TMT Trends 2017 – Oscars Oversight, MWC Mediocrity, Publishing Problems, M&A Mistakes Avoided

Nostalgia as the name of the game

Nostalgia has been the name of the game for many in the world of TMT [technology, media, telecommunications] for a couple of years now, as TV series are rebooted and eras brought back to life (think Fox’s The X-Files and Netflix’s Stranger Things, FX’s The Americans respectively), movie franchises are retooled (think Kong: Skull Island, Beauty and the Beast) and books also drag people back to the 80s (think Entertainment Weekly’s number 1 book of 2016, The Nix).

Nostalgia is almost certainly an appealing emotion for many media executives today too. In entertainment, they may look back to fond days before PwC screwed up who won an Oscar and who hadn’t; in technology, vendors are leveraging “digital detox” trends as an excuse to remake old products and in publishing many are surely screaming for the days before digital, when staff at the likes of Conde Nast were still allowed to throw “hissy fits” (to quote British Vogue’s Lucinda Chambers from the recent BBC documentary on the magazine). The empire is having to fast come to grips with a world of declining print revenue shared by all in the industry, as comprehensively covered in a recent piece by the Financial Times.

The one outlier to this trend, fortunately for them, is Viacom, which recently decided that instead of seeking refuge in the past (and in sheer scale) by re-teaming with CBS after splitting over ten years ago, it would instead streamline its operations down to six “flagship brands”. Undoubtedly the wiser move (if only based on the above cheat sheet from The Hollywood Reporter).

This article will focus on those first two issues, last weekend’s Academy Awards and last week’s Mobile World Congress event in Barcelona.

Oscars oversight

Talk about your burning platform. Last night Zeitgeist sat down to watch Deepwater Horizon, last year’s film an avoidable disaster in an event involving a lot of due diligence, seemingly little of which was executed properly.

So it was – far less catastrophically – with the 89th Academy Awards last weekend. PwC were caught out for the first time, having overseen the awards ceremony’s handing out of winning envelopes, among other things, for 83 years. In their apology, the firm explicitly made reference to the fact that a) such an incident had been foreseen b) protocols had been prepared, in case of such a rare eventuality c) these were not followed through quickly enough on the night. As with many cases of significant error, the fault appears to be with an excess of comfort.

• Firstly, PwC as a firm, it could be argued, had become too comfortable in the role of auditor. In an interview before the ceremony with one of the two partners involved, it was revealed the opportunity to be auditor for the awards had never gone out to tender. This is poor due diligence on the part of the Academy.
• Secondly, Brian Cullinan, one of the PwC partners, seemed himself to have acquired too much comfort with his role. Whether this was tweeting (hastily deleted) pictures of Emma Stone at the moment he should have been concentrating on his work (see picture above), as Variety revealed, or – as the same publication also uncovered the other day – that he wanted to have an on-stage presence, involving a skit with the host, Jimmy Kimmel.
• Thirdly, we would also add that – having worked for Deloitte in a strategy role in days gone by – PwC should never have let these two individuals stand in the limelight. Any project, however glamorous (or not), should always have only one face, that of the company as a whole, not an individual.

The eventual winner, Moonlight, was praised by The Economist (among many others) for being a wonderful film, and one that deserved to win the coveted Best Picture award. Interestingly, it noted how it had been made for “a tenth” of the budget of films that had won in the past several years. This is a worrying trend, as these prior winners were already considered to be of a small budget; minnows that did not attract the attention of the studios, who increasingly find themselves in the comic-book franchise game, rather than the Oscar race. It bodes poorly in the medium-term for the release and backing of films that try to tell human stories about real life; art that may actually have an impact on others. It is these types of films that, with current political turmoil, are needed right now.

MWC mediocrity

Innovation in mobile is becoming harder and harder to come by. If, as Forrester reported recently, smartphones are in the hands of 40% of the global population (even including those people hanging out with penguins in icy tundras and running away from lions on barren plains) then such a product is in need of something new to differentiate the market for consumers. At the annual Mobile World Congress, such things were in short supply. This week’s Economist quoted Ben Wood of CCS Insight summarising the event as a “sea of sameness”.

