Mischief, managed – digital disruptors in need of legacy structures

“Move fast and break things”. That is the motto of Facebook, and unofficially many of its contemporaries. While much of the most visible impact of new digital organisations has been on how they respond to, engage with and influence user behaviour, just as significant has been the extent to which these organisations have eschewed traditional business models, ways of working and other internal practices. This includes traditional measures of success (hence the above cartoon from The New Yorker), but also of transparency and leadership. Such issues will be the focus of this piece, to compare the old with the new, and where opportunities and challenges can be found.

What makes digital-first organisations different

It’s important to acknowledge the utterly transformative way that digital-first companies do business and create revenue, and how different this is from the way companies operated for the past century. Much of this change can be summed up in the phrase “disruptive innovation”, coined by the great Clayton Christensen way back in 1995. I got to hear from and speak to Clay at a Harvard Business Review event at the end of last year; a clear-thinking, inspiring man. There are few things today that organisations would still find use in from the mid-90s, and yet this theory, paradoxically, holds. The market would certainly seem to bear this concept out. Writing for the Financial Times in April, John Authers noted,

Tech stocks… are leading the market. All the Fang stocks — Facebook, Amazon, Netflix and Google — hit new records this week. Add Apple and Microsoft, and just six tech companies account for 29 per cent of the rise in the S&P 500 since Mr Trump was inaugurated.

The FANG cohort are entirely data-driven organisations that rely on user information (specifically user-volunteered information) to make their money. The more accurately they can design experiences, services and content around their users, the more likely they are to retain them. The greater the retention, the greater the power of network effects and lock-in. (Importantly, their revenue also make any new entrants easily acquirable prey, inhibiting competition). These are Marketing 101 ambitions, but they are being deployed at a level of sophistication the likes of which have never been seen before. Because of this, they are different businesses to those operating in legacy areas. These incumbents are encumbered by many things, including heavily codified regulation. Regulatory bodies have not yet woken up to the way these new companies do business; but it is only a matter of time. Until then though, the common consensus has been that, working in a different way, and without the threat of regulation, means traditional business structures can easily be discarded for the sake of efficiency; dismissed entirely as an analogue throwback.

The dangers of difference

One of the conceits of digital-first organisations is that they tend to be set up in order to democratise the sharing of services or data; disruption through liberalising of a product so that everyone can enjoy something previously limited via enforced scarcity (e.g. cheap travel, cheap accommodation). At the same time, they usually have a highly personality-driven structure, where the original founder is treated with almost Messianic reverence. This despite high-profile revelations of the Emperor having no clothes, such as with Twitter’s Jack Dorsey as well as Google, then Yahoo’s, now who-knows-where Marissa Mayer. She left Yahoo with a $23m severance package as reward for doing absolutely zero to save the organisation. Worse, she may have obstructed justice by waiting years to disclose details of cyberattacks. This was particularly galling for Yahoo’s suitor, Verizon as information came to light in the middle of its proposed purchase of the company (it resulted in a $350m cut to the acquisition price tag). The SEC is investigating. The silence on this matter is staggering, and points to a cultural lack of transparency that is not uncommon in the Valley. A recent Lex column effectively summarised this leader worship as a “most hallowed and dangerous absurdity”.

Uber’s embodiment of the founder-driven fallacy

Ben Horowitz, co-founder of the venture capital group Andreessen Horowitz, once argued that good founders have “a burning, irrepressible desire to build something great” and are more likely than career CEOs to combine moral authority with “total commitment to the long term”. It works in some cases, including at Google and Facebook, but has failed dismally at Uber.

– Financial Times, June 2017

This culture that focuses on the founder has led to a little whitewashing (few would be able to name all of Facebook’s founders, beyond the Zuck) and a lot of eggs in one basket. Snap’s recent IPO is a great example of the overriding faith and trust placed in founders, given that indicated – as the FT calls it – a “21st century governance vacuum“. Governance appears to have been lacking at Uber, as well. The company endured months of salacious rumours and accusations, including candid film of the founder, Travis Kalanick, berating an employee. This all rumbled on without any implications for quite some time. Travis was Travis, and lip service was paid while the search for some profit – Uber is worth more than 80% of the companies on the Fortune 500, yet in the first half of last year alone made more than $1bn in losses – continued.

Uber’s cultural problems eventually reached such levels (from myriad allegations of sexual harassment, to a lawsuit over self-driving technology versus Google, to revelations about ‘Greyball’, software it used to mislead regulators), that Kalanick was initially forced to take a leave of absence. But as mentioned earlier, these organisations are personality-driven; the rot was not confined to one person. This became apparent when David Bonderman had to resign from Uber’s board having made a ludicrously sexist comment directed at none other than his colleague Arianna Huffington, that illustrated the company’s startlingly old-school, recidivist outlook. This at a meeting where the company’s culture was being reviewed and the message to be delivered was of turning a corner.

A report issued by the company on a turnaround recommended reducing Kalanick’s responsibilities and hiring a COO. The company has been without one since March. It is also without a CMO, CFO, head of engineering, general counsel and now, CEO. Many issues raise themselves as a start-up grows from being a small organisation to a large one. So it is with Uber – one engineer described it as “an organisation in complete, unrelenting chaos” – as it will be with other firms to come. There is only a belated recognition that structures had to be put in place, the same types of structures that the organisations they were disrupting have in place. The FT writes,

“Lack of oversight and poor governance was a key theme running through the findings of the report… Their 47 recommendations reveal gaping holes in Uber’s governance structures and human resources practices.”

These types of institutional practices are difficult to enforce in the Valley. That is precisely because their connotations are of the monolithic corporate mega-firms that employees and founders of these companies are often consciously fighting against. Much of their raison d’être springs from an idealistic desire to change the world, and methodologically to do so by running roughshod over traditional work practices. This has its significant benefits (if only in terms of revenue), but from an employee experience it is looking like an increasingly questionable approach. Hadi Partovi, an Uber investor and tech entrepreneur told the FT, “This is a company where there has been no line that you wouldn’t cross if it got in the way of success”. Much of this planned oversight would have been anathema to Kalanick, which ultimately is why the decision for him to leave was unavoidable. Uber now plans to refresh its values, install an independent board chairman, conduct senior management performance reviews and adopt a zero-tolerance policy toward harassment.

Legacy lessons from an incumbent conglomerate

Many of the recommendations in the report issued to Uber would be recognised by anyone working in a more traditional work setting (as a former management consultant, they certainly ring a bell to me). While the philosophical objection to such things has already been noted, the notion of a framework to police behaviour, it must also be recognised, is a concept that will be alien to most anyone working in the Valley. Vivek Wadhwa, a fellow at the Rock Center of Corporate Governance, clarified, “The spoiled brats of Silicon Valley don’t know the basics. It is a revelation for Silicon Valley: ‘duh, you have to have HR people, you can’t sleep with each other… you have to be respectful’.”

