What businesses can learn from the movies

What businesses can learn from the movies

William Shanklin Professor of Marketing & Entrepreneurship, Kent State University, Kent, Ohio

Now playing in Business Horizons! A look at the movie industry’s epic struggle to cope with one technological challenge after another. Reeling from the advent and huge popularity of wireless tellevision in the mid-20th century, the motion picture business slowly made a comeback, only to be

buffeted by successive waves of revolutionary

technotogies-co!or TV, cable and pay TV, VCRs,

PCs, the Internet, and DffD players. Time and

again, this venerable institution that thrives

on “make believe” has dealt with the harsh

realities confroflting it.

“Analysts have been interring the movie indusn-y almost since its birth. ‘I’he funeral choir was enormous after I’V took wing, and swelled again as tapes and tape players swept the world aerials. Ditto when cable snaked through the streets and bounced around the world from satellites. Yet last year movie box ofice revenue was among the greatest ever. Only bad movies can kill the movie business. Great movies will always pack ‘em in. So long as the world turns, so will movie reels.”

-Malcolm S. Forbes, 1987

C onventional ways of doing business are being rad- ically transformed by advances in information and communication technologies. Indeed, it is hard to

imagine any establishment that has not been affected. Stockbrokers, banks, universities, mortgage lenders, insur- ance companies, and a host of others are forced to do business differently than only a few years ago. The US Postal Service even proposed canceling Saturday mail delivery because of the business it has lost to e-mail.

Prior to the great dot-corn crash on the Nasdaq in March 2000, some purported experts held that a paradigm shift was at hand: Net-based businesses were the wave of the future. In these revolutionary online “concepV companies, earnings did not matter in valuation-or so the thinking went. Anyone who had lived through, or care- fully researched, past bubbles knew better.

In a new economy, dot-corns would presumably replace many of the ponderous bricks-and-mortar companies, which would be unable to combat faster and more effi- cient online competitors. Microsoft’s Bill Gates talked of a new genre of “friction-free capitalism” whereby the Net would streamline business transactions by eliminating middlemen, a process he referred to as “disintermedia- tion.” Early in the dot-corn era, for instance, popular sites like Yahoo! were spectacularly successful in bypassing advertising agencies to solicit business directly from companies. But Yahoo! has been forced to change and become like conventional media in having to court agencies for a share of their clients’ advertising expenditures.

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With the implosion of the dot- corn sector, companies began to view e-commerce as a modus operandi for enhancing their businesses, rather than thinking of online firms as discrete entities. Webvan, the erstwhile online gro- cer, became one of the Internet economy’s most monetarily costly bankruptcies because its founders tried to replace actual stores where customers could handle merchandise and make price comparisons. No doubt there is a market for online grocery shopping, but not enough demand to support a stand-alone business. Even the vaunted Disney Company found that the Walt Disney Internet Group was unable to make it as a separate entity and consequently folded the tracking stock for the Group back into the parent company’s common stock.

For the preponderance of execu-

Table 1

Jifkxts of the commercialization and diffusion of television on US movie theater business, 1950-1980

HOUSeholds Box ofice Admissions Year with a TV set gross (BM) (millions) 1950 10% 1,379.0 3,017,s 1960 87% 984.4 1,304.s 1970 95% 1,429.2 920.6 1980 98% 2,748.S 1,021.S

Source: Motion Picture Association of America Warldwide Market Research

Table 2 Effects of the growth of cable television on US movie theater business, 1970-2ooo

Households with Households with Box office Admissions Year basic cable pay cable gross [$M) (millions) 1970 7% L429.2 920.6 1980 23% 2,748.S 1,021.S 1990 59% 29% 5,021.8 1,188.G 2000 67% 33% 7,GGl.O 1,420.8

Source: Motion Picture Association of America Worldwide Market Research; Nielsen Media Research

tives struggling with how to fuse new information and communication technologies into their companies, in lieu of having the companies be superseded by them, the movie industry in the United States provides a valuable historical perspective. From the silent movie era until about 1950, “going to the movies” was America’s favorite way to be entertained. Then came wireless television, cable television, and eventually videocassette recorders that made it possible for people to watch taped and rented movies in the convenience of their homes. These innovations threatened to do to the movie business, particularly theaters, what motion pictures had done to vaudeville. Until the emergence of television, more than two-thirds of the American population attended the movies at least once a week, whereas fewer than 10 percent do so today.