Indeed, ZTE (as above), had a gloriously twee “fairy garden” on display, which seemed very very similar to the one we saw at MWC in 2016. From a product point of view, Nokia (yes, Nokia) seemed to generate the most buzz for its revamped 3310, a resurrected product from a bygone mobile age. A feeling of sameness hung in the air from those reporting from the ground too; cynicism was prevailing.

Last year, Zeitgeist found that if you didn’t have Oculus at your stand (for any reason, no matter how inconsequential), you were a nobody. You also needed to be talking about 5G (no matter how vaguely). The same seemed to be the case this year, except more so. This, despite the fact that Oculus has squandered an eighteen-month lead in the market, now with a position of third in the VR marketplace by revenue. VR in general has yet to transfer to a mainstream pursuit, to the surprise of analysts. 5G, on the other hand, saw some glacial movement. While operators in Japan and South Korea had already begun investment and deployment of the networks before standardisation, the UN’s ITU body has now set those standards, laying the way for other markets to begin upgrading their networks. Their challenge is a formidable one, and to be honest they should not expect it to be anything other than a thankless task. Their main approach to this eventuality at the moment seems to be bigging the technology up beyond all recognition, which has started a backlash of sorts among the more experienced in the sector.

Trends, threats and opportunities in the film industry

“In the 1950s… 80 per cent of the audience was lost. Studios tried many ways to win back this audience, including new technologies such as Cinerama, but none of these worked. What did work was to view the entire business as basically an intellectual properties business where they optimised on as many platforms as possible. That’s the business today.”

– Ed Epstein

Strategy is something that this blog has in the past accused the film industry of lacking, particularly when it comes to issues of development (over-leveraging risk with expensive tentpoles) and distribution (a lack of progressive thinking when it comes to day-and-date openings across platforms). This piece takes a look at how, in some areas, there are kernels of hope for the industry, as well as some specific areas that are ripe for improvement.

Given our initial contention, It was refreshing to discover this gem of an illustration (see top image) from none other than Walt Disney himself that was recently recovered from the archives, according to Harvard Business Review, showing “a central film asset that in very precise ways infuses value into and is in turn supported by an array of related entertainment assets”; all that’s missing is the strategic goal. Such forethought, of complementary assets combining to drive value, is arguably a symptom of the much-ballyhoed “synergy” and convergence the industry has undergone over the past ten to fifteen years; here was Walt writing about in 1957. The HBR article contends that it is not just synergy that is important, but in identifying those areas where you possess “unique synergy”. Disney’s current state, with Pixar, Marvel and Lucasfilm as content production houses, is an impressive pursuit of such a unique synergy, helped in no small part by having the impressive Bob Iger at the helm. The recent announcement of a Han Solo origin story, with the pair behind 21 Jump Street attached to direct, would have been to music to many a filmgoer’s ears. Unfortunately, the danger of undue risk from arranging a surfeit of tentpole releases remains, and is unlikely to be challenged while films such as Tomorrowland tank and Jurassic World soar. A brilliant piece on the evolution of the summer blockbuster, featured in the Financial Times recently, can be found here.

The film industry in China is a subject we last wrote about around a year ago. It’s a booming scene out there (last year China added as many screens as there are in all of France), which despite a quota on foreign film has proved enormously profitable to Hollywood. And while some films have had to seek opaque deals that ensure the inclusion of Chinese settings and talent in order to get the thumbs up for exhibition in China – e.g. the latest iteration of Transformers – others pay scant attention to such cultural pandering, and meet with similar success. In June, the Financial Times wrote that Furious 7 had no Chinese elements, but still managed to break “all-time box-office records since its release in China in April, taking in almost $390m”. Importantly, the figure beat the US’s taking of $348m. China is due to be the largest movie market in the world in less than three years. As we have written before, part of this is due to the cultural interest in moviegoing; people will see pretty much anything in China while the experience is still new and tantalising. While good for revenues, it does imply that content produced will be increasingly skewed – at least for a while – to lowest common denominator viewing that titillates rather than stimulates. The sheer volume of takings for such fare is ominous; of the fastest films ever to reach $1bn globally at the box office, three are from this year. China has played no small role in this development.

