truck is only visible for around ten seconds of the two minute clip but subtly shows that while others struggle, Fedex delivers.

This particular clip has already been viewed by over half a million people and other instances and TV broadcasts will boost that number considerably.

And all through the good luck of having a competent driver in the right place at the right time. If the Fedex marketing team haven’t already broken up for the holidays they might even think about buying the rights to the first 30 seconds of the clip and running it as an advert while the weather remains so severe.

Whatever they do, Zeitgeist hopes Fedex identify the driver and give him (or her) a nice Christmas bonus. They might also want to offer jobs to the drivers of the red and black cars who managed to keep calm and deliver a driving masterclass.

Timing it would seem, really is everything!

Silent Bob makes some noise

Previous editions of Zeitgeist have touched on how brands should deal with bad news and what happens when brand ambassadors go bad.

The recent hullabaloo regarding film director Kevin Smith and Southwest Airlines provides an opportunity to examine what happens when a celebrity suddenly starts badmouthing a brand following a bad experience.

The backstory is that Smith, who had originally purchased two seats to travel to from Oakland to Burbank, changed his travel plans and joined the standby list for a new flight.

Having boarded the new flight, the captain allegedly approached and told him he was considered a safety risk due to his size and he would have to leave the plane.

Clearly, there isn’t an easy way to tell someone they have to get off the plane because they are too fat. Nor would we imagine is it a pleasant experience to be told that you have been judged as being too big to fly, particularly in front of other passengers of acceptable proportions and even more so when you are a semi-famous face.

Everyone knows that you should never send an email in anger or text when drunk but the Clerks and Dogma director couldn’t resist and immediately began tweeting his fury from the airport terminal. His 1.4m followers were soon treated to a flurry of further tweets expressing his indignation including…

Dear @SouthwestAir – I know I’m fat, but was Captain Leysath really justified in throwing me off a flight for which I was already seated?

Wanna tell me I’m too wide for the sky? Totally cool. But fair warning, folks: IF YOU LOOK LIKE ME, YOU MAY BE EJECTED FROM @SOUTHWESTAIR.

Dear @SouthwestAir, I’m on another one of your planes, safely seated & buckled-in again, waiting to be dragged off in front of the normies.

Southwest Airlines didn’t dally and responded with a tweet of their own apologising to Smith for the experience, offering him $100 while also reiterating their policy on their website.

Smith wasn’t placated and continued to express his unhappiness, challenging Southwest to bring a seat onto a talk show so he could demonstrate how he could fit in it without compromising the safety or comfort of other passengers.

Inevitably, such an emotional and personal subject drew polarising comments from other bloggers ranging from outrage that airlines don’t have special seats to accommodate larger fliers to outrage that smaller flyers should be squashed by more corpulent passengers.

In the end a poll on CNN showed that 58% of people sided with the latter group and Smith blogged that he wanted to let the matter die.

As the dust settles, Southwest appear to have ridden the storm while setting out their position while Smith is conveniently back in the headlines a couple of weeks before the release of Cop Out.

Voices for Change

From the Winter 2009 Zeitgeist…

“Even in the face of tyranny, people insisted that the world could change.” So said President Obama at the twentieth anniversary of the fall of the Berlin Wall. Both Obama and the destruction of the Wall demonstrate the power of the populous. Weʼve seen time and again that when people have come together, online, to demand action over something, they have precipitated change. From Facebookʼs accession to Canuck privacy requirements, to HSBC changing their policy for student customers, social networks can help upset the order of things.

When more is at stake than the reinstating of an erstwhile chocolate bar, what then? Horace wrote some time ago “The mountains will be in labour; a ridiculous mouse will be born.” Thousands spoke out online in protest at the rigged Iranian elections – Afghanistan, with only 25% mobile and 1% fixed-line penetration, didnʼt stir similar attention–demonstrating a heart-warming solidarity with the Iranian people. But did it achieve anything substantial? CNN said Twitter and Facebook posts provided the US with “critical information in the face of Iranian authorities banning Western journalists from covering political rallies.” However, the camaraderie was not terribly helpful for Iranians. Despite months of protests on the streets, Ahmadinejad is still in power, and those caught face harsh punishment.

This past week has seen an event of potentially similar import in Denmark. Representatives of the developed and developing world alike attended the COP-15 summit in Copenhagen, debating how best to combat climate change. Ogilvy Earthʼs Hopenhagen campaign, charged by the UN, is designed to give people from all over the world a chance to show their desire for action to be taken. The 6.2m petitions may have played a part in the ensuing (albeit diluted) accord reached.

As Zeitgeist composes this article in the rugged environs of a remote WPP outpost, a radio station is playing Bachʼs Brandenburg Concerto No. 2. If intelligent life were to ever intercept the Voyager spacecraft jettisoned into space all those years ago, this piece of music would be the first thing they would hear. Though we can only hope for something to come of that mission, there are

pressing things on our planet that do require immediate action. Sometimes all that is necessary is to speak up and be heard. The alternative, as Niemöller pointed out, is surely far worse:

First they came for the communists, and I did not speak out—because I was not a communist;

Then they came for the trade unionists, and I did not speak out—because I was not a trade unionist;

Then they came for the Jews, and I did not speak out—because I was not a Jew;

Then they came for me—and there was no one left to speak out for me.