Nevertheless, the movie industry has proved to have the proverbial nine lives in surviving technological threats. Arguably, no enterprise has been more buffeted by oppo- sition from new technologies, and still survived and pros- pered. How has this happened?

The ebb and flow of Hollywood fortunes

I n a few short years after the commercialization of wireless television, the movie theater business was eviscerated by the public’s embrace of the newfangled

entertainment invention. As shown in Table 1, TV had

immediate and devastating results for both movie theater admissions and revenues. Between 1950 and 1960, the percentage of homes owning a TV set soared from 10 percent to 87 percent, while theater attendance plummeted from more than 3 billion admissions to 1.3 billion. Gross receipts from theater box office sales dropped from almost $1.4 billion to $984 million.

When these box office revenue and admission declines are adjusted for inflation and population growth, respectively, they are much worse than the absolute amounts indicate. The box office dollar sums do not reflect inflation and the admission totals do not account for the fact that more people were available to attend movies in each consecu- tive year because of population growth.

Throughout the 1960s and into the 197Os, movie admissions maintained a downward trajectory. By 1980, their number had reversed course, although the 1980 total was still 66 percent below the attendance level for 1950. After 30-some years of television, Americans’ fascination with the medium had subsided somewhat and people were increasingly venturing outside their homes for entertainment. What’s more, the motion picture industry, which had been a monopoly in the days before television, had become proficient in battling for business.

The spread of cable television, beginning around 1970, undoubtedly dampened movie theater attendance, but not to the same extent as wireless television in the 1950s and 1960s. Table 2 shows that the percentage of homes with basic cable TV rose from 7 percent to 67 percent between

24 Business Horizons / January-February 2002

Table 3 EH’ects of household usage of VCRs, PCs, and the Internet on US movie theater business

Year Households Households Households Box ofice Admissions

with VCR with PC with Net access gross (BM) (millions) 1980 2.4% 2,748.5 1,021.5 1985 27.3% 3,749.4 1,056.l 1990 70.2% 23.5% 1.7% 5,021.B 1,188.G 1995 79.5% 34.0% 9.5% 5,493.5 1,262.5 2000 86.2% 63.0% 52.0% 7,GGl.O 1,420.B

Source: Motion Picture Association of America Worldwide Market Research; Nielsen Media Research; US Census Bureau

Table 4 Condition of the US motion picture industry in an era of proliferating DVTI players, VCRs, PCs, and Internet usage

Sales of pre- Number of Total New films recorded videos

Year screens employment released to dealers 1990 23,689 407,700 410 241.8M 1995 27,805 487,600 411 522.4M 2000 37,396 630,800 478 701.7M

Source: Motion Picture Association of America Worldwide Market Research

1970 and 2000; by the end of the century, 33 percent of all households also subscribed to pay cable TV. Nevertheless, movie theater attendance rose by 55 percent in this 30-year period, while box-office receipts more than quintupled.

Technological challenges for Hollywood

H &h-tech innovations have dramatically changed the way people work and play. Three blockbusters are videocassette recorders, personal computers, and

the Internet. Not only does the modem household average running a lV set more than seven hours per day and 51-

plus hours per week, many people also spend countless hours at home playing movies on a VCR, performing tasks on a computer, and surfing the World Wide Web.

Table 3 shows that as of the end of 2000, 86 percent of American households owned a VCR, which represented a threefold increase in 15 years. PC ownership by households and Net access at home also accelerated. The number of households owning a PC grew from 23.5 percent in 1990 to 63 percent in 2000. Similarly, households with Net access soared from 9.5 percent in 1995 to 52 percent by the close of 2000, and Web traffic has been doubling every nine to twelve months.

