Hollywood's Digital Dilemma

This article first appeared in the April 2002 issue of the Convergence Report

By Chris Manners

Hollywood clearly has a love/hate relationship with digital technology exemplified perhaps the most by blockbusters such as The Matrix. This movie, in particular, demonstrated the film industry's dilemma - on the one hand it was packed with high-end digital special effects, but on the other hand the plot is a study in cyber paranoia. Technology and machines are something to fear. No, wait. Actually, technology is pretty cool. It's no coincidence that the very technologies that made the film possible are the same developments that Hollywood is having a hard time coming to terms with. And it's not only movies that are confused about technology, network television is in on the act with shows like CSI and The X Files that both use and, at the same time, are frightened of the technological domain.

The irony is that movies and television are both completely dependent on high-end digital technology to develop both the actual production and the action-packed promotional materials that draw the fans into seats. Interestingly enough, this disconnect mirrors Hollywood's economic quandary: while the entire industry has much to gain from digital technology, the industry is completely hung up on what it has to lose.

But What Are The Benefits?
New advances in filmmaking are already providing the ability to shoot, edit, and deliver movies all digitally. This revolution will benefit studios by allowing for the creation of virtual sets and actors, while eliminating the formerly prohibitive cost of film and its storage. At the same time, the creative process can be enhanced by removing the interruptions during shooting that occur when film must be reloaded, while also allowing for the immediate playback of shots on set to ensure that the director has been able to capture the exact look that's required.

Forward-thinking directors such as George Lucas and Steven Soderbergh have already jumped onto the digital bandwagon. Digital prints of Soderbergh's latest movie, Ocean's Eleven, were released by Warner Bros. And Lucas is already creating an all-digital production of his latest film in the Star Wars series, Revenge of the Clones. In fact, at last year's NAB (National Convention of Broadcaster) in Las Vegas, Lucas announced that he'll "never, ever produce another film on film." The latest installment is being shot on a Sony high-definition DV camera.

Amusingly enough, for all his love of things digital, Lucas himself has been bitten by the new technologies. Shortly after Star Wars I: the Phantom Menace was released, a re-edited bootleg of the film appeared on the Web. This version, dubbed Star Wars Episode 1.1: The Phantom Edit, cut numerous scenes (including all of those with the infamous Jar Jar Binks), removed weak dialog and generally tightened up the movies' storyline. Needless to say, this kind of audience empowerment that digital technology provided did not go down well with Lucas. While he wasn't too worried initially, as soon as momentum built up around the re-edited version of the film, the corporate machine rolled into action and quickly snuffed out the unauthorized re-edit.

Concurrently with the advances in digital filmmaking, studios and broadcasters are working out ways to deliver content to TV sets and computers digitally. This digital distribution may be able to provide instant availability in the home and the opportunity to eliminate middlemen such as movie theaters, Blockbuster, and HBO. However, there still will be a need for some kind of partnership deals for distribution - AOL and Viacom could be the main vehicles in the future. While the studios are working out how to offer feature films for downloading online, it's apparent that the initial user experiences will be fairly unsatisfactory. The films will appear in a tiny rectangle on screen and will potentially be jerky and subject to audio dropouts. The experience has been described as part of the "lean forward experience" in the industry, and may end up taking a long time to reach critical mass online.

It will certainly take a few years before a full-screen movie can be downloaded and played on a computer in real time, let alone interacted with as some pundits expect from the future. Nonetheless, some forms of digital distribution are already in existence and are providing Hollywood with additional forms of revenue - pay-per-view is already available in many homes through many of the satellite and digital cable networks. Naturally Microsoft is trying to horn in on this newly developing "market," as is Real Networks. Both companies are trying to develop secure formats for delivering content online while simultaneously creating business models that will, hopefully, make their online offerings so easy and cheap that viewers will chose to use them rather than track down pirated copies. Already, two joint ventures for online distribution have been announced: Movies.com (from Walt Disney Co. and 20th Century Fox) and Movielink (from Sony Pictures Digital Entertainment, Warner Bros., Universal Pictures, Paramount Pictures and Metro-Goldwyn-Mayer).

Movielink, which was announced in August 2001, will create an open-access IP-based system for content delivery, and the studios will supply movies to the service on a non-exclusive basis. Each studio will determine its own release dates and pricing structures. Movielink is planned to be available only in the United States, but with over 10 million broadband households, the studios think it's time to strike while the iron is hot and create an online video-on-demand digital distribution channel in spite of the threat of piracy. Jupiter Media Metrix has recently posted results of research regarding video-on-demand (VoD) services, and concluded that they will harm current cable pay-per-view services. Jupiter, which said the U.S. VoD market will grow to $641.9 million by 2006, believes that the majority of consumers will come from the pay-per-view audience instead of from video rental or box office audiences.

At the same time, the Wall Street Journal recently reported that the U.S. Justice Department was performing a low-key investigation on the movies-ondemand industry for possible antitrust violations - an issue that the DOJ is already examining with the new online music subscription services. At issue is the question whether the joint-venture services are being used to block potential rivals in the online-movie business. The government wants to know whether the studios are refusing to let outside service providers license their content, or if they are trying to use the partnerships to lock out competition and boost fees. Although no subpoenas have yet been issued, the department has already queried potential competitors Intertainer and Blockbuster.