Meanwhile, another CEO stepped down recently in more forgiving circumstances, recently but which still prompted unfavourable comparisons; Jeff Immelt of General Electric. As detailed in a stimulating piece last month in The New York Times, Immelt has had a difficult time of it. Firstly, he succeeded in his role a man who was generally thought to be a visionary CEO; Jack Welch. Fortune magazine in 1999 described him as the best manager of the 20th century. So no pressure for Immelt there, then. Secondly, Immelt became Chairman and CEO four days before the 9/11 attacks, and also had the 2008 financial crisis in his tenure. Lastly, since taking over, the nature of companies, as this article has attempted to make clear, has changed radically. Powerful conglomerates no longer rule the waves.

Immelt has, perhaps belatedly, been committed to downsizing the sprawling offering of GE in order to make it more specialised. Moreover, the humility of Immelt is a million miles from the audacity, bragaddacio and egotism of Kalanick, acknowledging, “This is not a game of perfection, it’s a game of progress.”

So while the FANGs of the world are undoubtedly changing the landscape of business [not to mention human interaction and behaviours], they also need to recognise that not all legacy structures and processes are to be consigned to the dustbin of management history, simply because they work in a legacy industry sector. Indeed, more responsibility diverted from the founder, greater accountability and transparency, and a more structured employee experience might lead to greater returns, higher employee retention rates and perhaps even mitigate regulatory scrutiny down the line. The opportunity is there for those sensible enough to grasp it.

On new distribution strategies in film

Fade to black?

“Any media company is a laboratory right now. There is no established way to do anything.” Thus spoke Adam Moss recently, in his role as editor in chief of New York magazine. The publication has altered its cadence and is expanding into the worlds of cable television and live events. His comment referred to print media but it might just as well have been applied to the entertainment industry at large.

The film industry, in particular, could benefit from more experimental, “agile” thinking and delivery. Over the weekend, The New York Times ran an article that was laden with anxiety over the state of cinema-going. As with all popular past-times that have been ingrained in our culture, we have a tendency not only to sentimentalise the activity but also to remove such activities from their contextual moorings. Going to the cinema has not been a consistent experience, as A.O. Scott sagely illustrates,

“The nickelodeons of the earliest days gave way to movie palaces, which were supplemented by humbler main-street Bijoux and Roxys. In the ’30s, the major home-entertainment platforms were radio and the upright piano in the parlor, and movies offered a cheap, accessible and climate-controlled escape. And millions of people went often, less out of reverence than out of habit, returning every week to take in double features, shorts and serials, newsreels and cartoons…

In the postwar years, the rise of car culture and the growth of the suburbs planted drive-ins in wide-open spaces, while grindhouses, art houses and campus film societies flourished in the cities and college towns. Moviegoing has never been just one thing.”

Much has been made of Sean “Napster and Facebook” Parker’s Screening Room initiative – offering newly released films at $50 for home viewing – that has very publicly split Hollywood in two. It has been referred to as “weaponised VOD“, in tones not dissimilar from those who worried about the end of cinema back when TV arrived on the scene. Such a technology, and more importantly such a way of consuming media, is hardly new. Millions of people have been watching films in this way (i.e. at home while the film sits in scarcity-inducing cinemas) for years, just without a legal way of doing it for the most part (shining exceptions include platforms like Curzon At Home).

The unfortunate trap this article falls into is to assume that any money spent on watching films using platforms such as the Screening Room platform is money necessarily lost by exhibitors. This thinking is overly simplistic and lacks any basis on quantitative data. It is the same argument made against those, referred to above, who pirate content. In reality, data from 2014 show that “people who illegally download movies also love going to the cinema and do not mind paying to watch films“.

Current industry inertia is not merely preventing new innovative consumer products and platforms from arriving, it is also hurting existing business models. While a sizeable minority of independent films are increasingly turning to day-and-date SVOD releases, they remain a minority, in an industry where risk is baked into multi-year franchises at $300m a go, but is nowhere to be found when considering if a film might need to be released in a tailored manner. Films showing up in such fashion look more often to be those that the studio don’t mind breaking even on, rather than a film that might hit home with a demographic who would be more likely to pay a premium to stream it from home. Last week, The New Yorker wrote about the antiquated distribution strategy of “limited” and “wide” release. This is where cinema can play a proactive role: in supporting independent cinema

“Because there’s no comparable venue now, far fewer independent films get proper releases; some of the best of the past few years… are still awaiting release.”

The article points out that such definitions of release, in an era of instantly available content, is not only anachronistic but harmful to films.

There are thus several opportunities for new revenue streams to be explored in the film industry. These can be adopted with a more experimental attitude toward distributing films; the kind of attitude that gave birth to the industry in the first place. It also requires that some of the risk of potentially destabilising tentpole film franchises be redirected into exploring the potential of films to reach a much, much wider audience.

Tech frailty in 2016

In the course of history, many smart people have been scared by the rapid progression of technology and its impact on the way we live. Forget the printing press; Socrates was concerned that even the technology of recording via written documents (i.e. writing) would “create forgetfulness in the learners’ souls, because they will not use their memories”. One need only look at the graphic above, representing swings in market share for tech titans, to see significant change in just the past 35 years.

January has been a difficult month for the stock market, with share prices around the world taking a tumble. A lot of the liquidity in the market rests on the valuation of a growing number of technology firms, whose route to profitability varies wildly. The oft-written about “Unicorns” are seemingly due for some market correction – no bad thing for the tech sector – but what about the bastions of the industry, how are they looking?

Twitter – The firm would have breathed a sigh of relief at the end of last year, when original co-founder Jack Dorsey committed to returning to the company. There were promising sounds at first, but recently it has been mulling a move away from the 140-character limit that defines its modus operandi. It has the potential, according to Forrester, to repackage such long-form fare in the mode of Facebook’s Instant Articles. But attempting to emulate what has already been done cannot hold any hope for actually catching up with its rival. An article in The New Yorker this week derides the social network, calling out its lack of direction, and questioning its relevance in a growing pool of competitors. Twitter’s US penetration has been flat for the past three quarters, and Snapchat is nipping at its heels in terms of engagement. While overall Twitter is seeing steady growth, it’s rate of growth continues to decline

Facebook – By contrast, Facebook is doing well, particularly concerning its financial performance. Its increasing collaboration with telcos as it explores new revenue opportunities pave the way for sizeable rewards in the medium term. And it is slowly learning from the likes of WeChat and Kakao Talk in Asian markets on how to better integrate various functionality into its Messenger app; it’s first foray is working with Uber to allow users to hire a car without leaving Messenger. (This week Whatsapp also begun to get the message, no pun intended). We commented in our last article about how the social network is fast having to adapt to an ageing user base and lower engagement, but Facebook is attempting to combat such trends with numerous tactics. Sadly, its attempt to provide free internet services in developing markets has run into obstacles. In both Egypt and India, government regulators have interceded to stop the network from running its Free Basics service, under the guise of net neutrality (which in our opinion stretches the definition, and the spirit, of net neutrality).

