Hollywood has long struggled with the challenge presented by digital content. The internet has at once been a source of consternation—with pirates abounding—and a source of endless new opportunities. Thanks to the success of streaming video at companies such as Netflix, Hulu, and TV Everywhere, Hollywood is finally starting to give digital content the respect it deserves. The movie industry realizes there is profit to be made and value to be had in giving the viewer what she wants, when she wants it. But is Hollywood really ready to change, or is digital delivery still just an after-thought?

“Well that’s sort of the burning question of the day,” says Rich Hull, who advises many of the nation’s largest media and entertainment companies on content strategy, finance, and distribution, and who is a former film and TV producer as well as an EContent columnist. “People recognize that it’s going to be the future. … The reason is I think people have come to the mindset that we’ve gone from this culture of ownership to a culture of access.”

Hull explains that consumers used to own physical goods, such as movies on VHS/DVD—and those were easy to sell—but “now people want anything, anywhere, anytime on any device. It’s a different sort of mindset so I think people in Hollywood recognize that and they realize that’s where their business is going.”

Seth Shapiro—principal of advisory firm New Amsterdam Media, LLC, adjunct professor at the University of Southern California’s (USC) School of Cinematic Arts, and research fellow at the USC Annenberg Innovation Lab—says studios can’t afford for digital delivery to play second fiddle. “It can’t be an afterthought anymore because there’s too much economic pressure on the alternative if Hollywood does nothing,” he says.

One of the risks Hollywood faces if it does nothing is piracy, notes Shapiro. “Of the top 15 global sites receiving traffic, maybe five of them are illegal download sites,” says Shapiro. “If the owner of Mad Menor Breaking Bad did not put [its content] up internationally, it would get there anyway—that horse is out of the barn. And so you’ve got to find more efficient ways of selling it.”

Hollywood needs to act quickly to avoid the plight of the music industry, which notoriously scuffled with illegal sharing site, Napster. “Everybody looks at [the music industry] and doesn’t want this to happen to them so I think everybody has been galvanized,” says Shapiro.

However, Tinseltown, according to Shapiro, is slow to change. “The alternative of ‘do nothing’ is sort of the standby in Hollywood—until the heat gets so bad people have to do something; and the heat really is that bad because of piracy,” he explains. “The only way to combat piracy, I would suggest, is by providing reasonable legal alternatives, which is exactly what the music business did not do.”

Streaming Done Right

Shapiro points to Hulu—founded in March 2007—as one example of a digital delivery success story. Hulu addresses piracy in its FAQ section, calling it “an industry wide problem.” The site adds, “By building a compelling service for end users that is easy-to-use and free, we believe that Hulu is a great platform for content providers who want to legally monetize their content online.”

Hulu, Shapiro says, is an example of NBCUniversal Media, LLC and FOX taking much-needed action by getting together and saying, “Well, we better come up with some sort of legal alternative to put TV content online that we can monetize.” He adds, “Hulu is an example of the industry [realizing it] can’t just sit there—it’s got to do something.”

Hulu adds that it is “fortunate to have a very strong relationship with our content partners.” It continues, “This connection provides us with exclusive content that other competitors don’t have. For example, Hulu and the network sites are the only legal online destinations that provide access to current season TV shows from top networks like ABC, Comedy Central, FOX, NBCUniversal, MTV and many more.”

Another well-known company that has benefited from “very close relationships for a long time with the content owners and studios” is Netflix, says Hull. “Netflix is one of those few companies … that’s ever been able to sort of move on a dime and create a streaming business without really cannibalizing their physical DVD business. And they, for the most part, pulled it off—who knows what they’ll look like in a few years, but this stuff is pretty hard,” he explains.

Netflix is an attractive option for film and TV studios, which have the opportunity to resell old content over and over. “It was really additional revenue without any costs. Basically, the job of the studios is really to sell everything that they’ve got again, again, again, and again,” says Shapiro, adding that Netflix “essentially started as a really attractive revenue, sort of a creative cash flow option.”

But it’s blown up since those humble beginnings. According to its website, Netflix is “the world’s leading internet subscription service for enjoying movies and TV shows”; in fact, it has more than 23 million streaming members globally.

Netflix “came in years ago and just started backing up a money truck to Hollywood. They were just way overpaying for streaming rights for movies … and Hollywood was like, ‘Hello, come on in,’” adds Hull. He points out that Netflix addresses the only two things studios care about: “‘How do I get paid and how do you protect my content so no one rips it off?’ If you can solve both of those issues for them, they’re happy to do business with you.”

Streaming Originals

Many of the leading destinations for streaming services are also starting to dip their toes into the original programming waters. In this case, they’re taking a cue from many premium and basic cable networks (think Home Box Office, Inc. and AMC Networks, Inc.).

Earlier this year, Netflix launched its first original series, Lilyhammer, which stars Steven Van Zandt as a New York gangster who finds himself living in Norway as part of the witness protection program. In addition to Lilyhammer, Netflix is planning to roll out more original series over the next year. House of Cards, starring Kevin Spacey, is expected to launch in the fourth quarter, while Season 4 of the canceled FOX series Arrested Development is planned for early 2013.

