MGM, DVD, and “TV”

by: Thomas Schatz / University of Texas-Austin

MGM Logo

MGM logo

Among the latest deals in the endless churn of media mergers & acquisitions was Sony Corp.’s purchase of MGM a few weeks ago for $5 billion. In the overall scheme of things, this scarcely qualifies as a “big deal” – not when TV networks and movie studios are being bought and sold for tens, even hundreds (in the case of AOL-Time Warner) of billions of dollars. But the Sony-MGM deal speaks volumes about the vastly rising stakes and the radically changing structure of “the media” in recent years, and the enormous changes in media culture and media experience as well.

And paradoxically enough, the purchase of the once-glorious, now-struggling MGM movie studio by the global media giant Sony – the only media conglom without its own television network(s) – speaks volumes about the changing state of “television” as well.

One measure of how much the stakes have changed is that Sony paid nearly as much for MGM last month as it paid for Columbia-TriStar some 15 years ago. In buying Columbia-TriStar, Sony acquired a huge, active, successful motion picture and television production-distribution company. In buying MGM, conversely, Sony acquired an anemic production company – one that’s expected to produce only three or four movies a year, most of them sequels from its handful of brand-name movie franchises (most notably the Bond series) – along with a movie library that is most distinguished for hits produced over a half-century ago.

Back in 1989, Sony was accused of overpaying for Columbia-TriStar, and it may have paid too much for MGM as well, due mainly to a bidding war with Time Warner, which until the eleventh hour was expected to acquire MGM for $4.5 billion. So what gives? Why were these two media giants willing to pay so much for MGM, when its key assets are 4,100 movie titles, most of them decades old?

The answer, of course, is the booming DVD market and the rapidly evolving digital home-video arena. The MGM purchase gives Sony the world’s largest movie library, totaling over 7,000 titles, and some estimates put the DVD-related value of MGM’s titles at over $1 billion per year. This is a truly staggering figure, and one that would have been inconceivable even five years ago, when the home-video value of MGM’s library was widely considered to be tapped out.

DVD changed all that, and it did so very quickly. The studios had learned their lesson with the VCR in the1980s, initially battling but eventually embracing home-video technology. By the time DVD technology emerged in the mid 1990s, the Hollywood powers had long since learned to think in terms of hardware-software synergies. The VCR by then was a ubiquitous home appliance and the studios’ home-video revenues more than doubled their theatrical income. Thus the studios and their parent companies displayed uncharacteristic good sense, fueled of course by enlightened self-interest, and worked together to fully exploit the radical new system of digital home-video delivery. The results of that cooperation, along with the inherent benefits of the technology itself, surpassed even the most optimistic projections for this new home-video system.

Consider for a moment the phenomenal growth of DVD- as a technology, as a media format, and above all as a delivery system for movies to the home. It’s now become commonplace to note that DVD technology has enjoyed the most rapid “diffusion of innovation” in history, and it’s too seldom noted that the DVD boom took off at the very same time that the high-tech, dot-com market collapsed. It’s worth noting, too, that the DVD’s diffusion has been driven primarily by movies. At the end of 1998, the year that DVD became commercially viable, fewer than 2% of US households had DVD players. Five years later nearly half (46.7%, according to the Motion Picture Association) of American homes had at least one DVD player. In 1998-1999, DVD rentals and sales went from virtually nil to nearly 100 million units. In 2003, over one billion DVD’s were sold, most of them directly to consumers as “sell-through” movie titles. Sell-through DVD’s return far more to the studio-distributors than rentals, which accounts for the studios’ current financial viability – not to mention their increasing reliance on effects-driven, franchise-scale blockbusters.

What’s equally remarkable about the DVD boom is the number of movie titles that have become available in just a few years – a total that surpassed 30,000 earlier this year. Hollywood currently releases only a few hundred movies per annum, so the number of DVD titles available obviously means that the studios are digging deep into their libraries for product. This represents a major break from the VHS home-video era, when the market was geared to contemporary films – although it syncs up quite nicely with cable television, which since the early 1990s has relied more and more heavily on classical Hollywood for programming.

Consumer interest in “old” Hollywood movies clearly has been a pleasant surprise for the Hollywood powers. Indeed, along with the DVD explosion in general, it proves yet again how little the entertainment industry understands its audience. This extends well beyond media content to DVD “players” to the mode of display – i.e., to “TV sets,” if that term still applies at all.

