Digital Economics: Movies


This is a multipart series on digital economics. More here.

It seems like movies have been through a lot of traumatic change in recent decades: VCRs, DVDs, streaming, pirating, the collapse of movie theater attendance. So the movie industry seems like a great candidate for reviewing how digital economics disrupts industries. But what’s surprising is the movie industry never needed to change much to adapt to the digital economy. The real disruption to the economic structure of the movie industry came with the collapse of the studio system in the 1960s. Since then it’s structure has been surprisingly stable despite large technology changes for consumers.

From roughly 1920-1960, most movies in the US were made within the studio system, wherein vertically integrated movies studios owned their product from start to finish. Studios owned contracts with directors and stars, created the movies, and owned the theaters  This fell apart in the 1960’s and was replaced with the “blockbuster” model we’ve had ever since. In the blockbuster model, each movie is made as an independent project, then sold out through a variety of channels to make what money it can get. This led the movie industry to have a “hollow middle”, with superstars and losers long before the rise of digital economics. Furthermore, the marginal cost of adding another person to view a movie was already close to zero in the theater era. So movies already had an economic structure, on the production side at least, that was ready for the digital era. There was no need for that to change.

So what about viewing movies? Where’s that headed? The right way to think about this is that Netflix video streaming is economically the same as a cable company. Once you ignore the technology you can see that both Netflix and Cable companies bundle together a set of content for a fixed monthly cost. Now since each movie is produced as an independent deal, this means that not all bundling companies carry all movies. So for those exceptions you just need to buy them a la carte.

The rather mundane point here is that movies are a case where we’re already done with the big changes. People will continue to buy bundles of movies/tv shows for a monthly cost, plus a la carte buy particular items that are especially popular and not available on their bundling service. You do that now. All that’s needed to make “cord cutting” more popular is for the movie selections on services like Netflix to get deeper, and for the a la carte offerings from companies like Amazon and Apple to also get deeper. This is happening gradually with each new independently produced movie. But what does this mean for cable tv? That’s a great topic, so we’ll look at it next post.

This is a multipart series on digital economics. More here.

Categorized as Economics

By Nathan Taylor

I blog at on tech trends and the near future. I'm on twitter as @ntaylor963.

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