Yahoo – The troubles for this company are more than we can summarise in this short review. Let it suffice to say that Marissa Mayer’s wunderkind sheen has been significantly tarnished since her arrival at the company in 2012. In an editorial in the Financial Times last month, the company was described as a “blur of services and assets of different values”. As her inescapably significant role in the organisation’s lacklustre performance becomes increasingly apparent – hedge fund Starboard Value has issued an ultimatum for her to either leave peacefully or be replaced by shareholder vote come March – reports are that Mayer will have to lay off around 10% of the company. The FT puts it well,

[R]ather like AOL, it is considered a service stuck in internet dark ages. It is what grandma uses to look up the weather. It is not for Snapchatting teenagers. And it is not what investors crave most of all: the prospect of growth.

Amazon – Until this week the company had been faring extremely well, and its most recent concern was not getting investors too excited about its recent profit announcement. And while it’s reporting this week of a 26% YoY rise in sales was welcome, its fourth-quarter profits of $482m were one-third lower than what Wall Street analysts were expecting; the stock plunged 13% as a result. The disparity between rising sales and profits that don’t align to such a rise are nothing new for the company, unfortunately.

Holistic sector frailty – Two excellent articles in The Economist this month reveal a sector that is experiencing growing pains as the current digital era reaches a period of relative maturity. As the hype dies down, what hath such new ways of thinking, making and working wrought? The first article examines the seemingly glamorous role of a techie working in a startup firm, and the pitfalls that come with it. The article reports that “Only 19% of tech employees said they were happy in their jobs and only 17% said they felt valued in their work”. In looking at the explosion of demand for the inadequately named Hoverboard, the second article identifies that globalisation has vastly sped up a product’s journey from conception to delivery at a consumer’s home, at the expense of a proper regulatory system; it is unclear with so many disintermediated players who should shoulder the burden of quality control. The Economist sees such risk as a parable for the tricky place the sector as a whole finds itself in.

 

Big Data needs a Big Strategy

We’ve written several times over the years about the deployment of Big Data. One of the key challenges with such tools is the seductive risk of treating the data as a catch-all answer to a question not asked. Zeitgeist in the past worked with a large client in the public sector that understood this pitfall and studiously avoided it by knowing beforehand what Big Data meant to them, and how it could be used to improve its strategy and operations.

Without such forethought, applications of Big Data can be ineffectual, if not outright harmful, as the president of eBay Marketplaces said last year in an interview with McKinsey. Governments around the world – particularly in the West – have been using Big Data for some time now to help identify extremists. The jury is still out for some as to how harmful government digital surveillance can be. The deliberate weakening of virtual systems has its root in the fact that the US government originally classified once-arcane cryptography as a munition, which when licensed abroad was watered down. “The idea of deliberately weakening cryptography in the name of national security has not gone away”, writes The Economist. An article published in The New Yorker earlier this year investigated the NSA’s uses of Big Data – specifically mass surveillance of individuals in the US and beyond over cellphone metadata, social media, etc. – and found it wanting. This appears to be partly because there is no pre-determined strategy for what they want the data to do, other than to figuratively chuck it onto the pile with the rest of the data they have, which at some point might be used. The efficacy of such a practice, according to the article, has been minimal. In all of its surveillance, the article claims there was but a single case “where the NSA’s phone-records program was decisive”. It is perhaps telling that most of the perpetrators of terrorist attacks that have occurred on Western soil since 9/11 have been known to the intelligence community. In other words, the data needed was presented, but there was no strategic oversight for how it should be deployed. It is perhaps an inevitable consequence of too little direction and too much volume. The New Yorker elaborates, below:

“Patrick Skinner, a former C.I.A. case officer who works with the Soufan Group, a security company, told me… ‘We knew about these networks,’ he said, speaking of the Charlie Hebdo attacks. Mass surveillance, he continued, ‘gives a false sense of security. It sounds great when you say you’re monitoring every phone call in the United States. You can put that in a PowerPoint. But, actually, you have no idea what’s going on.’

By flooding the system with false positives, big-data approaches to counterterrorism might actually make it harder to identify real terrorists before they act. Two years before the Boston Marathon bombing, Tamerlan Tsarnaev, the older of the two brothers alleged to have committed the attack, was assessed by the city’s Joint Terrorism Task Force. They determined that he was not a threat. This was one of about a thousand assessments that the Boston J.T.T.F. conducted that year, a number that had nearly doubled in the previous two years, according to the Boston F.B.I. As of 2013, the Justice Department has trained nearly three hundred thousand law-enforcement officers in how to file ‘suspicious-activity reports.’ In 2010, a central database held about three thousand of these reports; by 2012 it had grown to almost twenty-eight thousand. ‘The bigger haystack makes it harder to find the needle,’ Sensenbrenner told me. Thomas Drake, a former N.S.A. executive and whistle-blower who has become one of the agency’s most vocal critics, told me, ‘If you target everything, there’s no target.’“

This last quotation applies to strategy in general. Without anything specific to focus on as a strategic achievement or direction, one shouldn’t expect any improvement in that area.

Making the Oscars more relevant

Are the Oscars as outdated as wearing your hat to work?

Last month, AMPAS celebrated a year of achievements in film, for the 87th time. In a recent article, the Financial Times lambasted the film industry for its overwhelming focus on high-risk, high-reward blockbusters and the death of middle-budget studio films, the likes of which were often lauded by the Academy. Viewing figures for the show in 2015 were the lowest in six years (though, let’s keep things in perspective, it was never watched by a billion people). In a guest post, M.K. Leibman looks at what’s going wrong with a format that has often been criticised as outmoded, if not inappropriate. M.K. is a native New Yorker with experience in film production. She hosts a popular blog where she often critiques film industry practice.

*

It’s been a couple of weeks since The Academy Awards. Everyone’s think pieces have already been written, the internet has had its say and Hollywood has already returned to work on this years slate of new releases. It’s back to business as usual. Disappointed with the 18% decline in ratings, the industry assures us that “next year will be better”.

Others like Variety remain less convinced that will be the case.

In it’s incredibly popular piece, Variety stepped up the tone warning that things are unlikely to improve with the Oscars unless several changes are implemented. In its article, Variety noted six changes which should be implemented, notably the inclusion of more popular films as nominees, not televising technical awards, and reducing the run-time of the broadcast.

However, I argue that they don’t go far enough, or actually get to the core of what’s wrong with The Academy Awards. Looking at over 150 comments underneath the article, you could get a feel for what people actually thought was wrong with the ceremony, and it wasn’t giving stage time to the sound editor. The general consensus is: The Oscars just aren’t relevant any more to the average American.

