Can Hollywood Survive Streaming Services?

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Ben Fritz talks about his new book on the decline of Hollywood in the age of streaming services.

Big Picture CoverHollywood once ruled the world with must-see movies that would entice people to head to the nearest cinema every weekend. But movie crowds have been declining as more people opt to “Netflix and chill” at home. Like other industries, entertainment is feeling the shock of technology and scrambling to adapt to sharply shifting economics. Studios are increasingly banking on big-budget franchise films to bring in bucks. But is that enough? Wall Street Journal reporter Ben Fritz considers these issues in his new book, The Big Picture: The Fight for the Future of Movies. He talked about what’s ahead for Hollywood on the Knowledge@Wharton show on SiriusXM channel 111. (Listen to the full podcast using the player at the top of this page.)

An edited transcript of the conversation follows.

Knowledge@Wharton: Give us your take on the state of the movie industry.

Ben Fritz: The state of the movie business right now is that it is becoming a franchise/brand-driven business. Calling it the movie business is not quite right anymore. You sort of call it the “cinematic brand business.” That is a business that the major studios of Hollywood are in. All other types of films — especially mid-budget, original movies for adults — are becoming an endangered species. They’re not very economically relevant to the major studios. In that business, the non-franchise, the non-Marvel superhero, The Fast and the Furious, Transformers business is being quickly overtaken by the Netflixes and the Amazons of the world.

Knowledge@Wharton: In that context, what is happening with the Academy Awards?

Fritz: The Oscars are increasingly becoming irrelevant. That’s just a fact. The ratings are declining rapidly, in large part because they don’t celebrate the movies that most people go to see. The Shape of Water grossed something like $50 million, and that’s fine for what it cost. But in the past, the Oscars were celebrating some of the most popular films of the year. Rain Man won the Oscar and it was the No. 1 movie in America. Titanic, Lord of the Rings, Terms of Endearment, Forrest Gump — these were very popular films. You never see a top 10 film even nominated for Best Picture anymore, let alone win, because those films are these big franchise movies. Those are what audiences love, especially around the world, and those are not the types of films the Oscars like to celebrate.

“The state of the movie business right now is that it is becoming a franchise/brand-driven business.”

Knowledge@Wharton: What is the impact of Netflix and Amazon on Hollywood?

Fritz: They’re having a massive impact on Hollywood. They’re disrupting all the traditional economics of television and movies. It’s inescapable how much Netflix has become the TV diet for so many people. Now it’s happening to movies.

They’re not yet producing the $200 million major franchise films. Those are movies that are still worthy of a cinematic experience and feel too expensive. But they started off with the really cheap indie movies, like Manchester by the Sea. Netflix had Mudbound this year that was nominated for Oscars. But they’re moving up. They’re making Adam Sandler comedies. These are $50 million, $60 million movies. They just made this Will Smith film Bright that was almost $100 million. They’re getting into the lower-upper or upper-mid budget films, the sort of star vehicles that used to be the bread and butter of studios. They’re increasingly overtaking the lower to middle chunks of the film business and leaving only the upper echelon in terms of cost to the studios.

Knowledge@Wharton: You bring out in the book that traditional studios have made some poor business decisions and experienced missed opportunities. Can you explain?

Fritz: Yes, the studios definitely have been slow to adapt in a number of ways over the past decade or two. Marvel is clearly the most significant, most dominant movie company this century. If you want to look at the changes that have happened to Hollywood, Marvel is the company to look at. There’s a lot about them in this book. Marvel kind of came out of nowhere. Nobody in Hollywood seemed to see them coming, which is why Disney ultimately bought them for $4 billion.

Back in the 1990s, when Marvel was a comic book company, nobody cared about them. They’d just come out of a protracted, terrible bankruptcy. They were desperate for cash, so Sony Pictures went to Marvel. They wanted to get the rights to Spider-Man. They already had home video rights, and they were looking to get the rest of the rights. The Marvel executives, who wanted so much cash, said, “Forget Spider-Man. We’ll give you the movie rights to all of our characters — Captain America, Black Panther, Thor, Guardians of the Galaxy. You can have them all for $25 million.”

This Sony lawyer who heard this went back to his bosses, and they acted like it was Jack coming back with the magic beans. They were like, “What are you talking about? Nobody cares about all these other characters. Nobody wants to see a Black Panther movie. Nobody wants to see a Captain America movie. Just get Spider-Man. We don’t want that deal.” They passed on $25 million for all the Marvel characters. Cut to a decade later, and Disney bought them for $4 billion.

Knowledge@Wharton: You delve into the 2014 Sony hack, which leaked confidential information about the film studio, as context to understanding the current state of Hollywood.

Fritz: This is a story I’ve wanted to tell for a while, as a journalist and author, about how Hollywood has transformed the century. How the original mid-budget movies died off and franchises came to dominate Hollywood. But it’s a tough story to tell without having a narrative hook. You want to tell it through the lens of one studio. No studio is ever going to invite a journalist to come in and sit in on all their meetings for a year, but the Sony hack was almost the next best thing.

I had full access to all of their decision-making, all their hand-wringing, all the drama they were going through in dealing with these changes. Sony was a studio that struggled with the transformation of the movie business, from star-driven, from original idea-driven, to franchise and sequel-driven. In the book, we see Sony executives grappling with these changes, and it tells us a story of how Hollywood has grappled with these changes.

Knowledge@Wharton: One of the big stories is Disney’s acquisition of 21st Century Fox. For Disney, they make this deal knowing that they’re going to have a streaming service next year.

“It’s inescapable how much Netflix has become the TV diet for so many people.”

