Skip to Content

Stanford GSB News

 
  • Email
  • Print
  • Share

Technology Shapes Future of Entertainment

April 8, 2003

Entertainment Business Faces Ever Bigger Stakes, Commercial Pressure on Creativity

STANFORD GRADUATE SCHOOL OF BUSINESS—Entertainment is big business. That's hardly news. But in an age of digital production and global distribution, the economic rewards—as well as the risks—of producing popular culture have never been greater.


Conference cochairs
Chen & Sokolowsky

Major studio blockbusters now debut on 3,000 screens and rake in over $100 million in one weekend—while a few, like Spider-Man, ultimately become billion-dollar franchises, with a web of distribution and ancillary rights and products spread over much of the globe.

Can the creative process survive in such an intensely commercial environment? And how will digital technology continue to shape the entertainment industry? Those were some of the questions addressed by a high-powered gathering of leaders and rising stars of Hollywood at Stanford's Graduate School of Business on April 5.

"The Internet is the greatest vehicle for the distribution of entertainment ever invented," said Yair Landau, vice chairman of Sony Pictures Entertainment and president of Sony Pictures Digital, as he opened the "Future of Content" conference. The Web, the rapid advance of processor-driven, digital technology, and the rise of a global economy already have sparked revolutions in the music, electronic gaming, and movie industries. But since mass networking of entertainment content—unlike data content—is still in its infancy, the full impact of that revolution has yet to be felt, said Landau, MBA '89.

Consider The Terminator, a series of three (so far) movies produced in the United States. Released in 1984, the first film in the series cost between $5 million and $6 million to make and grossed about $38 million. Seven years later, Terminator 2: Judgment Day cost close to $100 million to produce and grossed $52 million the first weekend it was released. So far, the movie has grossed $204 million in the United States alone, according to the Internet Movie Database (www.imdb.com).

How did the numbers get so big? On the production side, crowd-pleasing but enormously expensive special effects not available for the original Terminator quickly ran up the bill, said Landau. Additionally, computer-aided manipulation of images allows for nonlinear editing, a technique that dramatically increases the number of shots and the pace of the movie. Previously, movies were edited by physically splicing snippets of film.

Then there's the globalization of sourcing and distribution. Whatever his failings (or virtues) as an actor, Arnold Schwarzenegger was arguably the first international action star; he recognized the power of an international brand and traveled extensively to build it. Meanwhile, Hollywood had deepened its penetration of foreign markets with a sophisticated web of distribution partnerships. As a result, Terminator 2 has made even more money abroad—$310 million—than it has in the United States. That brings the total box office gross to about $514 million, not including sales and rentals of VHS tapes and now DVDs. Terminator 3, set for release in July, cost nearly $200 million to produce, said Landau.

In business terms, the success of The Terminator demonstrates the exponential increase in the potential rewards for companies investing in modern mass entertainment—as well as the risks.

Not every film is as expensive to produce as Terminator 3, of course, but a typical major-studio movie now costs about $55 million to make and another $30 million to market, Hal Richardson, MBA '80, head of international television distribution for DreamWorks SKG, said at the conference. And to break even on that $85 million investment, a studio needs to gross $170 million at the box office, because roughly 50 cents of every dollar in ticket sales stays with the distributor.

Not surprisingly, the huge investment required to make a major movie adds enormous pressure to every step of the process. Is that pressure killing creativity? Probably not, said Richardson and others on a conference panel addressing that topic, but they agreed commercial pressures certainly restrict, and sometimes damage, the creative process.

Because the risks are so great, major studios are less willing to gamble on creative but unproven people, projects, and ideas, said Jim Fleigner, MBA '95, a veteran of Paramount Pictures and founder of Hangin' Hams Productions, an independent production company. Instead they prefer to make sequels or remakes of proven successes. That same pressure makes it difficult for the creative process to remain iterative. "I often get some of my best ideas late in a project. But big studios don't like surprises, so making significant changes late in the game is difficult," said Fleigner.

Fleigner, whose recent work was screened at the National Gallery of Art in Washington, D.C., added that art house divisions and, to an even greater extent, independent moviemakers are poorer but more flexible.

Brown-haired Dolls
Anyone with a child under 10 probably has been badgered to buy a seemingly endless series of toys, dolls, costumes, or "happy meals" based on the hit movie of the moment. And that's no accident. "I call the ancillary market the necessary market," said Richardson. Sales of merchandise, DVDs, and other tie-ins often generate greater margins than the movies themselves and push projects into profitability, he added.

In fact, Terminator 2 might never have been made if its predecessor hadn't done so well in video release, Landau said.

As schlocky or distasteful as some might find movie-inspired merchandise, the need to sell it doesn't usually impinge on the creative work. "People accused us of making Toy Story to sell toys," said Ralph Eggleston, a director and production designer at Pixar Animation Studios. "It wasn't true. There weren't even toys on the market when the movie launched."

On the other hand, there are exceptions. Eggleston delighted his fellow panelists with a story about the making of an animated movie called Quest for Camelot. Warner Brothers, he recalled, hired a producer with little animation experience. The producer had heard that brown-haired dolls are hot sellers, so he promptly ordered the animators to make sure many of the characters had the correct shade of hair. The movie cost $140 million to make and grossed about $19 million, Eggleston said.

Here are a few of other key points made at the conference:

  • The music industry, under severe pressure from people who download, burn, and distribute free, albeit illegal, copies of commercial songs, will recover but will be less profitable, said Landau. A likely price point: $1 a song. Despite the hype, no major artist has become a star without the marketing power of a major label, he said.
  • Digital distribution and projection of films is coming but is being slowed by high costs (about $100,000 per screen) and concerns about piracy, said Carl Rosendahl, founder of Pacific Data Images and a 1979 graduate of the Stanford School of Engineering.
  • TiVo and other similar hard-drive-based recording technologies are worrying the television industry but won't put an end to commercials. Expect networks to experiment with new ways to support advertisers, such as sponsored concerts or even sporting events that contain unzappable commercial content, several speakers said..
  • Top-tier video games now cost as much as $13 million to develop and market but can generate $100 million in gross revenue, said Bing Gordon, MBA '78, cofounder of Electronic Arts. By 2010, costs may have to triple to keep pace with growing demand for realism.

—Bill Snyder

Related Links

Video File, (41:34 minutes, RealPlayer® format)
access restricted to alumni; sign in required

Other Entertainment Conferences at Stanford Graduate School of Business