Unlike in the early days of television, movie theaters have been able to augment their admissions and revenues

despite, or perhaps because ot new technologies. For example, although VCRs enable people to watch taped or rented movies at home, which erodes theater business, the flip side is that VCRs also foster interest in movies and there- by create new patrons for viewing first-run features at cinemas. Dur- ing the 199Os, US box office revenues at theaters grew by nearly 53 percent, theater attendance reached the highest level in 40-plus years, admissions per capita rose from 4.5 to 5.2, and the total number of theater screens grew from 23,689 to 37,396.

DVD technology is demonstrating how quickly a fresh delivery sys- tem can boost sales. Even in their infancy, DVD players have spurred a marked increase in movie studio receipts for home videos because they have become the fastest- growing new entertainment for- mat ever. Between 1997 and 2000,

the number of DVD players shipped to dealers jumped from 350,000 to 8.5 million, the software units went from 10.8 million to 182 million, and movie titles available for use with the players exploded from 600 to 8,000.

The Net has also generated interest in movies. Chat rooms and Web sites that focus on individual movies, actors, and the Academy Awards all cultivate word-of-mouth communication. The low-budget horror film “The Blair Witch Project” became a box office hit after it became one of the hottest topics on the Web. The film’s makers and their alleged accomplices were accused of faking many of the glowing reviews that appeared on the numerous fan sites for the movie.

Another factor contributing to the healthy condition in the film industry is that the Motion Picture Association of America (MPAA) has moved aggressively to combat the pirating of movies. In 2001, it sent warnings to Internet service providers (ISPs) and universities for violating the Digital Millennium Copyright Act of 1998 by enabling people to trade movies over the Gnutella file-sharing sys- tem. The MPAA hired Ranger Online, a firm offering Inter- net intelligence and surveillance, to search the Web for instances of copyright infringement.

As shown in Table 4, sales of prerecorded rental videocas- settes to dealers almost tripled during the 199Os, and the motion picture industry boosted the number of films it released annually by nearly 16.5 percent. Employment in all sectors of the industry (production and services, the-

What businesses can learn from the movies 25

aters, video rental, and miscellaneous) rose by 55 percent between 1990 and the end of 2000.

To be sure, all is not well. Since 1995, screen growth has outpaced attendance growth. Customer demand lured major theater chains into pursuing a “Field of Dreams” philosophy of “build it and they will come.” Too many

Companies take a dismissive posture toward emerging competitive technologies at their own peril.

theaters were constructed, particularly the megaplexes with as many as 30 screens. Now there is an oversupply of theaters showing the same basic fare. Household names like United Artists and General Cinemas have sought bankruptcy protection, and a shakeout in the number of movie theaters is under way.

Nevertheless, the widespread incorporation of VCRs, PCs, the Net, and DVD players into American lifestyles has not caused the same deep attrition in theater attendance and box-office gross that occurred in the wake of wireless television. In fact, the opposite is true.

Lessons from Tinseltown

T he ebb and flow of movie theater fortunes over the last half century implies three directions for executives-regardless of industry-who are wrestling

with how to handle technologies that threaten their products, services, and established business models.

1. Don’t underestimate a new technology. Like most entrenched industries, Hollywood in its heyday reacted mostly with denial and hubris when confronted with new technologies. “Who the hell wants to hear actors talk?” said Harry M. Warner of Warner Brothers Pictures in 1927. Years later, with the advent of television, Warner refused to show a TV set in any of his motion pictures. In 1946, just before television became the most sensational entertainment innovation in history, Darryl E Zanuck, then head of 20th Century Fox Studios, prophesied that “Video won’t be able to hold onto any market it captures after six months. People will soon get tired of staring at a plywood box every night” (The Experts Speak 1984).