When Sony acquired MGM, the trade paper Broadcasting & Cable made this rather curious and illuminating comment about the purchase: “For Sony and its financial group, TV is a small part of the deal. The group is far more interested in the $1.1 billion a year that MGM has been generating by selling its movies on DVD.” Where and how, one might ask, are consumers watching all these DVD’s? “On TV,” of course, but here too consumer behavior and the marketplace at large are rapidly changing. Just as the studios had no clue how interested consumers might be in old(er) movies, they also were clueless about audience interest in screen format, aspect ratio, and the quality of image and sound. In one of the oddest and most unexpected developments in screen history, letter-boxing has become so prevalent that it’s even being used in TV commercials – not that anyone’s watching them, given the TiVo and DVR technology that’s accompanied DVD’s and a new generation of digital television sets.

One wild card in the Sony-MGM deal is Comcast, a true Hollywood outsider that promises to further complicate the evolving movie-television symbiosis. The nation’s largest cable operator, Comcast recently made a serious run at Hollywood via a failed $54 billion bid for Disney. The investment here is far more modest – a mere $300 million to acquire an eventual 20 percent stake in MGM – but the implications are considerable. Comcast is busily acquiring “content” for its burgeoning VOD (video on demand) service, while another division is rolling out a VoIP (voice over Internet protocol) telephone service. Clearly Comcast is leading the cable industry’s three-pronged strategy to provide video, broadband and telephone service – envisioning an America, perhaps, where media-hungry gadget hounds are making phonecalls on their computers and watching movies on their cell phones.

While the Sony-MGM deal gives Comcast access to a vast movie library, it puts Sony on line with 21 million cable subscribers, which is a significant figure in today’s fragmented television universe. This fall, for the first time ever during the first week of the new TV season, basic cable with its hodge-podge of networks and programming services drew more viewers than the six “broadcast” networks (43% versus 41% of TV households, with the balance watching pay-cable or PBS).

But it’s the millions watching their DVD’s that matter most to Sony, particularly with yet another generation of HD (high-definition) DVD technology poised to launch in early 2005. After the recent rush to DVD players and “home theater” audio-video systems, we may be ready at long last, after decades of hype and disappointment, to make the leap to HD – a leap that traditional television simply could not induce. Whether this occurs, and whether it alters the nature of “watching TV,” remains to be seen. But it would be a delicious irony indeed. A half-century ago, the postwar emergence of commercial television left the Hollywood studio system in ruins and decimated its audience; now a resurgent movie industry and a revolutionary home-video technology threaten to exact their revenge.

Links of interest:

1. Sony USA

2. MGM

3. Time Warner

4. MPAA

5. Broadcasting & Cable

6. DVD Verdict

Please feel free to comment.

Image Credits:

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12 comments

  • The forthcoming launch of competing high definition DVD platforms (HD-DVD and Blu-ray) is particularly pertinent to the Sony-MGM deal. As lead proponent and developer of Blu-ray technology and hardware devices, Sony has strengthened its overall DVD market share while ensuring content supply for the Blu-ray introduction. While conglomeration seems increasingly bound to synergistic and integrational (vertical or otherwise) business strategies, the Sony buyout of MGM must be contextualized in terms of product launch and new technologies.

    DVD’s launch and subsequent diffusion into the home video marketplace avoided the VHS/Beta format battles now facing high definition hardware and software. Through cooperative agreements, hardware manufacturers teamed with Hollywood “majors” to form the DVD Forum. This collective, organized to ensure a standardized/unified introduction of optical disc technology, has since controlled industrial development of new technologies, copyright standards/encryption, etc. However, the Forum now faces mutiny from member corporations, spurned by Sony’s success in Blu-ray development.

    Rumors abound that FOX has recently joined the newly formed Blu-ray Association (in an advisory capacity) with the intent to endorse the technology. Paramount, also a member of the Forum, is thought to be following suit. At the very least, it is clear that “the majors” are hedging their bets in the high stakes high definition marketplace.

    TV on DVD, meanwhile, is changing marketing, distribution/syndication, production, and exhibition/reception structures and practices. Perhaps not so coincidentally, the financial boon of TV on DVD is synchronous with the diffusion of high definition television sets and high defintion television production. As television on DVD begins to challenge the market dominance of film on DVD (the release and marketing of Seinfeld is illustrative of similar “franchising”/blockbuster mentalities) the importance of content on HD will undoubtedly determine the format battle between HD-DVD and Blu-ray.

    This week’s TV DVD Awards served as a virtual coronation of Hollywood studios in TV land. Of the twelve awards presented, Paramount and Fox claimed seven. It seems that the endorsements of these two corporations, who control and distribute a variety of televisual and filmic content, could tip the scales in the high definition battle. However, the role of high definition television production, diffusion, and TV on high definition DVD could escalate the conflict to apocalytic proportions. But who will win the war? Will there be an industrial divide between television and film on high definition DVD? Will cooperation and compromise again prevail? Or will Sony bring the majors into the Blu-ray fold, pushing the DVD Forum further to the brink? Time and consumers’ fickle consumption and adoption patterns will tell.