However, all is not as rosy as it could be. Traditional players in the industry are wary of new entrants. Domestic companies Baidu, Alibaba and Tencent, YoukuTudou and Leshi have either partnered with studios for exclusive distribution deals over online platforms – irking the exhibitors – or simply investing in developing their own studios and content production. The FT writes, “[c]ollectively, these internet firms co-produced or directly invested in 15 films in 2014, which earned more than Rmb6bn ($965m) at the box office last year – a fifth of total receipts… Industry participants worry that these internet giants may soon seek to cut them out of the equation altogether“.

How to respond to such disruption? Well, they might for a start take a step up in their customer engagement management, from developing more complex segmentation to encouraging retention, whether it be to a particular studio or a particular cinema. At a simple level, this might mean things like not revealing the twists of films in the trailer. At a more complex level, it might involve working with social networks, perhaps even some of the very ones otherwise considered as competitors, listed above, to gain Big Data insights that can better inform messaging, targeting and identification of high-value users. Earlier this year, Deloitte worked with Facebook to produce a piece of thought leadership that looked to do just that, helping telcos with what was defined as “moment-based”, dynamic segmentation, with initial work and hypothesis from Deloitte and their Mobile Consumer Survey correlated against Facebook’s data trove. Using different messages over innovative channels, for example on WeChat, would also likely prove fruitful. Luxury brands, long the laggards in digital strategy, have recently been making headway in customer engagement via such methods. Looking further ahead, they might also consider how their “unique synergy” will be positioned for future consumer trends. The Internet of Things is set to fundamentally change the way we go about our lives, including the relationship businesses have with their customers. How will it impact movie-going and people’s relationship with the cinema? For all the global talk on the impact of such devices, the film industry has yet to develop any coherent thinking on it. One bright area is the subject we mentioned at the beginning of our article; collapsing release windows. Paramount announced earlier this month they have reached an agreement with two prominent US exhibitor chains, Cineplex and AMC, to “reduce the period of time that movies play exclusively in theaters” to just 17 days for two specific films, according to The Wrap. It’s not clear what financial (or otherwise) incentives the theater chains received for such a deal.

So while the threat of disruption is ever-present – as it is for so many industries around the world right now – there are ample opportunities for studios and exhibitors to up their game, through better targeting, better communication, better distribution deals, and, just maybe, better product.

Threats and Opportunities for the Entertainment Industry in 2014

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*Our 2015 trends for the sector can be found here*

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At the start of a new year, what to make of the entertainment sector? It depends where you look. One thing is for certain though; at the close of 2013 that old laggard the music industry upstaged its media cousins. For sheer daring and innovative nous, few initiatives could claim to beat Sony in its launch of Beyoncé’s new album. In the face of increasingly ailing streaming services, the album was released as a fixed bundle on iTunes, with no marketing behind it. The news of the release thus came as a last-minute surprise to the industry and consumers alike, creating a short but extreme burst of anticipation. The artist posted a message on Facebook saying she wanted to recreate the “immersive experience” she used to have listening to music. The album sold 80,000 copies in three hours. It is difficult to envision Sony’s film division at Columbia Pictures doing anything similar.