Hulu has also jumped into the original digital programming fray with Battleground, a 13-episode series that focuses on the lives of workers in a fictional campaign for a U.S. Senate seat in Wisconsin. Disney is also getting into the mix, teaming up with YouTube to produce original content for the most popular streaming video site of them all: YouTube.

“Netflix and Hulu are essentially other networks ordering content from producers, which is good for the industry itself and hopefully gives consumers more choice,” observes Shapiro. “It’s an evolutionary change to the same underlying model of consumption on multiple devices—not an either/or proposition.”
Shapiro continues that he doesn’t believe a time will come when a streaming-only program will be more widely viewed than a TV show. “At best, it will have equal mindshare with traditional [distribution] at some point in the future,” he states.

Logan Mulvey, CEO of Santa Monica, Calif.-based GoDigital, on the other hand, says he does see a future where an original streaming digital program is more widely viewed. “I do [see it]; it’s going to take smart producers who understand marketing and putting together a project with a real budget that can allow people to make money,” he says. But his optimism comes with a warning. “We need people to understand that digital is still very small and will not realize its full potential for a while.”

As far as what this new trend in programming means for the future of Hollywood, Mulvey says, “I think the industry will wait and see how these made-for-digital shows play out,” and if they’re successful, “you’ll see a bunch of bandwagoners.”

Showdown: Digital Versus Traditional

Despite digital’s booming popularity, Hull says it represents “pennies compared to the dollars of traditional distribution.” However, services such as Netflix are catching up. “Roll up their 20-million-plus subscribers, and this is not the type of money that you generally see in traditional distribution … yet. It will totally get there; it will definitely get there,” says Hull.

In April, Bloomberg News reported that Providence Equity Partners, Inc. was looking to sell its stake in Hulu in order to invest in a new production company. The 10% share was reportedly valued at about $200 million, which represents a doubling of the firm’s money since 2007. Not too shabby.

Meanwhile, there has been a decline in overall DVD rentals. According to a March 26, 2012, piece on Deadline Hollywood, consumers spent $5.65 billion renting DVDs and Blu-ray Discs in 2011. That’s down 3.4% from 2010. In the last 3 months of the year, rentals were down 21.3% from the same period in 2010, as business at kiosks—including Redbox Automated Retail, LLC, which charges $1.20 a night—grew by 28%, notes Deadline.

Redbox, which generated $1.6 billion in revenue last year, also plans on launching a streaming service of its own, notes the Los Angeles Times. Redbox announced in February that it would be teaming up with Verizon to create a rental service that would offer digital delivery and compete directly with Netflix.

Blockbuster, LLC—which filed for Chapter 11 bankruptcy in 2010 and had been criticized for failing to embrace digital delivery—launched its own streaming video service last year. Last fall, Dish Network, LLC unveiled a Blockbuster-branded service to watch movies over the internet and rent DVDs through the mail.

So far the results are fuzzy, says Hull. “It’s unclear what’s going to happen with Blockbuster’s streaming service still. At first, everyone thought it’d be a Netflix competitor … or killer. Now, the feeling is that it’ll just be a value-add for DISH subscribers only,” explains Hull. “In the big picture, there’s still room for more competitors in the streaming marketplace, especially one as well capitalized as DISH. But Blockbuster needs to get off their tail and make some bold moves soon. Every day that goes by is one more day that Blockbuster’s name is forgotten.”

The Importance of Being Nimble

Moving forward, studios and content owners have to be very careful, adds Hull, because “they’re walking this very fine line where they’re kind of planning for the future and also not cannibalizing their existing revenue model.” Consequently, says Hull, studios are slow to change. “They’ve always been that way; they’re always going to be that way. That’s just kind of how they’re built; they always resist change for that reason.”

Hull points out that it’s a bit of a misconception that everyone in digital media is getting rich. “You can pick up The Wall Street Journal any day of the week and people are talking about digital media, digital media as if everyone’s getting rich in it—we’re not quite there yet, particularly on professionally produced content. … We are getting there but we aren’t there yet.”

Mulvey says he thinks Hollywood is ready to go fully digital, but he cautions that “it takes a long time to get people used to the way new business is going to be done.” His company GoDigital works with premium independent films to make them available to the widest possible audience on all the major platforms, including iTunes, Xbox, cable, and video on demand through Time Warner, Cox Communications, Inc., or Comcast, according to Mulvey.

“The independent side has been more progressive than the studios because we are more nimble and it’s easier for us to make changes and convince filmmakers to try what’s been considered alternative styles of marketing and distribution,” explains Mulvey. “But I do understand that it does take a while to make a transformation to a completely new way of marketing and consuming.”

Just as independent filmmakers often push artistic limits, it seems that now they may be the ones to push Hollywood to truly embrace alternative distribution. As shows such as Lilyhammer or Battlegroundenjoy internet success, distributors phase out their DVD business, and customers continue to demand more access, Hollywood is going to have no choice but to step up and take digital distribution seriously.