Of course the Academy isn’t just going to throw up their hands and close up shop at this revelation. There needs to be massive changes implemented at all levels of the broadcast in order to sustain its future.

The first decision The Academy should make is to not re-hire show producers Craig Zadan and Neil Merron. They’ve had a run of three years and the show has failed to see a big boost in ratings. It’s not to say these two gentlemen aren’t very talented producers. However, to effectively implement change means to start those changes at the top in order to bring the show in a new direction.

Under the tutelage of Merron and Zadan, the Oscars have struggled to define their tone. In their first year as producers, they made a bold move and picked comedian Seth McFarlane to host the show. His performance drew ire from the older Academy voters and Hollywood for unorthodox jokes, while thoroughly pleasing the younger demographic. The next year they decided to change course drastically to compensate for offending many, hiring the lovable comic Ellen DeGeneres. After McFarlane’s raunchy style, Ellen just felt too clean and safe. While the broadcast was widely watched, the biggest moment felt like a corporate gimmick: a Samsung-sponsored selfie became the most re-tweeted image on Twitter of all time. Neil Patrick Harris was the producing duos most recent choice. He too was a very safe choice, and failed to leave his mark on the show – even feeling awkward at times with the written material he was given to present, such as the joke mocking the broadcasts lack of diversity.

The one common tone these hosts and their shows all share is that the modern Oscars also feel more like a Broadway musical than a celebration of film.

While some may like this Vaudevillian style, most people on social media and in the Variety comments section seemed tired of these long drawn out musical numbers. Several recent hosts have made the musical a centerpiece of their show, including McFarlane with the asinine “show me your boobs.” The Oscars isn’t a Broadway musical, it is a show that ought to celebrate film – not dance around to silly songs, or theme songs from movies made 50 years ago. Or worst of all, in the case of the 85th Academy Awards, to Merron’s own film Chicago in a rather transparent attempt at self promotion.

When asked about their strategy for taking over the Oscars three year ago, Neil Merron and Craig Zadan told Entertainment Weekly that they needed to both shorten the show while increasing the number of performances; an arguably impossible task. They decided to reduce the stage time for technical awards, seating them closer in order to reduce the walk-time to the stage for acceptance of awards (a total of 40 seconds). They reason this frees up more time for musicals and other in-between performances which in turn allegedly attracts more talent to want to attend the broadcast live. Unfortunately, this has failed to decrease the run time and this year’s ceremony nearly approached the four hour mark.

They need to cut out more of the musicals and, like the BAFTAs, eliminate the televised acceptance of technical awards. They need to do this no matter how loudly those technical trades collectively complain about it. By eliminating technical awards, the BAFTAs run on average an hour shorter than the Oscars. This may be a hard pill to swallow for some, but people just don’t have 3.5 hours to devote to an awards broadcast on a Sunday night.

Once we cut out all of the musical numbers and technical awards, what could they be replaced with?

For starters, hosts that can actually captivate an audience without song and dance and poorly-scripted spectacle. None of these hosts were the sort of folks that could get a family to want to sit in front to the TV together to watch. When you think of some of the more successful Oscars hosts throughout history, they were comedians who could naturally work a room, loved by many generations. The current Oscars feel victim to a teleprompter mentality, a hyper-scripted event that fails to feel authentic. In trying to achieve the right tone, the Oscars could benefit from handing the hosting job to a duo like Amy Poeler and Tina Fey, whose Golden Globes hosting gig remains one of the more talked about award shows in recent memory. Some have even suggested their former SNL co-star Jimmy Fallon, but even he feels too safe a choice and slightly over-exposed given his Tonight Show gig. The host needs to be a natural comedian or comedic duo, with more choice over the written material and someone who is not overexposed that plays well with multiple key demographics.

The other part of the tone that needs to change is its pretentiousness. There is no faster way to assure irrelevancy than if you make the Oscars into a club of pretentious film buffs. There needs to be more time devoted to financially successful films that captivated general audiences during the year, and less time making fun of them. You don’t need to give an award to the superhero films, but to mock – or worse, just ignore – their existence isn’t going to improve your ratings either. Perhaps add a segment which praises some of the more financially successful films of the year, or include a performance related to those popular films.

This years ceremony felt almost like the Independent Spirit Awards, the award show that nominates the best of independent cinema. In fact several of this years big winners were also indie films honored at the Spirit Awards. Apart from the film buff niche, the American public isn’t going to see films like Birdman or The Grand Budapest Hotel. That doesn’t mean, as Variety suggests, you need to honor tentpoles with Best Picture nominations, but it’s not like the studios didn’t put out good films people enjoyed which were also award-worthy; Gone Girl was but one notable snub in that arena. People care about the Oscars more when films they care about are nominated or win. The most successful year of all time was when megahit Titanic was nominated in 1998, that year saw 55.5 million viewers versus this years 34 million.

Did the mainstream cachet of David Fincher’s Gone Girl hinder its chances at further Academy recognition?

 

The other 800 pound gorilla in the room is diversity. While not discussed in the Variety article, a highly visible Oscars boycott took social media by storm under the hashtag #OscarsSoWhite and #BoycottOscars. The tweets were in the millions, suggesting the boycott was substantial according to the number of tweets supporting it. Upset by the lack of nominations for Selma and no people of color nominated for acting awards, many decided not to watch. Even Al Sharpton called off a protest of the red carpet, hours before the show was to begin at the request of Selma director Ava DuVernay.

Before one chalks this up to being just another case of social justice sentiment on social media, there are serious long-term financial ramifications. If viewers don’t see themselves represented on screen, or at the Oscars, they’re not going to watch. As America grows more diverse, with people of color expected to become the population majority by 2050, the Oscars need to do more to include illustrate this diversity in their broadcast. Granted, a chef is only as good as his ingredients, the show’s lack of diversity isn’t helped by the product released, which this year had a paucity of strong roles for women. As Variety commented at the time,

“It’s always easier to identify a worrisome trend than to figure out its cause, much less to suggest a workable solution. We can point to the limitations of genre in the case of “American Sniper,” “The Imitation Game” and “Unbroken,” given that most biographical war movies are about the exploits, adventures and sufferings of men. Still, whatever these films’ particular shortcomings or virtues, I suspect that awards voters are too often inclined to accept them on their own grand, self-important terms, which not so subtly conflate significance with masculinity: Watch Chris Kyle and Louis Zamperini march off to war! See Alan Turing change the face of history!”

The Oscars need to find a way to appeal to young people, and people of color alike. The future of this show is not white people over 34, but the critical 18-34 demographic and minorities. This needs to be reflected not only in the broadcast’s format and demeanour, but also in the makeup of the Academy itself; 94% white, 76% men, 63 years old on average.