Near the end of last year, Zeitgeist was fortunate enough to be able to attend the 5th Annual GlobeScreen Conference at London’s May Fair Hotel. Eve Gabereau, the co-founder and MD of Soda Pictures lamented “nurturing a film is not possible any more… there is less opportunity for a film to find its audience”. Word of mouth, she said, had to be very good, and happen very quickly, in order for it to have an effect. Simon Crowe, founder and MD of SC Films International, disagreed with another speaker, who asserted that filmmakers were being hampered by a lack of data, in that they did not know who they were making films for. He dismissed the need for data, and, most worryingly, stated the primary focus should not be on the bottom line. This is dangerous thinking. Films may be art, but if the medium is to continue then it needs to be profitable. So the primary focus has to be ‘How will this product turn a profit?’. Zeitgeist asked him afterward about the viability of VOD (video-on-demand) as a channel; Crowe was not optimisitic about its future as a significant revenue producer, calling films that have found success on such platforms – such as Arbitrage and Margin Call – outliers. Zeitgeist offered that Netflix had not been considered a significant distribution channel for a while, until suddenly it was. Did he foresee a similar situation with VOD? “Don’t know”, was his retort. It was well worth staying late to receive such gems as answers. The whole conference spoke of an ignorance of the insight data can provide, a shunning of profit-focused management, and a general yearning for bygone times when the industry – not to mention the champagne and other substances – was flowing more freely.Such anecdotal frustrations found company in the form of hard data. To cap off 2013, Business Insider published an article entitled ‘The US 20: Twenty huge trends that will dominate America’s future’. Number 16 was ‘Old Hollywood is dead…’. It noted that inflation-adjusted box office receipts were down around 8% from their 2004 high (see chart). Industry trade mag Variety reported recently that UK box office fell 1% in 2013, which was the first drop in ten years and the biggest in more than twenty. Of course, part of the reason for this was because 2012 had a rather suave helping hand from James Bond, in the form of Skyfall. When Zeitgeist prodded Cameron Saunders, Managing Director of 20th Century Fox UK, about the news over Twitter, he was quick to leap to into the fray, noting that it was “still the second biggest box office year on record”. He also went on to concede though that “UK admissions however have flatlined, despite lots more films = fewer people seeing each movie”. The same scenario is happening in the US. China is one of the few bright spots in the world of film, and has seen an explosion in the number of physical screens installed in the country over recent years. But even the Chinese film industry has medium to long term challenges it will need to overcome, if, as some predict, it is to become the world’s largest film market – overtaking the US – by 2019. It is still at the mercy of a government with strict controls and vague whimsical notions about what makes for permissible content; the state is involved at almost every level of production and distribution. Moreover, though the quota on foreign releases in the market has been relaxed slightly, it is by no means open season for Hollywood. In much the same way as the banning in China of Google’s app service and videogames consoles led to poor knock-offs, so with film. The restrictions have spawned poor remakes of American films that didn’t see a release on China’s shores, which inspires little creativity or excitement.

It was not all doom and gloom in the cinema of late of course. Gravity continues to light up screens across the world, and seems poised to do well come Oscar night. Its only obstacles come in the form of other films that critics and audiences have been similarly impressed with this season, including 12 Years a Slave and Captain Phillips. But such artistic achievements can hardly make us forget what was a poor summer for the film industry. We have written before about how films in development are increasingly either mega-blockbusters or niche arthouse films. Producer Kevin Misher, talking to The Economist last month, echoed our thoughts; “Hollywood is like America: the middle class has been squeezed”. The article went on to lament the unique situation the film industry finds itself in, relying on outsiders for both ideas (“imagine if Apple or Toyota did this”) and funding.

Will more content producers partner up with those infringing intellectual property?

The challenges extend further. Though Kodak suffered from other problems too, one of the things that prevented it from ever laying down a long-term strategy to embrace digital photography was the revolving door of executives at the top. Hollywood is similarly afflicted. In the past 18 months, according to The Economist, four of the six main studios have seen change at the top. Perhaps some longevity in senior roles would have encouraged these companies to embrace new ways of delivering films to eager customers. Instead, most films, particularly the ones glutting the summer schedule, still cling to an outdated distribution strategy of staggering releases across platforms. Studios resist doing this – save for the odd arthouse release – because it risks the ire of exhibitors. We’ve written before about the antiquated nature of such thinking. Every delay in getting to a consumer increases the chances that customer will resort to piracy. Companies like Netflix are reporting that intellectual property rights infringement dips once legal alternatives are made available to people; there are signs of hope.