There's Always a Downside
Just as any cloud has a silver lining, any time an industry is lining its pockets with silver, there's a cloud - in this case the ease of digital duplication. Hollywood's chosen approach to regulating new cinematic technologies is to act through the courts and stifle copyright threats by tying up any "threatening" technological advances.

The studios are scared about their ability to control distribution in the future. Most of the major studios belong to conglomerates that include record labels, and they've been unable to stop supposedly rampant copying and distribution via the Web. In the meantime, Hollywood continues to be concerned with video piracy - some reports estimate the annual losses due to illegal copying to be as much as $250 million in the U.S. and $2.5 billion worldwide. And digital formats frighten the studio honchos even more because there's no degradation of quality with a digital copy - at least analog VHS copying produces an inferior product. So the doomsayers claim that digital video pirates could saturate the black-market with inexpensive exact duplicates of digital materials and completely cut the profits out from under the industry.

Because of these dangers, Hollywood is beating a path to the courts. The DVD Copy Control Association - the trade organization that controls the licensing of the encryption technology on DVDs - has already taken legal action against 21 people in multiple countries for posting a program, DeCSS, that lets users decrypt DVDs and copy them. And while the organization won its court case, the DVD-cracking software had already been released and dispersed.

What Else Could Possibly Go Wrong?
In addition to the online threats to it's established distribution model, Hollywood is now trying to strong-arm the cable and satellite operators, who are making big strides in the effort to deliver digital video to the mass market. With the release of DVRs (digital video recorders) such as the ReplayTV 4000 from SonicBlue, affordable DVD recorders, and D-VHS devices, viewers are now able to digitally record broadcast television shows and movies. This development has the industry up in arms, and they're attempting to try to restrict consumers' right to record what's broadcast on TV. Compounding the problem there are companies like ShowShifter, SnapStream, and CyberLink that are already marketing software that lets PCs digitally record TV broadcasts, even HDTV.

One solution the industry has proposed is to downgrade highdefinition content (See Pirates Plunder Broadband and DTV on the front page). But customers paying thousands of dollars for a digital TV set are anticipating high-definition quality and expect to have the ability to record programs, as they can with traditional sets and standard analog VCRs. In the meantime, the TV-set manufacturers are wary of adding copy-protection technology to these new digital sets because there is no universally agreed upon copy-protection standard and it would additionally inflate their already high prices. Yet Hollywood doesn't want its content on TV if it isn't fully protected. And the Satellite and cable companies don't want to rock the boat because they don't want to forgo the all-important high-definition movie content Hollywood can provide.

Hollywood is also frustrated by the fact that there are already over 1.4 million digital-TV sets in American homes. In the year 2000 alone, manufacturers delivered nearly 650,000 integrated DTV receiving sets and DTV monitors to U.S. retailers, representing around $1.4 billion in factory dollar volume, according to the Consumer Electronics Association (CEA). And there are no built-in protections on these sets to control the way that digitally delivered material is copied and distributed. The CEA estimates that in 2002, 2.1 million of these sets will be sold domestically.

This issue isn't going to disappear - the number of such sets will continue to increase exponentially over the coming five years, even though the TV networks' rollout of digital content is on something of a hiatus. However, ever since the 1984 Supreme Court decision in Sony v. Universal Studios, consumers have had the right to record anything on TV for personal use. And for 20 years Hollywood has been trying to reduce, if not eliminate, TV viewers' rights to record video.

Conclusion
Hollywood isn't known for strong reasoning. When Final Fantasy: The Spirits Within was released there was an outcry from a number of industry veterans and actors about the "all digital" nature of the film. Tom Hanks, for example, voiced his concern that the digital actors in the movie might end up becoming the wave of the future and eliminate real people from movies.

This is yet another example of scaremongering - cartoons haven't wiped out live action stories, and vactors, as they are often referred to, are simply another device for telling a story. The idea that technological developments must cease so that Hollywood doesn't have to change its distribution and revenue model is ludicrous, and litigation is unlikely to be a successful long-term business strategy. Besides, in many respects, the cat is already out of the bag - there are already thousands upon thousands of videos, CDs and DVDs already on the market that can be copied and distributed illegally.

But what about the experience? While the availability of household TV sets may have marked the end of the movie theater's heyday, the release of VHS recording devices didn't kill what was left. Movie buffs will continue to visit theaters, in much the same numbers they do today. Hollywood still controls the speed of distribution by releasing movies first in the cinema, then through pay-per-view, and making them finally available at Blockbuster, they can limit their vulnerability to the end of a movies' lifecycle. And with careful control of the pace at which movies are released to DVD, the Internet and TV, they'll continue to generate the vast profits that drive the entertainment industry.

In the short-term, though, we can expect to see more movies from Hollywood that reflect the industry's distrust of new technologies, while at the same time those offerings themselves take advantage of digital advances. There's nothing like having your cake and eating it too. And a little hypocrisy will keep everything ticking over nicely, thank you very much.

This article first appeared in the April 2002 issue of the Convergence Report