Fritz: There are two major themes in the book that we are seeing playing out with this Disney/Fox deal. One is consolidation. There are just too many major studios for the current business. Back when the movie business was booming and DVD sales were rising like crazy, six studios made sense. They could all make a lot of profits. Now the business is shrinking and there aren’t enough profits to go around. When that happens to an industry, you see consolidation.

The other big thing is Disney is getting into the streaming business. They need to compete with Netflix. If the studios don’t get into digital distribution, they’re going to get creamed by these tech giants — Netflix, Amazon. Apple is getting into original content now, too. Disney is going to launch their own family streaming service. They’re launching an ESPN sports streaming service. And in buying Fox, they’re taking over Hulu, which will be an adult content streaming service, and Fox is going to provide them with more content to put on those platforms.

Knowledge@Wharton: Is the movie industry going through what the record industry has gone through?

Fritz: It’s absolutely comparable. Obviously, the way you produce content is very different, but what’s comparable is that digital disruptors are changing the content production business, and the content producers are slow to adapt.

The No. 1 thing that’s changing it is subscription streaming. Ultimately, what consumers want in the digital age is what they get. The music business has had to adapt to people streaming, switching between tracks, putting together their own playlists, and that’s going to happen in the movie business. A lot of traditionalists are saying, “No, a movie is made to be seen in a theater. That is what a movie is.” That may be what the artists want, but that is not what a lot of consumers want. The movie business either has to adapt to that, or it’s going to continue to get creamed.

Knowledge@Wharton: One of the other things you bring up in the book is that the Hollywood star has become inconsistent in terms of the draw at the box office.

Fritz: Yes, the star has been replaced by the brand, the franchise. It used to be you go to see the Tom Cruise movie, the Will Smith movie, the Julia Roberts movie. They were the most important brand. That’s why they were paid so much money. Now people are much more loyal to Marvel, DC, Fast and Furious, Mission Impossible. That is why movie stars, with rare exceptions like maybe Dwayne Johnson (“The Rock”), don’t get $20 million very much anymore. The idea of the “star vehicle” — where anything this movie star wants to make, Hollywood eagerly ponies up $20 million for them to make it — that’s gone.

I tell that story in the book primarily through two Sony movie stars, Will Smith and Adam Sandler, who used to do whatever they wanted at that studio. The Sony executives would joke, “Will and Adam bought our houses.” Now, Will and Adam are essentially gone from Sony, and they both make movies for Netflix. That tells you a lot.

“Ultimately, what consumers want in the digital age is what they get.”

Knowledge@Wharton: You have an interesting chapter in the book about producers, including Wharton grad Dan Lin, who was previously an executive at Warner Bros.

Fritz:  He made that switch just at the time when DVD sales started plummeting and movie production started shrinking. The economics of the movie business were changing rapidly. The idea of being a producer and just making all these interesting movies that you like didn’t work anymore. Dan is thriving right now because he drove the Lego movies. That’s a major franchise for Warner Bros. As a producer, he essentially is the brand manager, both creatively and financially, for Lego. And if you want to survive as a creative person in Hollywood and really thrive, being attached to a franchise is critical.

Knowledge@Wharton: How is the #MeToo movement and the demand for greater diversity changing business in Hollywood?

Fritz: People are very aware of the two things you mentioned. It used to be you’d talk about diversity for a while, and then it kind of goes away and you go back to your normal way of doing business. The other thing was powerful people could kind of get away with behaving however they wanted. There’s so much scrutiny now that I do see that changing. You can’t get away with not having more inclusive representation, both in front of the camera and behind it. And the worst behavior by Hollywood executives is just not being tolerated by millennials anymore.

I was talking to a studio executive who said, “So much is changing. I barely understand the economics of this anymore. I can’t understand consumer behavior. And at the same time, I’m so worried about how people behave within my own studio.” To say that their world is being rocked would be an understatement.

Knowledge@Wharton: It feels as though Hollywood has been ignoring all the data about the audience.

Fritz: Hollywood has ignored data for so long, it’s amazing. It has really been a business driven by the guts and the tastes of the people who run studios. On the one hand, this is an artistic, creative business. You can’t just be driven by data because data won’t tell you what the next thing is going to be. On the other hand, ignoring what your audience wants is crazy for any business and can lead to a lot of missteps. It can lead to being loyal to Adam Sandler and Will Smith for too long. It can lead to having too many white men making your films or being represented in your films, and not telling the stories of the diversity of your movie-goers. Hollywood is just now starting to catch up.

Knowledge@Wharton: How are all these changes impacting the TV industry?

Fritz: This is a book about the movie business, but you can’t talk about movies now without talking about TV. TV has changed our film-going behavior in multiple ways. Don’t forget, when we were all growing up, TV was the “idiot box.” TV was the lowest common denominator, garbage. You went to theaters because if you wanted to see intelligent, original, interesting visual content, that was the only place to go see it. TV has changed because the economics of TV have changed. TV used to be advertising-driven. When your raison d’être is advertising, you want to reach the biggest audience possible, which means you need to be bland and inoffensive. You don’t care if they like it a lot. You just care that they don’t change the channel.

Now it’s driven by subscriptions, so they care about passion. You really have to like what you’re watching. They’d rather have 3 million people who love it than 10 million people who feel “eh” about it. That means they’ve got to take more creative risks and do more interesting content that will make people excited and care about it.

That’s the reason we have the Golden Age of television, the reason we’re getting such great content on TV. Once TV becomes great, why go to the movies? Why get out of your living room, pay a babysitter, drive there, pay for your $15 ticket, pay for food, take a risk that maybe this movie will be good, maybe it won’t. With TV, the marginal cost is zero. And if you don’t like it, just turn it off.

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