Tinseltown Follies

It was funny at the time. “There were a lot of big movies this year,” Steve Martin noted in his opening patter at the Academy Awards in March. “Now, I loved The Lord of the Rings; that was a great downloa—sorry—um, theatrical experience … ”

The line drew laughs, but it was the kind of nervous laughter that masked discomfort and, for anyone in the auditorium that night who wasn’t in deep denial, the disquieting sensation that it was one of those handwriting-on-the-wall moments. While studio executives have been busy gloating over their impressive 2002 numbers—global revenues up 18 percent from 2001 to $37.3 billion, including soaring DVD sales, up 82 percent—there is considerable anxiety about the future. Hollywood has watched in fascinated horror as the music industry has been derailed by Internet downloads and CD copying. Warner Bros. claims that 800 million fake CDs are sold annually, a third of legitimate sales, at a domestic loss of $10 billion.

The record companies are losing customers because they haven’t embraced new ways of giving them what they really want: cheap, instant gratification. Given a new-CD price tag of $15 or more (close to the cost of a DVD loaded with extras), more and more people are—with no apparent pangs of conscience—getting in the habit of grabbing free music off peer-to-peer file-sharing sites like LimeWire and Kazaa and burning their own CDs.

The music industry, which recently filed suit against four college students who ran music-sharing Websites, has given Hollywood a precious gift: a road map not to follow. Yet so far the studios are going down the same route. The digital age makes the global dissemination of a movie as easy as the click of a mouse. Though downloading a movie is still a frustrating time suck, that will change quickly; the technology for getting a movie in seconds already exists. “Most movies are on the Internet days before they open,” says Sony Corp. of America chairman and CEO Howard Stringer. “And they are no longer simply made from digital cameras in a theater; they’re very sophisticated.”

Studio executives tend to regard downloaders, copiers, and DVD hackers as common criminals who need to be dragged into court. So what if their enemy is just your average college geek with a high-speed connection—who also happens to be the core audience for movies (18-to-25-year-olds). And downloaders increasingly include people like Peter, 54, the founder of a successful Internet database, who boasts with boyish glee that he downloaded The Pianist off Kazaa over Christmas because, he says, “I didn’t have time to go to the theater; I wanted to watch it at home on my laptop.” And 15-year-old Ben, who admits that he and his school chums spend their afternoons watching downloaded Kazaa movies, many of them copies of “For Your Consideration” Motion Picture Academy DVDs. He even has 8 Mile on his iPod. “So many people are doing it now,” Ben says, “that I feel it’s all right. Most people think they’ll never get caught.” The MPAA estimates that $3.5 billion was lost to global piracy last year.

“We spend hundreds of millions producing, marketing, and distributing movies,” Fox Filmed Entertainment co-chairman Jim Gianopulos told theater owners at March’s Showest exhibitor convention in Las Vegas. “But we can’t compete with free. That’s an economic paradigm that doesn’t work. If films are stolen, it’s the death knell of our industry.”

The MPAA’s Jack Valenti is working in Washington to get legislation that will make reproducing copyrighted material and hacking encrypted devices illegal. And the studios are setting their best technological minds to the task of inventing a silver bullet (digital rights management, or DRM) to protect the content that runs on the new devices from being reproduced.

But consumer-electronics lobbies are putting up mighty resistance, and so are consumers themselves. After a recent tour to spread the anti-piracy gospel at college campuses, Valenti became “disconsolate,” he admits, when he found that many kids “refuse to stop what they are doing.” Fox has filmed a slick PSA to run in theaters, in which Ben Affleck, Lucy Liu, George Lucas, James Cameron, Ridley Scott, and M. Night Shyamalan beg audiences to do the right thing. “There is no free lunch,” There’s Something About Mary director Peter Farrelly says grimly to the camera. “If people keep taking for free, movies will cease to exist.”   Or maybe, you can just hear strapped-for-cash downloaders thinking, James Cameron will have to take a less Titanic-size cut of his next megahit, and Ben and J.Lo might have to stop buying houses.

Fighting online downloads through a “Just Say No” campaign seems downright delusional. What might be threatened is the current fat-cat Hollywood system, which spends money like water and churns out more crap than quality. The studios are already battling piracy by opening more movies on the same date all over the world. But they must also be willing to make movies available for download, at a competitive fee, much sooner. The more people get into the habit of taking that free lunch, the more home-video and DVD revenues—the post-theatrical markets that now make most movies profitable—will plunge.

“If home-video revenues drop 30 to 40 percent,” says Fox Searchlight distribution president Steve Gilula, “how many movies will move from profitable to unprofitable?” Fewer profitable movies will lead to layoffs and spending cutbacks. And under duress, the studios will get even more conservative about avoiding risk in favor of safe formulas. On the other hand, the deep industry depression in the sixties forced the studios to venture into the last great fertile creative-moviemaking decade: the seventies.

Whatever happens, the industry is on the verge of its greatest change since the advent of sound. To its credit, Sony, an innovative hardware and content company, two years ago created Movielink, a video-on-demand Internet service. “It’s a defensive gesture on the part of our industry that we need to make,” Stringer said when he announced the service. “Otherwise, there’s no point to making either movies or music.”

But Sony delayed the launch of Movielink in order to coax four other studios to join it. Stringer easily persuaded Universal and MGM; he also wooed Warner Bros.’ influential then–home-video czar Warren Lieberfarb, who in turn pulled in Viacom-Paramount’s foot-dragging Jonathan Dolgen.

At this point, few people have heard of Movielink, which offers PC users with Internet Explorer just 320 titles, at $2.95 to $4.99 a download (the movie is erased from your desktop 24 hours after you start to play it), including limited classic and foreign titles and “new” movies available only during the brief pay-per-view window some six to eight months after their theatrical release. Each home-video-quality download takes from 20 to 40 minutes.

Movielink barely competes with the independent CinemaNow service (which boasts 700 mostly B-titles and better-looking “streaming” into the Windows Media Player, as well as an “After Dark” section), much less with Kazaa. For $18 a year, even a Mac user can download just about any movie off Kazaa well before it hits the multiplex. After a few months, even the “new” movies move from Movielink to pay-TV channels like HBO or Showtime.

Inside studio suites, executives are hashing out future scenarios as division heads fight for turf. But several top executives admit that the solution to the problem is right in front of them: Give audiences what they lust for—cheap downloads whenever and however they want them.

“Technology let this genie out of the bottle,” says digital-media consultant Chris Dorr. “On-demand this and that. The question is whether the studios figure out a way to deal with it. They have to view it as not only a threat but a promise.”

“You can’t go back and change the past,” adds Warner Bros. technology guru Chris Cookson. “You have to try to get a solution as soon as possible.”

Wait too long, and an awful lot of people are going to get used to just saying yes to watching movies at home. For free. That will be a very tough habit to break.

Tinseltown Follies