As depicted by these anecdotes, companies that dominate their industries are likely to underestimate potential rival technologies because the new technologies are typically rough at first and it is not readily apparent that they will ever be perfected enough to be sold successfully in the marketplace. The earliest versions of xerography certainly would not have struck fear in the hearts of mimeograph executives; the first PCs were unsophisticated devices for hobbyists; and so it was and is with most revolutionary technologies. A study by Steven Schnaars (1994) of how markets accept products and services based on new technologies found that 40 years expired before 35mm cam- eras gained commercial acceptance; 20 years went by before microwave ovens made inroads; and 15 years elapsed before the demand for telephone answering machines exploded.

Companies take a dismissive posture toward emerging competitive technologies at their own peril. Andrew Grove, Intel’s chairman, summarized his advice for dealing with continual and unpredictable technological change by entitling his book on the subject Only the Pura- noid Survive (1996). While this is a sound admonition, the fact is that most companies do not, in actual practice, give adequate concern to being displaced by possibly superior products and services. Typically, as demonstrated by Cooper and Schendel’s classic 1976 study in Business Horizons, the superior technology is pioneered outside the threatened industry. When Schnaars investigated how technologies or product innovations were initially com- mercialized in 28 industries, he discerned that the pre- dominant pattern was for a small firm to pioneer the market. Then, after it became clear that an incipient technology would be lucrative, a large company would come into the market and displace the trailblazing firm. This pattern held true in 19 of the 28 industries, ranging from CAT scanners to projection television.

2. Co-opt new technology. One place for a company to start in contending with a disruptive technology is to try and figure out ways to accommodate it in order to augment the core business. This “If you can’t beat ‘em, join ‘em” strategy focuses on how to make the company’s offerings stronger by embrac- ing rather than resisting new technology. VCRs allowed viewers to duplicate copyrighted movies with impunity, but they also opened up a mammoth after-market for films initially shown in theaters. Televised movies detract from theater business, but create a demand for movies. Today, studios make most of their profits from the sale of ancillary rights for video, television, and toys based on movie characters, rather than from theatrical releases.

A speaker at a conference for business school professors was waxing eloquent about how his university’s MBA con- centration in e-commerce was the wave of the future, the


model for teaching tomorrow’s business leaders. A skepti- cal and more seasoned professor in the audience asked the speaker whether, if it were a century earlier, his younger colleague would have recommended offering a business curriculum with a focus on how to use the telephone. The point-that the Net is just another communication tool-is proving to be valid. Enrollment in once oversubscribed e-commerce courses at such leading business schools as Stanford, MIT, and Northwestern has declined dramatically, and “e-education” is being absorbed into the general curriculum. During the dot-corn heyday, Stanford’s e-commerce elective was the most popular offering; a year later there were plenty of empty classroom seats to be had for the asking.

The conundrum for most companies is to figure out how best to integrate e-commerce into their operations-to combine rather than supplant bricks with clicks. The companies excelling now are the ones that never looked on their physical assets as being hindrances or even dinosaurs, but rather searched for ways to enhance the effectiveness of bricks-and-mortar facilities through e-commerce. GE was late in undertaking an e-commerce initiative, but moved rapidly after a top-level management meeting in January 1999 that then-chairman Jack Welch entitled “Destroy Your Business.” (GE’s Aircraft Engines unit adopted the Web address www.destroyyourbusiness.com.) The company is saving billions of dollars by digitizing work pro- cesses and billions more by conducting Web-based auc- tions among its suppliers. And Global exchange, its huge business-to-business commerce network, operates private supply networks for clients such as Target and 3M. Another important thrust of GE’s Internet efforts is marketing over the Web and improving customer service. The company expected to sell $15 billion worth of products and services via the Net in 2001, compared to $7 billion in 2000.