Piracy is of course playing a role in television, too. In Poland, consumers have to wait months after the US broadcast for their dose of Homeland. It is thus one of the more popular shows to be pirated. Making the most of this trend, a publishing company responsible for a new book detailing Carrie’s life before the start of the series has been inserting adverts into the subtitles for the show. The MD of the publishing company told TorrentFreak, “We decided to advertise via subtitles because we wanted to show the book to all the fans of the Homeland series in Poland, no matter where they watch the show”. You can’t argue with placing a promotion for where you know your likely customers are. It will be interesting to see if any other unlikely coupling between pirates and content producers emerge. For, as amusing as this news is, it does point to a fragmentation in audiences, and thus in places for advertisers to reach them. It should have come as little surprise then when, last month, the Financial Times reported that TV’s share of advertising spend will slip this year, after three decades of uninterrupted growth. Jonathan Barnard, ZenithOptimedia’s head of forecasting, warned, “After television ad spending has grown pretty consistently for at least the last 35 years… there will be quite a lot of disruption to come over the next 10 years.”

Of course, disruption will come to other sectors of the entertainment industry, too. This was apparent at the recent Consumer Electronics Show in Las Vegas, where Samsung and Sony, among others, held court. It wasn’t the best of showings for Samsung, where famed producer / director Michael Bay walked out seconds into a presentation on curved televisions after the autocue failed. Sony had its disruptor product to tout, a cloud TV service. Beyond the glitz and glam of such new product releases, a big question remains: Can Sony use what assets they have and combine them effectively? A great article in the FT probed deeper, asking whether all these new products and services – we would be remiss were we not to mention the PS4, currently outstripping the Xbox One in sales – can be successfully integrated into an ecosystem that Sony is desperately trying to create. The corporation dabbles in film distribution, film production, smartphones, music as well as videogames and is slowly trying to tie them all together. All this while seemingly trying to disrupt itself, with cloud gaming doing away with the need for a console and image projectors doing away with the need for physical screens (Sony loses about $80 on every set it sells currently). As the article concludes,

“[CEO] Mr Hirai is trying to pick up the pace as Sony searches for its digital destiny. But the familiar questions remain: can it execute on the plan, how fast can it move – and how much pain is it prepared to take along the way?”

Where next for Sony?

Certainly if companies like Samsung and Sony wish to succeed in the coming years, they will have to do away with the obsession of focusing on hardware. It is plain now that, in consumer’s eyes, technology has reached a tipping point where the specifications of an object are no longer a unique selling point; they are a redundancy. This became clear at the Mobile World Congress in 2012, when PC Magazine published its event wrap-up under the headline “The End of Specs?”.

There are some companies that are embracing disruption, or at least, trying to hire those who started it in the first place. Disney, which often seems to have a strong strategic head on its shoulders, recently made the eminently sensible move of hiring the chairman of Twitter Jack Dorsey to join the Walt Disney board. This was no isolated occurrence for Disney, who had previously had Steve Jobs on the board and who have also hired Facebook COO Sheryl Sandberg. Elsewhere, the canny Weinstein brothers, who rarely miss an opportunity to make impressive artistic works that turn a decent profit, reteamed with their old company Miramax to develop further iterations of their film library. Seeing the opportunity for increased creativity in television, as well as new channels like Netflix and Amazon, they will also be developing new television series. And while online takes away advertising spend from other channels under the promise of reaching the right people at the right time, new local television development in the UK promises to do similar as it targets localised areas. Still, the film industry as a whole seems to be outright resisting any changes to the calendar; schlock in the summer sun, followed by arty pretense come Oscar time. Repeat. A writer in the New York Times elaborates,

“And then, after the Oscars, the machine picks up speed and starts excreting ghastly product like Oz the Great and Powerful, one of the worst movies of 2013 and the eighth highest domestic grosser of the year. Then the fall hits, and we cling to movies like Gravity and insist that, really, it isn’t all bad. And it isn’t, of course, even if creating a Top 10 list is finally an exercise in exceptionalism.”