In order to remain relevant, the Oscars need to find a tone that can compete with people’s attention in a highly-distracting digital age. The Oscars are starting to feel too self-congratulatory, too Hollywood, despite the irony. Americans don’t feel represented by the choices the Academy makes. The musical nature of the show leaves many men out of the equation and the lack of diversity is off-putting to entire races. Yet I doubt most of these considerations will be on the table for next year’s show. I suspect another safe choice for host with a near four hour run time chock full of endless musicals, lack of diversity and self-congratulatory scripted satire which is bound to generate uncomfortable laughs – and in today’s day in age I just don’t know how much longer that format can last. When Americans don’t feel like they’re invested in the show, there are just too many other entertainment options in the present day than to have to tune in for what they know will be in the news tomorrow or on social media in seconds.

Too much content, too many channels, too little time?

We all seem to have less time to ourselves these days. But there seems to be more to watch – on more platforms – than ever before. What trends have led to this, and what’s the result? Much editorial ink has been spilled over the years about how our lives seem to be getting busier, with less free time to ourselves. This is somewhat of a painful irony given that many of our more intellectual ancestors thought our evolution as a species would quickly lead to a civilisation mostly consumed by thoughts of how to fill the days of leisure. In last week’s New Yorker, Harvard professor Thales Teixeira noted there are three major “fungible” resources we have as people – money, time and attention. The third, according to Teixeira, is the “least explored”. Interestingly, Teixeira calculated the inherent price of attention and how it fluctuates, by correlating it with rising ad rates for the Super Bowl. Last year, the price of attention jumped more than 20%. The article elaborates,

“The jump had obvious implications: attention—at least, the kind worth selling—is becoming increasingly scarce, as people spend their free time distracted by a growing array of devices. And, just as the increasing scarcity of oil has led to more exotic methods of recovery, the scarcity of attention, combined with a growing economy built around its exchange, has prompted R. & D. in the [retaining of attention].”

It’s such thinking that has persuaded executives to invest in increasingly multi-platform, creative advertising during the Super Bowl, and to media production companies taking their wares to the likes of YouTube and Netflix. But it’s all circular , as demonstrated last week when Amazon announced it would be producing films for cinema release. The plurality of such content over different channels carries important connotations for pricing strategies. At its most fundamental, what is a product worth when it is intangible and potentially only available in digital form? It chimes with an article written earlier this month in The Economist on the customer benefits of e-commerce. Though most knee-jerk reactions would assume price is the biggest benefit to customers, recent research illustrates this is not always the case. Researchers at MIT showed on average people paid an extra 50% for books online versus in-store. This isn’t because that latest David Baldacci is sold for more on Amazon, but rather because of the long tail. Which means more products are able to find the right owner, for a price, whereas in store comparatively they go unsold. More channels have meant more availability for content, which should benefit consumers in that more content destined to be a hit now finds a home, where once it might have been lost if turned down by the major TV or radio network stations. The Economist elaborates,

“Seasoned publishers have only a vague idea what book, film or song will be a hit. A major record label can sign only a fraction of the artists available, knowing full well it will unwittingly reject a future superstar. Thanks to cheap digital recording technology, file sharing, YouTube, streaming music and social media, however, barriers to entry have been dismantled. Artists can now record and distribute a song without signing to a major label. Independent labels have proliferated, and they are taking on the artists passed over by major labels. Hit songs are still a lottery, but the public gets three times as many lottery tickets.”

So while we may have less time to consume it, more content over more channels will allow for greater chances for breakout hits, particularly with avid niche audiences. Amazon Prime video content was until recently confined to a niche audience, and the show Transparent dealt with niche subject matter. But the show has broken out into the zeitgeist and won two awards at the recent Golden Globes ceremony. (Full disclosure, we know a producer on the show and were lucky enough to visit the set on the Paramount lot in Los Angeles last summer). It is likely such a great show – recently made available free for 24 hours as a way to upsell customers to Prime – would not have found a home on traditional TV networks, and thus in people’s homes, were it not for this plurality.

(R)evolutions in television and film – Peter Pan and The Player

What goes around, comes around…

Plus ça change, plus c’est la même chose… TV executives’ concern over changing viewing habits is nothing new. Sports coverage continues to deliver; it’s such thinking that pushed BT to pay almost GBP900m to show some football matches. But it’s not just knowing the score as it happens that has kept audiences from time-shifting. We wrote a piece back in 2011 detailing how the industry was trying to put a renewed focus on live events. Social media have contributed to this; having a constant stream of wry comments on Twitter to snark at while watching Downton Abbey can vastly improve the viewing experience. This is somewhat lost if viewing the show later.

There was a time when live events were much more common on network TV. Back then it was other formats – radio and cinema – that were running scared from the box in the corner. Now it is television that is trying to retain eyeballs; DVRs and OTT rivals are diminishing its sway; the cable industry lost 2.2m subscribes last quarter and Fox COO Chase Carey recently conceded the cable cord was “fraying”. TV viewing in general dropped 4% last quarter, Nielsen reported on Friday. Mobile use in general seems to be the largest culprit (see chart, below). As part of a strategy to keep viewers glued to scheduled, linear TV, NBC has previously screened the live performance of Sound of Music, and recently announced plans for a live rendition of A Few Good Men. Like the latter piece on content, Peter Pan similarly began as a play, and this past week saw its own broadcast, live, on NBC. It was a fine tactic in a broader strategy. Sadly, execution, and timing, are everything. Salon saw much room for improvement. The New Yorker compared it with earlier TV adaptations (NBC did a live version back in 1955) and found it lacking. More damningly, it also saw a broader disconnection from reality, as protests swept the nation in reaction to events unfolding in Ferguson. Viewing figures were half what the network got for Sound of Music. As The Wall Street Journal points out, live events may be losing their pull; both the Emmys and MTV Music Awards saw dips in ratings this year. Meanwhile though, marketers are still willing to pay a premium for advertising during such shows. Brands are said to have paid as much as $400,000 per-30 second commercial for the telecast.

“The nature of the internet as a platform for art is double-edged. The thing that makes it attractive — the fast turnover of content produced by unusual, gifted people — may be what stops it from bringing about a Golden Age 2.0.”

