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Porter’s Five Forces Meets Hollywood

February 14, 2012

Recently there has been much debate around SOPA & PIPA in the media and certainly on the web. While the question “How does this impact my freedoms?” has been exposed, the question I ask is “How did we get here?”

To answer these types of industry level questions I recommend using Porter’s Five Forces Framework. The framework allows the user to ask the questions uncovering who is competing most effectively for industry profits.

The amount of box office ticket sales in 2011 was lower than 1995 ticket sales. Some reasons listed recently in the press include;

pressure from players like Netflix

less than interesting movie scripts and plots

pay per view

Each industry generates profits, and the industry competes against 5 competitive forces for the profits. If left unchecked, the industry’s entire profits will be siphoned off making it irrelevant economically.

Those 5 competitive forces
1. Threat of New Entrants
2. Bargaining Power of Buyers
3. Bargaining Power of Suppliers
4. Threat of Substitution
5. Intensity of Rivalry

Threat of New Entrants…Previous to the current digital age, there was little threat to the movie making industry. There were a handful of powerful studios who for the most part dictated who was allowed to participate and who was not. The cost of Movie Stars, sets, payrolls, equipment and the risk of loss, combined with the fickle tastes of a theater going public made the industry a large risk. To offset that risk, a large expense was required to generate success in the first few weeks of the movie’s release in the form of advertising. Therefore, it took large pools of capital and many investors to spread out the risk. Making this a high barrier to entry.

Today…There are more low budget and independent movies finding acceptance among a larger audience. The reason? The long tail generated by the internet. Many examples of lower budget films achieving success in profits versus box office receipts exist. These examples are due to reasons beyond a good story line. It’s because the scope of information we as individuals can take in has broadened. The internet allows us to seek out avenues of entertainment beyond the mainstream movie. Anyone with a good story, willing actors and a creative entrepreneurial talent can make a movie, and use a social media campaign. The definition of the movie going industry is widening its boundaries to entertainment and the industry finds itself competing against new entrants with lower barriers of entry.

Bargaining power of buyers…Once upon a time, if you wanted to see the movie, you had to pay to see it in a theater, or hope it played in a drive in. Then in the 80’s came the battle of betamax and VCR, as well as cable channels. Soon thereafter developed pay per view, DVD’s. And since the millennial we have seen the capacity of the information super highway carry movies! Concurrently there was YouTube. And an entirely new way of watching and expressing ourselves erupted. And unexpectedly blogging allows others to write reviews about movies they’ve seen. If we trust them and their opinions, it opens up an opportunity for us to watch something we otherwise would not have. My daughter is an avid watcher of Netflix movies and is constantly recommending movies to me. For the theater owners, they paid whatever the cost of the movie Hollywood said they would pay. Today there is more flexibility, but for the theaters, it is still largely ogopolistic pricing. Netflix and Blockbuster famously dueled in the early 2000’s to gain competitive advantage with Hollywood. H’wood charged Netflix $65 for one tape. B’buster had to rent it out several times. And had to cover the overhead of a brick and mortar business model. Netflix paid one fee rented the movie on a scale level and had no overhead for brick and mortar distribution. Thus is written the tombstone for BlockBuster. Yet Netflix is not out of the woods yet. They still have to battle studios to gain access to content.

Bargaining power of suppliers…Here my conservative Id chuckles. H’wood is famously liberal. Liberals are famously enamored with unions. Whenever I hear of work stoppages and budget overruns due to unions in H’wood, deep down I think there is justice. Movie stars are being paid vast sums of money to pretend on the screen. Sure sure it’s hard work…”You talkin’ to me?” “You talkin’ to me?” Even these groups are having to settle for less as the profit pools are shrinking. Technology here again presents the industry with another unusual competitor for the industry profits, Pixar Studios. Here some very bright computer folks, backed by story lines and crative talent can craft a movie entirely on Mac’s (Thank you Steve Jobs). There exist no moral hazards with Woody or Buzz. And if the Piggy Bank character ends up on a fat farm, well…that would just be a great short story.

Threat of substitution…Here lies the largest threat to H’wood. Once upon a time, they defined our sense of entertainment. Once upon a time, they created for us a subculture of ideas and expectations. Remember the James Bond movie where he flew in a jet pack. Everyone thought we would all be traveling that way. They showed us lasers in Goldfinger that could cut James in half before we could actually do it. Yet somewhere along the way, they have lost that ability to create excitement or expectation. The story lines they present in the major releases are so poor the studios rely on massive spending in advertising to gain as many box office sales as possible in the first few weeks. Otherwise, it’s a write off for the investors. And still there is that nagging internet where so many forms of entertainment can be distributed for next to zero. And so MANY various forms of entertainment are available. Want to watch TV shows you missed. Sure you can. Hulu and Netflix. Want to watch a movie from a genre that just happens to strike your fancy. OK, you can have that too. Feel like stepping out on the wild side and watch a Norwegen indie film subtitled in English. OK. And by the way, many of those story lines, are vastly superior to what is available in mainstream H’wood. Want to play games? Ok, on an iPad, iPhone, etc. How about Slingblade. The product where you can watch anywhere on an iProduct what is playing on your cable TV. Compare these options to the main plot of the recently released MI3. Ethan Hunt is faced with a seemingly impossible task. He succeeds. He is then thrown into another challenge, save the world. He does. With some of the most interesting special effects and stunts.And all of this before we begin discussing the expanded definition of entertainment, Twitter, Facebook, Zynga and on and on.

Intensity of Rivalry, evidence of intense rivalry does not exist here. It could be due to a clubbiness in H’wood among studio executives, unions representing everyone else.

Summarizing, Hollywood had to push for SOPA and PIPA to not have to compete against these forces. That’s what an industry will do when they are threatened….turn to government to pass legislation to protect their profits. It is a good idea to perform a PEST analysis once in a while.


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