Why you should care

An infusion of Netflix-style data could spare moviegoers from endless reels of predictable sequels – if Hollywood would only open up to change.

Orson Welles once said, “Hollywood is the only industry, even taking in soup companies, which does not have laboratories for the purpose of experimentation.”

You can’t help but wonder what Orson Welles would’ve thought about Netflix. With detailed user data for over 30 million U.S. subscribers, Netflix’s servers now house what might be the world’s greatest entertainment laboratory.

As David Carr reported in the New York Times, Netflix was able to use its detailed knowledge of user preferences at the individual level to guide its decision to back the series House of Cards. Based on Netflix’s analysis of the streaming activity of director David Finch’s films, the popularity of works featuring Kevin Spacey and the success of the British version of House of Cards, the company had reason to believe that the U.S. adaptation would resonate with its user base — reason enough to justify the acquisition of exclusive distribution rights to the program. The show ended up being a major success, taking home three Primetime Emmy Awards in its first season and thus validating Netflix’s data-driven approach to understanding consumer preferences.

Netflix developed an industry-disrupting business model, but what does it mean for the rest of the entertainment sector?

It’s clear that Netflix has developed an industry-disrupting business model, but what does this mean for the rest of the entertainment sector? Has Netflix ushered in a new era of predictive analytics? The television industry has already seen the entrée of Big Data. Although Amazon, Apple and Google, among others, are still determining the best way for their businesses to tackle the industry (e.g., devices, content distribution platforms, etc.), Amazon has emerged from the pack as a clear leader (and potential Netflix competitor) on the content development side.

As Amol Sharma reported in the Wall Street Journal, Amazon is making a serious play for original content. The company backed the development of 14 pilots from more than 5,000 submitted scripts and used the viewing, rating and sharing data from over one million viewers to determine which five would be turned into original series. A pilot for a political comedy written by Garry Trudeau and featuring John Goodman is now in the works. The mad dash for supremacy in TV is on, naturally prompting the question of whether film will be next. Are Hollywood movie studios adopting predictive analytics, and do they need to, before Big Data steps in and takes over?

Popcorn on yellow table and blue background

Source Corbis

Surely Hollywood has something to learn from Netflix. In fact, they’d love to learn something. But it’s not that easy. The biggest obstacle comes from film distributors, who possess (and tend to protect) the performance data for the films they release through the video-on-demand (VOD) channel. With VOD in 60 percent of U.S. households and total U.S. VOD revenue expected to reach $10 billion in 2014, this is a key piece of the puzzle. Plus, box office sales no longer account for the dominant share of film revenue. In 2012, domestic box office sales accounted for approximately $11 billion of the total $34 billion North American market for filmed entertainment, representing only 32 percent of the market. Distributors recognize the value of VOD data given how intensely competitive and rapidly growing the channel is, and they do well to keep these figures confidential.

The studio strategy has placed more value on predictable than predictive.

Lacking superior data troves to guide decisions about generating innovative content, it seems the major studios have had nowhere to go other than up: bigger budgets and bigger bets. They’ve tended to support larger budgets while sticking to films with strong brand equity and broad appeal. The studio strategy has placed more value on predictable than predictive.

The seven highest-grossing films of 2012 all fit the franchise model (five cracked the top 10 in terms of profitability that year). But the strategy has its limits, and the misses can be big. Disney expects a write-down of up to $190 million on The Lone Ranger, which comes approximately one year after losing an unprecedented $200 million on John Carter, another failed attempt to capture cross-generational appeal.

Jennifer Anderson, chief operating officer of Slated, an online marketplace that connects investors, filmmakers and industry professionals, posits that a more data-driven approach could have potentially exposed the folly in Disney’s attempts to appeal to massive audiences with these films. Not only did young children have no knowledge of these two franchises, but even their parents, most of whom are in their 30s and 40s, weren’t old enough to have developed strong connections with the brands.

Is the threat of competition from Big Data prompting a paradigm shift in Hollywood? Not yet.

“If I were sitting back, I might re-evaluate the business model,” says Peggy Rajski, an Academy Award-winning director and producer who now teaches at NYU’s Tisch School of the Arts. Rajski acknowledges the difficulty major studios have had in generating outsized returns without superior data. “The analytics really have become much more sophisticated, but there’s no transparency about how this is done.”

Not surprisingly, the voices calling for more transparency in Hollywood are getting louder. In a move emblematic of his crusade for transparency in the film industry, John Sloss, CEO of Cinetic Media, recently released the VOD performance of Escape From Tomorrow, a film distributed by Producers Distribution Agency, which he co-founded. A statement from his company urged other distributors to do the same.

Anderson posits that transparency will benefit all key players in the long run. “A sophisticated investor will not be dissuaded from investing if the risk is made public but will be enabled by this data to make investments more thoughtfully.” She argues that transparent data will be important in enabling investors, studios and distributors to make better decisions about which projects to back. This takes on even more significance if companies such as Netflix and Amazon find that their data-driven content-development strategies are sound enough to enable their entry into film.

So is the threat of competition from Big Data prompting a paradigm shift in Hollywood? Not yet. “The pitch towards transparency is getting louder, but it will be very, very gradual,” says Anderson. There is plenty of money to be made by the entrenched distributors, and they have little short-term incentive to enable companies like Nielsen or Rentrak to publish standardized VOD metrics.

If the public release of VOD data seems like a far-off goal, perhaps it’s time the major film studios begin thinking about a new economic model. Oddly enough, however, they don’t seem to be falling over themselves to forge partnerships with the keepers of the data.

Peggy Rajski sums it up most pithily. “Hollywood is a behemoth. And it isn’t going to change quickly.”

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