There+will+be+blood

IN 1948, when only one in ten Americans had seen a TV, Time magazine sized up the new medium. Its quiz shows, cooking lessons and vaudeville were perfectly watchable, it said, but the films were awful. “The ancient cabbages that are rolled across the telescreen every night are Hollywood's curse on the upstart industry,” it wrote. “Televiewers, sick of hoary Hoot Gibson oaters and antique spook comedies, wonder when, if ever, they will see fresh, first-class Hollywood films.”



Sixty years have not done much to alter Tinseltown's instincts. As it prepares for its 80th Academy Awards this weekend, Hollywood is facing another new medium—the internet. Instead of using the web to get films to people, studios are still in the cabbage-rolling business: they use the web mostly as a medium to show dross, and just a handful of decent films. Yet, if the studios hope that by ignoring the web, Tinseltown can put off change, they are surely wrong. Hollywood needs to confront the web—by embracing it.

In the 1940s the studios feared TV because they thought it would destroy movie-theatres. Now they reckon the internet could spoil sales of DVDs, which in America now bring in about half of their total revenues. But in 2007 American consumers spent $23.4 billion on DVDs, down 3% from 2006. Studio executives are hoping to offset the decline of the DVD with a new, fancier disc, called Blu-ray, which gives a better picture. In fact sales of the new format are tiny relative to DVDs—and the demise of HD DVD, Blu-ray's rival, this week is unlikely to change that anytime soon. Meanwhile, box-office revenues from cinemas are flat, and TV channels increasingly prefer cheap reality programming to Hollywood's flights of fancy.

Just as revenues look weak, production and marketing costs have spiralled upwards. A Will Smith or a Johnny Depp gets an upfront $20m, and then 20% of gross receipts when a film brings in more than $100m. At Disney, such payments and various add-ons have more than tripled in the past four years. And the studios are being asked to pay more to talent across the board. Having given striking writers better terms on new media, Hollywood faces a walk-out by actors in June. According to Screen Digest, the major studios' entire slate of 132 films from 2006 is set to lose $1.9 billion in cash over the five-year cycle of cinema, DVD, TV and new media.

Financing is harder to come by, too. As cash from DVDs poured in, Hollywood was able to lure money from outside investors, such as banks and hedge funds. It now sits on an estimated $10 billion of other people's money. But many of the outsiders' films have disappointed at the box office, leaving them with poor returns. Anyway, banks and hedge funds have other things on their minds just now. When Hollywood looks for new sources of money, it will probably have to offer better terms—meaning lower profits for itself.

In the circumstances you would have thought the studios would be falling over themselves to find new sources of revenue online. The success of a film like “Cloverfield”, which found its audience through marketing almost entirely on the internet, points to how the core audience for Hollywood—teenagers and young adults—is fascinated by all things web-related. In private, even Hollywood studio executives admit that their children don't buy CDs or DVDs: they download.

Although the studios spend millions on websites for every film, none sells the product itself. It is partly because the DVD business relies on big retailers such as Wal-Mart and Best Buy. To keep them happy, Hollywood is holding back most of its films from the web. In fact, DVDs get people into shops: the stores need the studios as much as the studios need the stores.

In addition, Hollywood is terrified of piracy, which is already costing it billions a year in lost revenue. One way to control online piracy is to get internet-service providers to prevent illegal downloading—which may be starting to happen. As people get used to getting films on the internet, Hollywood needs to persuade them to choose legal routes by providing top-class movie-download services. Log on, camera, action

Every time Hollywood has offered people a more convenient way to get its films, sales have leapt. Bringing movies into the home via television, VHS and DVD built the industry into what it is today. The internet may look unfamiliar and dangerous, but it could be the ultimate home-entertainment weapon. No trip to a thinly stocked retailer, no late fees, no waiting for a package in the post; instead, on-demand access to any film you want, from the latest blockbuster to the most obscure art-house tear-jerker. Because distribution costs mostly go away, online sales are more profitable too. The internet is the industry's best hope for future revenue growth. The rightful successor to the DVD is not Blu-ray or anything else. It is the web.

THis article is form [|The Economist].

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