Startups Killed The Video Star?

by Sam Huxley

Lost in the unprecedented volume of charged rhetoric surrounding the recent SOPA/PIPA firestorm was a post by Paul Graham, founder of Y Combinator, titled simply “Kill Hollywood”  (http://ycombinator.com/rfs9.html). Paul makes the case that the SOPA legislation is an attempt by a “dying industry” to maintain its viability and states Y Combinator’s commitment to go after the audiences currently held by the film and TV industries.   What makes this notable is that it is one of the few instances where a threat to the film industry has been announced from outside of Hollywood – usually it is movie moguls themselves who cry wolf. 

Here is a brief list of “threats” that the industry has fought over the last 100 years:

·      Sound – the major studios resisted incorporating sound into film for almost a decade after the technology was available due to format and labor concerns – after it was adopted in the late 1920’s, studio profits increased up to 7x in the years that followed.

·      The Studio System/Vertical Integration – It was common for the studios to own the theatre chains themselves, and force theatre owners to take a block of weak films for the rights to show a blockbuster. In addition, directors, talent, and crews were often under contract to a single studio for the length of their careers.  Hollywood had to reinvent its entire revenue model in 1948 after the Justice department filed the “Paramount case” antitrust action.

·      Television – After the rapid adoption of TV in the early 1950’s, ticket sales plummeted, and the major studios banned their film talent from appearing on the small screen. In addition, Hollywood released more color films, adopted widescreen formats, and 3-D in an attempt to drag people from their couches back into theatres.  When the majors realized how much they could make by licensing their studio libraries and entering into the TV production business, they changed their tune.

·      VCR – “I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.” Jack Valenti, then chairman of the MPAA, made this now-famous quote in 1982 during a Congressional hearing on the implications of the VCR. Two years later, the Supreme Court ruled against Hollywood in Universal Studios v. Sony by stating that consumers were not committing copyright infringement by taping broadcast films.  The biggest winners in this ruling, ironically, were the studios, that went on to make billions in the home video market while driving Sony’s Betamax into obscurity.

Then there is the Internet – much has already been written on what digital means for entertainment distribution, piracy, box-office, etc.  But one recurring pattern is that the disruptive technologies in the entertainment space have, more often than not, made it stronger, despite fierce internal resistance.  Looking back through the history of these developments, the biggest repercussions are usually a re-shuffling of who is defined as the “Big 5” and a shift in revenue streams – the studios that have faded (FBO, RKO, MGM) were usually on the ropes already, and the shift is what pushed them over the edge. 

Killing an industry is no small task, and I don’t think for a minute that Paul thought it to be a trivial venture.  I do wonder, however, if he has considered how many of his predecessors were eventually co-opted and assimilated. The entertainment industry is unique in the fact that so many of its assassins end up as its saviors. It will be fascinating to see if disruptive startups can break the pattern.