The worry is that any shift in the schizophrenic nature of film scheduling and creation will probably involve at least a short-term hit to the bottom line. And a recent dismissal hints that no such shift is underway at the moment. In October, the great James Schamus of Focus Features was let go by Universal. Schamus was instrumental in bringing director Ang Lee to the US, distributing his Crouching Tiger, Hidden Dragon before going on to make The Pianist, Far From Heaven and Brokeback Mountain, among many other extraordinary films. Doug Creutz, senior media and entertainment analyst for Cowen & Company, told the New York Times in December,

“The major media companies are so big that nothing but a blockbuster really makes sense. Say you make a low-budget comedy and it brings in $150 million. So what? That doesn’t move the needle. You make a blockbuster… You can do the sequel and the consumer products and a theme park attraction. The movie itself is almost beside the point. All Disney is going to be doing is Marvel, Star Wars and animation.”

That would be a great shame for those who like artistic diversity, as well as sensible financial returns, in their film studio output. Current business models seem to be producing diminishing returns. This is true for videogames, movies and music. Experimentation, such as that by Sony’s music division mentioned at the beginning of the article, must be more widespread to engage with new consumer habits and to rekindle jaded minds. Consumer engagement and feedback as a whole is largely missing from much of the strategy with which the entertainment industry steers itself. Shareholder returns and operational logistics occupy most of their time. A far more rigourous approach to data – collecting and analysing it – and a more open ear to one’s customer base, might prove beneficial.

The next ‘Ishtar’: Is the film industry nearing “implosion”?

“A legendary disaster… a cascade of dysfunction”; can the film industry avoid future Ishtars?

This post serves as a companion piece and extended update to our previous article on rethinking film industry strategy, which can be found here.

“For me, the business of tentpoles is about generating franchises. The more tentpoles that are being made, the more risky the first installment of a potential franchise is going to be. That’s why I think everybody needs to be asking hard questions about what is a real tentpole and what is a faux tentpole.”

– Jean-Luc De Fanti, managing partner at Hemisphere Media Capital

Since our last post a few weeks ago on the need to rethink film industry strategy, when Steven Spielberg publicly predicted an “implosion” in the industry, the subject remains in the zeitgeist. As we referenced in our last post, Mr. Spielberg has some familiarity with the industry’s modus operandi, having created the blockbuster phenomenon way back in the 70s with Jaws. Like a mutant in a film of that genre though, the nature of blockbusters has changed since then. Jaws, were it made today, would look very different (i.e. terrible). Despite Mr. Spielberg’s warnings, studios presumably took some comfort in an animated sequel – Despicable Me 2 – becoming, in the words of NBCUniversal chief Steve Burke, “the single most profitable film in the 100 year history of Universal Studios”, more than E.T., Jurassic Park, etc. Not only did it paint a picture of an industry continuing to grow (though presumably the figure did not take inflation into consideration), it must have also quietened any further calls for originality, safe in the knowledge that it was a pretty lowbrow sequel that had triumphed.

The caveat is a large one though, that any proponents of summer blockbusters need to pay close attention to. Despicable Me 2 has made £437 million so far, with a production budget of just £50 million. While on the surface then Despicable Me 2 seems to prove how successful and profitable summer movies can be, it actually provides a lesson in what commercial success can look like with a small-budgeted film. Instead, the rule of thumb during the summer is more likely to involve investing some $200m+ in a film that fails spectacularly – think The Lone Ranger. Though this Disney production is the most visible disappointment of the season, it is by no means alone. The New York Times count “six big-budget duds since May 1“. It is interesting to note that Now You See Me, “the kind of midrange film that studios have largely abandoned as they focus more on pictures that play globally — has taken in $200.4 million worldwide and is still playing”, after costing $75m to make.

Those responsible try to spread the blame. Johnny Depp and producer Jerry Bruckheimer absolved themselves of wrongdoing for their involvement in The Lone Ranger by blaming the critics. Said Depp, “They had expectations that it must be a blockbuster. I didn’t have any expectations of that”. Yet it is easy to see how one might assume the film – created at such expense, with ripe intellectual property to be exploited, with talent involved in the phenomenally successful Pirates of the Caribbean franchise – had all the appropriate ingredients to make it a blockbuster. Studios meanwhile harp on about Twitter, which lets people instantly share their thoughts on a film and is now considered a worrisome bellwether for box office potential. But this is a reaction to poor filmmaking, not a reason why a bad film exists in the first place. They also cite a tight calendar. As The New York Times elaborates, “One or more cinematic behemoths — those loaded with similar-looking computer-generated effects, films that cost $130 million to $225 million to make — have arrived almost weekly since May, fragmenting and fatiguing the audience”. Again, this is no one’s fault but that of the industry. The idea of launching films in a specific time window, when consumers now enjoy time-shifting and device-shifting with their content, is antiquated. It is just as irrelevant in winter, when back-to-back “prestige” films clutter cinemas, desperate for Oscar attention. It is overwhelming for audiences, reduces choice, and in the case of the winter season implies that the voting member of the Academy have no long-term memory.