3. Improve the core product. The movie industry has managed to survive attacks from various competing technologies over the years because it fought back with better offerings, although belatedly in the emerging days of television. While the argument is often made that today’s movies, with their emphasis on explicit sex and violence, are not as good as the more wholesome movies of a half-century ago, the fact remains that R-rated content has succeeded in attracting growing numbers of customers and boosting box-office revenues. In addition to producing movies with commercial appeal, the industry has vastly improved the creature comforts of movie theaters, while advanced acoustics and picture quality make for an experience that cannot be duplicated by watching a movie on a TV set. (The approaching changeover to high- definition television, or HDTV, will narrow the gap.) Cur- rently, although revenues from sales and rentals of video- cassettes and DVDs are more than two-and-a-half times

theater box office revenues, the movie theater business is still a mammoth enterprise because the industry has refused to concede its retail business.

Likewise, organizations endangered by modem technologies may be able to mitigate the effects on their core products and services by refining them. Professional sports teams are building plush new stadiums and arenas to deliver an entertainment ambience of sights, sounds, and smells that cannot be approached by radio and television accounts. Colleges and universities will surely lose stu- dents who actually study on campus, as the convenience of distance-learning technologies proves compelling-a trend that can be tempered only by providing a more rewarding on-campus experience. Retailers in malls will not be done in by Internet competitors as long as shopping for many people continues to be a process that entails browsing and handling merchandise, or provides an opportunity for just getting out of the house for a while. The Mall of America in Minneapolis is such a mag-

VCRs al/owed viewers to duplicate copyrighted movies with impunity, but they also opened up a mammoth after- market for films initially shown in theaters.

net that air travelers with ample time between flights are offered shuttle service to the huge shopping and entertainment complex.

The satisfaction derived from casually browsing in a fine bookstore cannot be matched by online vendors. Personal interchange with a caring physician or a gifted teacher is impossible to replicate with various forms of electronic interaction. And the impact of a grand slam home run has special magic when you see it in a packed stadium and hear the roar of the crowd.

Whenever possible, companies should exploit the inher- ent weakness of sterile technology. An advertisement for FLEXJET aircraft, makers of Lear-jet and Challenger, deftly promotes the value of face-to-face business meetings: “A smile and a frown sound exactly the same over a speaker- phone.. . .Some things just can’t be communicated over fiber optic cable. n

What businesses can learn from the movies 27

II H

istory is not, of course, a cookbook offering pre-tested recipes, * former US Secretary of State and Harvard professor Henry

Kissinger once reflected. “It teaches by analogy, not by maxims. It can illuminate the consequences of actions in comparable situations, yet each generation must discover for itself what situations are in fact comparable. w

The ongoing trials, tribulations, and successes of the movie industry in dealing with opposing technologies, beginning in its earliest days, offer parallels and guide- lines for industries and businesses in this new century. The glamorous enterprise whose mantra is “Lights, cam- era, action! * has plenty to convey to conventional businesses about coping with new technology. 0

References and selected bibliography

Cooper, A., and D. Schendel. 1976. Strategic responses to technological threats. Business Horizons (February): 61-69.

Epstein, E.J. 2001. “Final Fantasy” may lack plot or actors, but it has a goal: Sell PlayStations. Wall Street Journal (13 July): Wl.

The experts speak: 7’he definitive compendium of authoritative misin- formation. 1984. Comp. Christopher Cerf and Victor Navasky. New York: Pantheon Books.

Gates, W., III. 1999. Business @ the speed of thought. New York: Warner Books.

1995. 7’he road ahead. New York: Viking Penguin. Grove,‘A. 1996. Only the paranoid survive: How to exploit the crisis

points that challenge every company and career. New York: Cur- rency Doubleday.

Harrington, A. 2001. E-curriculum: Easy come, easy go. Fortune (16 April): 410.

Peltz, M. 2001. And the winner is . . . . Worth (May): 29-30. Schnaars, S. 1994. Managing imitation strategies. New York: Free

Press. ShankIin, W. 2000. Creatively managing for creative destruction.

Business Horizons (November-December): 29-35.


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What businesses can learn from the movies