  • TV on DVD

    My guess is that many viewers who buy DVDs watch them only a few times, even though they pay for the abillity to watch them as much as they want over a long period of time. This provides an opportunity for On-Demand and movie downloading services that allow viewers to “rent” a movie and watch it for a limited period of time. Rental prices have been high enough (and DVD prices low enough) to make purchasing the movie worth it, but perhaps this will change. If it does, this will certainly change the incentive for producers of movies/TV shows to produce denser, more complex, higher quality material that benefits from repeated viewing. As it stands, having DVD as a distribution channel for TV shows increases the incentive to create TV with broad, lasting appeal. It would be shame to see that change.

  • Re: MGM, DVD, and “TV” by Thomas Schatz

    As Thomas Schatz points out, Hollywood is blindly ignorant of audience interest. Perhaps the greed of the entertainment industry is so hungry that it will not allow itself to see what the end user wants. Entertainment is not alone in its quest for money and power; it is a global issue not segregated to any large corporate segment (IBM, Microsoft, Mitsubushi, Sony, Siemens AG, and on and on).

    More so, the entertainment industry remains frightened of technological changes yet wants to control them. The introduction of the lowly audio cassette by Phillips brought alarm that users would be able to record from the radio and records, resulting in a projected massive reduction of original sales that would wipe out the music industry. The film industry said that video cassettes would ruin the movie industry. (It is interesting that Sony, the purchaser of MGM, had a technically better product but failed mostly due to the time limit of its tape cartridge and poor marketing.) The recording industry killed off digital audio tape (DAT) for consumer use before it got off the ground, and added a per tape fee for every DAT sold, whether it would be used for consumer use or for professional use, The fee goes to the corporate music coffers whether the tape is used to record store bought music or original music or speech. The advent of the CD and now the widespread use of the Internet gave the industry (that has never reduced their pricing admidst the obvious recovery of start up costs) the excuse that record stores fail because too many people are copying CDs or downloading music from the Internet. They refuse to look at industry policy and greed for profits that has kept retail prices at an artificially high, non competetive level. Not even legislation has been successful at forcing prices to reason.

    So, Sony bought MGM. Sony is a major stakeholder in the entertainment industry. It owns not only MGM, but manufactures the technology from cameras and video tape, to recorders, players, and software, to computers and DVD players. Sony was one of the first to announce their double-layer DVD recorder, allowing consumers the space on a single disk to record movies complete with special and bonus features (i.e., to duplicate an original DVD), a rather vertical process. Yet it was Hollywood (and Sony is now even more of a Hollywood stakeholder) that was behind the requirement that all DVD recorders in the US have CSS copy protection, and the lawsuit by the MPAA against 321Studios, who sold DVD duplicating software which defeated CSS. 321Studios, a US company, has now ceased business, but similar software is still and was readily available on the Internet, not all of it was out of the reach of Hollywood lawyers.

    The great bullies of Hollywood have won. What they hae won is, however, not well defined. The resale or trade of copies of music or movies is a clear violation of copyright law. Yet the individual purchaser of a CD or DVD should hae the right to make backup copies just like software (the same digital process) for personal use. The Digital Millennium Copyrights Act is a farce to freedom. Hollywood should spend less on lawyers and more on determining how to form an alliance with its customers. Until then, it is time for US citizens to tell Congress that we want another Paramount decree, maybe no only in the realm of entertainment. One problem is that in our global economy, there is no world government to make global laws. And God help us if there ever will be.

  • Sony is a business

    The way I see it, Sony stands to gain a lot of money because of the options they now have with all of these MGM movies. They can rerelease special editions of classic movies and make a lot of money off of rentals and people buying DVD’s to add to their collection, and oh yeah I almost forgot that the James Bond movies are not gonna stop selling any time soon (unless they can’t get another hot star to play Bond). We must also look at the long run, when technology brings us another way to watch media that is more advanced and high-tech than the DVD is now, people will buy these movies in their new form and spend more money on them, even as VOD gets cheaper people will take advantage of that and Sony can make money off of their movies. Sony can also take advantage of this purchase by cross plugging it’s products, putting its name all over the place in new movies, maybe even making packaged specials like: if you buy a Sony portable DVD player you will get an MGM movie included with it. This is a bargain basement deal that Sony has tons of ways to take advantage of, and hey they have every right to do so since they are a business. If we the consumer are willing to buy it, why shouldn’t they sell it?