Just how many times can we see the White House being blown up?

The summer product is so derivative that evidently audiences are pushing back, showing indifference to the “clones” that feature so prominently at Comic-Con. Films are either direct sequels / reimaginings, or strongly resemble other recent projects. Again, The New York Times has an excellent article on this, elaborating,

“Studios showcased another Amazing Spider-Man, another Cloudy With a Chance of Meatballs, another Avengers, another Thor and another Captain America… In addition to Godzilla, remakes teased here in recent days included RoboCop… and Riddick,… Even many of the original movies introduced at Comic-Con this year had a been-there-done-that feeling to them, notably Legendary’s sword-and-sorcery picture Seventh Son, which co-stars Jeff Bridges, Julianne Moore and Ben Barnes. In thundering snippets of footage shown on Saturday, the movie at times resembled Clash of the Titans, Snow White and the Huntsman and The Chronicles of Narnia: Prince Caspian.”

Cheering news for Sony came last week when it announced a $35m profit in the last quarter, but turbulence lay beyond that. In our last post, we mentioned the imbroglio that Sony found itself in as investor Daniel Loeb – whose hedge fund owns roughly 7% of Sony – continued to urge Sony to spin off its entertainment assets. Last week, he wrote a third letter to Sony – the most aggressive yet, with the Financial Times calling it “blistering” – comparing the film division’s two recent duds After Earth and White House Down to Ishtar and Waterworld (two of the floppiest flops to ever flop). He wrote that the CEO, Kazuo Hirai was sitting by complacently while the film division remained “poorly managed, with a famously bloated corporate structure, generous perk packages, high salaries for underperforming executives and marketing budgets that do not seem to be in line with any sense of return on capital invested”. It was with some interest then that, this past Friday, Zeitgeist saw that none other than George Clooney had stepped into the fray, calling Loeb an “activist” who “knows nothing about our business”. He lambasted the hedge fund industry in general, saying “if you look at those guys, there is no conscience at work”.

Clooney added that the “climate of fear” Loeb was creating would lead to even more risk-averse productions. It is creative, rather than financial risk, that Hollywood is sorely in need of. Art doesn’t engage audiences when it is timid and derivative. It inspires people when it is innovative, daring and different. Usually such creative thoughts do not spring forth from the mind of a hedge fund manager. Such new thinking – involving a review of a market research firms say is suffering from “overcrowding” – will require a significant course correction, one that is not going to come anytime soon. The summer slate for 2015 currently includes a Terminator sequel, an Avengers sequel, a Smurfs sequel, Independence Day 2 and Pirates of the Caribbean 5.

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.

Shut that Window – On platform release dates for movies

Speaking of Disney, the film wing is in the news today for its proposals to release Tim Burton’s 3D extravaganza “Alice in Wonderland” early on DVD, i.e. in less than four month’s after its theatrical release, a date reached by gentlemen’s agreement betwixt studio and exhibitor. In return, major exhibitors are planning to boycott the release of the film unless Disney backs down. Zeitgeist has reported on the narrowing of release windows and its implications before. Variety, and the following day the FT, have more.

UPDATE: In related news, Ridley Scott Associates are planning with Philips to premiere select films online. The tide is definitely turning toward a time when a film is released simultaneously on multiple platforms.

UPDATE: Odeon cinemas will not be showing “Alice in Wonderland”, according to the BBC.

UPDATE: Odeon cinemas WILL be showing “Alice in Wonderland”, according to the BBC.