– India Ross, Financial Times

Another tactic in the strategy to retain eyeballs has been to license old seasons of shows still running to OTT providers like Hulu, Amazon and Netflix. On the one hand this may cannibalise viewers who are just as happy watching old episodes as new ones. On the other, it could provide a new platform to find audiences and increase advocacy and engagement. What Nielsen has found is that both are happening. As the WSJ reports, “Dounia Turrill, Nielsen’s senior vice president of client insights, said she analyzed the results of 16 such shows and found an even split of shows that benefited and those that didn’t”. Netflix, meanwhile, closed down its public API and is seeking world domination with culturally diverse content in the form of Marco Polo. Such OTT providers have their own problems to worry about, too; their niche is becoming increasingly cluttered. Vimeo is not mentioned often as a competitor to the likes of Amazon’s services, but it too is now producing original content for streaming, in much the same way as its peers, where shows are greenlit by popular demand and creatives given full rein. An article in this weekend’s Financial Times points out the limits of such a business model, “the internet audience — vehement but fleeting in its interests — may not always know what makes the best content for a more substantial series… returns are unreliable in a marketplace where even established services suffer at the hands of a capricious audience”.

In film, new possibilities arise in the form of ticket-booking innovation. While TV is recycling old ideas of content and engagement, these new tactics look to push the industry onward. This month through January 17, New York’s MOMA hosts a Robert Altman retrospective. One of his seminal films, The Player, shows in some ways how far the film industry has come, and in others how we haven’t moved on at all. The New Yorker wrote a brief feature on the retrospective. It’s insightful enough to quote at length, below:

“In the opening shot of “The Player,” from 1992, Robert Altman makes an explicit attempt to outdo Orson Welles’s famous opening to “Touch of Evil.” He has the camera zoom in and out, track left and right, pan one way and the other, and, before a cut finally comes, pick up with most of the major characters of the film. The scene also situates “The Player”—a movie about a studio created on a Hollywood studio lot—in film history, with passing references to silent film, forties genre work, the sixties, and, finally, the Japanese, who were then moving in on Hollywood, and are seen looking the studio over.

When it came out, “The Player” was regarded as a scorching attack on greedy and unimaginative Hollywood: in the film, the industry’s shining past surrounds the executives at the studio and shames many of them. Twenty years later, the huge profits from big-Hollywood movies—digital fantasies based on comic books and video games—have washed away that shame. The executives in “The Player” have stories pitched to them constantly by writers, and then they say yes or no. They don’t consult the marketing division on what will sell in Bangkok and in Bangalore. The thing that Altman may not have anticipated was that one would be able to look back at the world of “The Player” with something almost like nostalgia.”

Firefighting at Sony

Sony’s ‘The Amazing Spider-Man 2’ made a cool $700m+ at the global box office for the studio and its parent company. Elsewhere, the news for Sony was less rosy.

We’ve written about Sony multiple times over the years, rarely in a good light. A parody Twitter account of the company’s CEO, Kazuo Hirai, often makes for entertaining reading. The company can’t seem to catch a break.  Its latest financial results, released today, warned of a $2.2bn loss for the financial year, the sixth loss in seven years. For the first time since 1958, the company will not pay a dividend. Much of the blame fell to the ailing smartphone division, which generates a fifth of the company’s revenue, but other businesses hurt the conglom too. The company loses $80 on every TV sold; rumours abound they will sell the Spider-Man franchise back to Marvel for a quick payday; the one bright light, Playstation, which took the company into the black in Q2, is beginning to seem risky, as customers look beyond single-use devices like games consoles, a trend we spotted back in January last year. (Earlier this week, Microsoft continued to hint that it might spin off the Xbox business). Sony recently spun off its TV division into a subsidiary and sold its PC business. These actions in turn were supposed to bear fruit, but clearly haven’t.

Much of the difficulty Sony faces was elaborated on in detail in a brilliant profile of then-CEO Sir Howard Stringer for The New Yorker, back in 2006. Little has changed since then. In today’s FT, the newspaper outlines the longevity of Sony’s heartache.

*

June 1999 Nobuyuki Idei becomes chief executive. Four years later he presides over the infamous Sony “Shokku”, or shock, in which the group surprised investors with a profits warning.

June 2005 British-born Howard Stringer becomes chief executive, the first foreigner to lead Sony with a mandate to restore profitability and turn the core electronics business round.

September 2005 Sir Howard’s first major restructuring initiative outlines a plan to cut staff numbers by 10,000, or 7 per cent, and reduce costs by Y200bn. It will also close 11 manufacturing plants, streamline its number of products and generate capital from asset sales. “We must be like the Russians defending Moscow against Napoleon, ready to scorch the earth to stay ahead of the invaders. We must be Sony United and fight like the Sony warriors we are,” he says.

December 2008 A second wave of restructuring begins with plans to cut 16,000 full-time and part-time jobs in its electronics businesses around the world.

2011 Sony downgrades its net income forecasts four times.

March 2012 The group highlights its digital imaging, game and mobile units as the three core pillars of its electronics business.

April 2012 Kazuo ‘Kaz’ Hirai takes over as chief executive. Sir Howard says he will be a “tough-mind[ed]” leader. The first restructuring under Mr Hirai is outlined under the banner of “Sony will change”. Sony will shed 10,000 jobs, or about 6 per cent of its global headcount, over the next three years.

March 2013 The group reports its first full-year net income in five years.

October 2013 Sony warns on profits.

January 2014 Moody’s cuts Sony rating to junk.

February 2014 Plans to spin out the television business and sell the Vaio PC business are announced.

May 2014 Sony warns on profits for the third time in six months.

July 2014 The group surprises the market by swinging into profit for the second quarter.

September 2014 Sony warns that its expected annual net loss will be nearly five times as big as initially predicted at Y230bn.

On past and future innovation – Disruption, inequality and robots

How to define innovation, how has it been studied in the recent past, and what does future innovation hold for the human race?

Sometimes the word innovation gets misused. Like when people use the word “technology” to mean recent gadgets and gizmos, instead of acknolwedging that the term encompasses the first wheel. “Innovation” is another tricky one. Our understanding of recent thoughts on innovation – as well as its contemporary partner, “disruption” – were thrown into question in June when Jill Lepore penned an article in The New Yorker that put our ideas about innovation and specifically on Clayton Christensen’s ideas about innovation in a new light. Christensen, heir apparent to fellow Harvard Business School bod Michael Porter (author of the simple, elegant and classic The Five Competitive Forces that Shape Strategy) wrote The Innovator’s Dilemma in 1997. His work on disruptive innovation, claiming that successful businesses focused too much on what they were doing well, missing what, in Lepore’s words, “an entirely untapped customer wanted”, created a cottage industry of conferences, companies and counsels committed to dealing with disruption, (not least this blog, which lists disruption as one its topics of interest). Lepore’s article describes how, as Western society’s retelling of the past became less dominated by religion and more by science and historicism, the future became less about the fall of Man and more about the idea of progress. This thought took hold particularly during The Enlightenment. In the wake of two World Wars though, our endless advance toward greater things seemed less obvious;

“Replacing ‘progress’ with ‘innovation’ skirts the question of whether a novelty is an improvement: the world may not be getting better and better but our devices our getting newer and newer”

The article goes on to look at Christensen’s handpicked case studies that he used in his book. When Christensen describes one of his areas of focus, the disk-drive industry, as being unlike any other in the history of business, Lepore rightly points out the sui generis nature of it “makes it a very odd choice for an investigation designed to create a model for understanding other industries”. She goes on for much of the article to utterly debunk several of the author’s case studies, showcasing inaccuracies and even criminal behaviour on the part of those businesses he heralded as disruptive innovators. She also deftly points out, much in the line of thinking in Taleb’s Black Swan, that failures are often forgotten about, and those that succeed are grouped and promoted as formulae for success. Such is the case with Christensen’s apparently cherry-picked case studies. Writing about one company, Pathfinder, that tried to branch out into online journalism, seemingly too soon, Lepore comments,

“Had [it] been successful, it would have been greeted, retrospectively, as evidence of disruptive innovation. Instead, as one of its producers put it, ‘it’s like it never existed’… Faith in disruption is the best illustration, and the worst case, of a larger historical transformation having to do with secularization, and what happens when the invisible hand replaces the hand of God as explanation and justification.”

Such were the ramifications of the piece, that when questioned on it recently in Harvard Business Review, Christensen confessed “the choice of the word ‘disruption’ was a mistake I made twenty years ago“. The warning to businesses is that just because something is seen as ‘disruptive’ does not guarantee success, or fundamentally that it belongs to any long-term strategy. Developing expertise in a disparate area takes time, and investment, in terms of people, infrastructure and cash. And for some, the very act of resisting disruption is what has made them thrive. Another recent piece in HBR makes the point that most successful strategies involve not just a single act of deus ex machina thinking-outside-the-boxness, but rather sustained disruption. Though Kodak, Sony and others may have rued the days, months and years they neglected to innovate beyond their core area, the graveyard of dead businesses is also surely littered with companies who innovated too soon, the wrong way or in too costly a process that left them open to things other than what Schumpeter termed creative destruction.

Your new boss

Outside of cultural and philosophical analysis of the nature and definition of innovation, some may consider of more pressing concern the news that we are soon to be looked after by, and subsequently outmaneuvered in every way by, machines. The largest and most forward-thinking (and therefore not necessarily likely) of these concerns was recently put forward by Nick Bostrom in his new book Superintelligence: Paths, Dangers, Strategies. According to a review in The Economist, the book posits that once you assume that there is nothing inherently magic about the human brain, it is evidence that an intelligent machine can be built. Bostrom worries though that “Once intelligence is sufficiently well understood for a clever machine to be built, that machine may prove able to design a better version of itself” and so on, ad infinitum. “The thought processes of such a machine, he argues, would be as alien to humans as human thought processes are to cockroaches. It is far from obvious that such a machine would have humanity’s best interests at heart—or, indeed, that it would care about humans at all”.

Beyond the admittedly far-off prognostications of the removal of the human race at the hands of the very things it created, machines and digital technology in general pose great risks in the near-term, too. For a succinct and alarming introduction to this, watch the enlightening video at the beginning of this post. Since the McKinsey Global Instititute published a paper in May soberly titled Disruptive technologies: Advances that will transform life, business, and the global economy, much editorial ink and celluloid (were either medium to still be in much use) has been spilled and spooled detailing how machines will slowly replace humans in the workplace. This transformation – itself a prime example of creative destruction – is already underway in the blue-collar world, where machines have replaced workers in automotive factories. The Wall Street Journal reports Chinese electronics makers are facing pressure to automate as labor costs rise, but are challenged by the low margins, precise work and short product life of the phones and other gadgets that the country produces. Travel agents and bank clerks have also been rendered null, thanks to that omnipresent machine, the Internet. Writes The Economist, “[T]eachers, researchers and writers are next. The question is whether the creation will be worth the destruction”. The McKinsey report, according to The Economist, “worries that modern technologies will widen inequality, increase social exclusion and provoke a backlash. It also speculates that public-sector institutions will be too clumsy to prepare people for this brave new world”.

Such thinking gels with an essay in the July/August edition of Foreign Affairs, by Erik Brynjolfsson, Andrew McAfee and Michael Spence, titled New World Order. The authors rightly posit that in a free market the biggest premiums are reserved for the products with the most scarcity. When even niche, specialist employment though, such as in the arts (see video at start of article), can be replicated and performed to economies of scale by machines, then labourers and the owners of capital are at great risk. The essay makes good points on how while a simple economic model suggests that technology’s impact increases overall productivity for everyone, the truth is that the impact is more uneven. The authors astutely point out,

“Today, it is possible to take many important goods, services, and processes and codify them. Once codified, they can be digitized [sic], and once digitized, they can be replicated. Digital copies can be made at virtually zero cost and transmitted anywhere in the world almost instantaneously.”

Though this sounds utopian and democratic, what is actually does, the essay argues, is propel certain products to super-stardom. Network effects create this winner-take-all market. Similarly it creates disproportionately successful individuals. Although there are many factors at play here, the authors readily concede, they also maintain the importance of another, important and distressing theory;

“[A] portion of the growth is linked to the greater use of information technology… When income is distributed according to a power law, most people will be below the average… Globalization and technological change may increase the wealth and economic efficiency of nations and the world at large, but they will not work to everybody’s advantage, at least in the short to medium term. Ordinary workers, in particular, will continue to bear the brunt of the changes, benefiting as consumers but not necessarily as producers. This means that without further intervention, economic inequality is likely to continue to increase, posing a variety of problems. Unequal incomes can lead to unequal opportunities, depriving nations of access to talent and undermining the social contract. Political power, meanwhile, often follows economic power, in this case undermining democracy.”

There are those who say such fears of a rise in inequality and the whole destruction through automation of whole swathes of the job sector are unfounded, that many occupations require a certain intuition that cannot be replicated. Time will tell whether this intuition, like an audio recording, health assessment or the ability to drive a car, will be similarly codified and disrupted (yes, we’ll continue using the word disrupt, for now).

Hollywood & China – “To fight monsters we created monsters”

“The film market in China is like an experimental supermarket – with more and more racks but only one product… The viewers don’t care what they see as long as it’s a film. They’ll watch whatever is put in front of them.”

– Zhang Xiaobei, CCTV

LA is “a favourite place for Chinese businessmen to do business”, according to the objective opinion of China’s general counsel to Los Angeles. And that was back in 2011, before China extended its annual quota of foreign films allowed to be exhibited on the mainland. We’ve written before about the relationship between Hollywood and China, which in the two years since we wrote that piece has only deepened. It’s little wonder; EY has predicted China will be the largest film market in the world by 2020. Revenue is being squeezed in the film industry as millennials hang out on their smartphones and games consoles. When they do pay for movies, it’s more likely to be streamed rather than owned. Worse, that stream may be hosted by someone like Netflix, whose burgeoning clout makes negotiations for license fees increasingly difficult. So China provides a timely cash cow; an antidote to Western media fragmentation and fatigue. But at what cost?

China’s economic rise to superpower status has logically meant a rise in its viability as a place to invest in. From infrastructure, where cinemas screens have been springing up at the unbelievable rate of seven a day (as of May this year), to co-productions between Hollywood and homegrown Chinese outfits. These collaborations have resulted in overt references to China in storylines, such as that seen in The Mummy: Tomb of the Dragon Emperor, The Karate Kid and the Kung Fu Panda franchise, or the additional scenes filmed for Iron Man 3. This also includes the more recent Transformers: Age of Extinction, which saw not only a large part of the film take place in Hong Kong, but also included local talent and featured a mind-boggling amount of inappropriate product placement from Sino brands. The few production companies in China are also expanding, looking beyond more traditional propaganda fare, as well as to foreign markets, as is the case with China Film Group.

But the film industry in China is not quite as rosy as it appears. Interestingly, there have been few efforts at US talent getting involved in Chinese productions. This may be partly due to the mess that was The Flowers of War, starring Christian Bale, which was reportedly little more than a propaganda piece. And from a content point of view, caution has been the watchword for studios; The producers of World War Z removed a discussion over whether the zombie apocalypse started in China; Chinese villains were edited out of Pirates of the Caribbean: At World’s End and Men in Black 3. Is that really necessary? And while scripts are edited to appear more appealing to China, so are balance sheets. For while Transformers 4 is now China’s highest-grossing movie of all time, according to The Hollywood Reporter, what THR don’t mention was the way the gross is measured. For, says Julie Makinen, a China correspondent for the Los Angeles Times, box office revenue is arbitrarily inflated. She elaborates,

“I think everyone agrees there’s some fudging that goes on… It’s fairly common to go into a theater, say, ‘Hi, I’d like to buy a ticket for Transformers,’ and they say, ‘Great,’ and they print out your ticket for a local romantic comedy. So I’m pretty sure the 20 bucks I just handed over is being counted in someone else’s basket. Things like that happen; a lot of statistics in China are suspect.”

Moviegoers aren’t being particularly discriminating yet because the act of going to the cinema as an event or experience is still a relatively new phenomenon for many. Product placement, which we referred to earlier, while an opportunity for some synergy between film and brands, risks being too commercial and overt if done without context. A recent article in the Financial Times said such promotions in Transformers 4 quickly “start flying faster than bullets from an Autobot’s wrist-mounted Gatling gun”. Apart from bringing viewers out of the fictional narrative into reality, creating a disappointing experience, inappropriate product placement can also cause ire between businesses. (We’ve written several times over the years about product placement, here.) Such an occurrence took place at the end of July when a tourism group in China sued Paramount Pictures for failing to show a logo of the park that the company had paid to be prominently displayed in the movie. The implementation of co-productions between the two countries evidently needs work too. Scenes added exclusively for a Chinese version of Iron Man 3 added little except some questionable product placement as well as the dubious plotline of Tony Stark heading to China, of all places, for medical convalescence. Lastly, the current quota of films to be exhibited in China means that many good-quality US films fail to be seen in the country. Much like bans on US games consoles and the Android app store, Google Play, the result of this has been an explosion of home-grown imitators. In this case, films in China are made that precisely mimic the formula and set-up of popular American franchises like The Hangover, which was never seen by Chinese audiences, thus the extent of emulation isn’t evident. Assuming that eventually the quota will be entirely relaxed, this type of tactic can only ever be a short-term measure.

One of the greatest opportunities the film industry in China has is in part due to one of its greatest weaknesses. Because of historically protracted release windows, and a narrow selection of films making it to cinemas, piracy has been rampant. Indeed, infringement has been widespread enough that the industry has had seemingly no choice but to innovate. We reported back in April how China has relaxed its embargo on foreign games consoles, and, more to the point, how Tencent, in partnership with Warner Bros., were making the latest 300 film available to rent, while the film was still in cinemas in the US. Such forward-thinking is welcome. As well as offsetting any losses from piracy, it also hopefully points the way to a more open business environment in China, at least for TMT companies. Such innovative thinking will need to be extended, however, to the structure of China’s film industry itself, which is reportedly a vertically integrated engine driven almost entirely at the whim of the state.

Just as China’s tastes have held increasing sway over the production of art and wine in recent years, so with film. The middling global box office performance of Pacific Rim found salvation in Asia, and that was all the justification needed for a franchise to be developed. There is certainly much to be gained from investment and co-productions in China’s films industry, especially while it is still relatively nascent, not least of which are the financial returns. How such relationships impact the content itself is another matter. Hopefully some of the approaches China is taking with regard to multi-platform releases might even trickle over to Western markets. Studios should also be wary about putting all their eggs in one basket; CNBC reports that growth in ticket sales for Hollywood films in mainland China hit a five-year low in 2013. Only three US movies made the top ten highest-grossing films in China last year, down from seven in 2012. One reason for the slowdown is a lack of variety. And yet don’t expect the blockbuster formula to change anytime soon; as much as it was born in the USA, it is also what audiences in the worldwide market love to gobble up. (Michael Bay’s films – expertly dissected in the above video – prove that point no end, and it has been particularly driven home recently as Bay himself as well as sometime employee Megan Fox have expressed nonchalance about any negative press from critics, knowing their products make millions despite nasty reviews. Specifically, actress Fox told naysayers to “F*ck off”.) There is a certain amount of momentum behind the two industries’ relationship with one another, but recent productions have shown that future projects should perhaps be treated with a little more caution, particularly as Chinese audiences tastes mature. Last month the film historian Neal Gabler was quoted in the Financial Times, in a point that usefully sums up this piece,

“The overseas market has changed the DNA of American movies… The bigger-faster-louder aesthetic is very deeply embedded in the American psyche. No one else can do it. It’s one of the reason they export so well. It’s so much a part of who we are. But we have been victims of our own success. It’s a Catch-22. The things that make our movies so popular overseas are now larger than the American market can support by itself.”

UPDATE (30/8/14): The production side of the industry continues to evolve, as China’s largest video website Youku Tudou demonstrated on Friday when it promised to produce 8 films for cinema release and 9 to premiere on the internet. Chairman and Chief Exec Victor Koo pointed out to the Financial Times that there was a gap in the market left by Hollywood, “The US film industry is highly developed. It tends to be either blockbusters or franchise films. But in China you’re talking about small to mid to large budgets…”. The logistics of creating a film for online release – more than likely to be consumed on a smartphone – must consider important limiting factors such as, according to Heyi Film chief exec Allen Zhu, smartphones in China running films get “very hot after 20 mins”. Youku Tudou’s plans may seem ambitious – particularly given it reported a $26m loss for the second quarter – but when 18 screens are erected in China every day (last year more cinema screens were added in China than the total in France), it seems a risk some are willing to take.