  • Stephen Stephanian

    Cinemascope in my Living Room

    All of this excites me very much! I think change, due to financial or artistic demands, is a positive development in any industry by encouraging innovation. I firmly believe that the motives behind the Sony/MGM deal & the film industry’s focused attention towards television is the future.

    The film industry has been and is a transformative medium. The art and technique of making motion picture has changed with gains in technology (from silent films with title cards to talking pictures). The methods of display and distribution have evolved over time, from the examples of post Word War II television to the advent of the VCR. Cinema has seen this change as a result of competition with television.

    With this new revolution of cinema treading on television’s ground, I can only believe the reactions and influences will produce a better product for the consumer over time.

    A recent development to this story involves a deal brokered between Steven Soderbergh, an innovative, award-winning director, and entrepreneur Mark Cuban’s company 2929 Entertainment, to release six movies at the same time in theatres, television, and DVD (Hollywood Reporter). Instead of the typical 4.5 months now from theatres to DVD release, some film executives are expressing distress in the changes, for it may cause in a film industry attempting to squeeze every dime out of the audience.

    I believe the “cinema” that we know today will have a drastically different look to it thirty years from now. Just imagine the technology that will be available most households! Watching a movie in your house that is far superior in visuals and sound than current day movie theatres seems very likely. The film industry must adapt and take advantage of these new opportunities.

    I believe the film industry will be primarily using digital technology to record images. Digital motion pictures are cost effective, efficient in DVD distribution. A major factor holding back the industry that loves to make as much money as it can is the capital required to change film projection theatres into digital projection theatres.

    Will the whole movie-going experience change? How big of a difference will their be between television and cinema? Will there be more serialized movies? Will movie rental places be filling once grand megaplexes? Will the new Blockbuster only be available online through the cable box?

    If the adult film producers have any impact in the direction the film industry (they have with VHS over Beta), the direction will be focused on cheaper more efficient technology, and distributing primarily to the living room and not the movie theatre.

    [http://www.hollywoodreporter.c.....1000905068],

  • DVD vs. Internet

    Ever since DVDs came around, video retailers have had to shift their attention to accommodate this new technology for fear of losing business in the market.

    Despite its successes, I think that DVD’s are slowly losing out to a new and bigger competitor – the internet. No one can deny that the opportunity of downloading movies off the internet through various download software seems to be such an easy option. It is so much more convenient than actually going out and renting a movie and it’s free.

    That is all true but there are some problems connected with this idea of downloading movies. For one, depending on the speed of your computer and the sources you download from it may take a long time to download a movie you want to watch. You may also get a real bad quality of video in which it is hard to see the characters clearly.

    So what are the options either you watch a bad print for free or you make the time to go rent a movie or watch it in the theatre and pay for it.

    There is another option that is gaining popularity these days as Elliot mentioned in his comments. That is on-demand and movie downloads that require you to pay for the movie to watch it in a given time frame. I have personally never used this but I have heard from friends that it is a good option because at least the video quality is good. And it isn’t too expensive either.

    The one option I do have experience is a little different from what I have been talking about so far. It is a website called bollygrounds.com which allows me to watch Bollywood films online for a price for a given time period. It has reasonable prices to watch unlimited movies from the database. The problem I face here is quality of video in which it the print it not very clear, but still with no other source to watch Bollywood films I made do with the option I have.

  • In response to Harris’s response, it is interesting to note that Sony does in fact hold the rights to a new technology that is better than DVD. The UMD (Universal Mini Disc) can hold roughly the same amount of data as a DVD but is a small fraction of the size. So now that Sony owns MGM, they can draw upon their newfound library not only for making DVDs but also for this new technological medium.

    As long as technology continues to improve, the industry will continue to evolve. With things like DVD players, HBO, VOD and HDTV, new ways of presenting media are always being introduced. The way things seem to be going, it’s not unrealistic to think that it won’t be long before TV and the movies will be one and the same.

  • Karolyn McKenzie

    TV on DVD

    What America is really waiting for is to be able to record TV onto DVD affordably. With a VCR, it is possible to record your favorite show and have it in a hard copy. People want this with DVD and they don’t want to have to pay millions more to get it. The problem that happened though, with DVD is that once everyone bought them, they had to keep their VCRs in order to record shows. Once people are able to record TV onto DVD with ease and at a low price, they will have no reason to buy the package DVDs of television seasons that are being marketed like crazy. Companies may have the same fears as they did when the VCR first came out, but I think it will blow over and solve itself.

  • Schatz’ article on the rapidly growing and changing DVD and home entertainment technology and marketplace was interesting to me because of a recent trend that Hollywood picked up on with the advent of DVDs. As DVDs have grown more inexpensive they have virtually eliminated VHS tapes from the marketplace. DVDs are now more commonplace throughout the country and many people are buying the DVD version of some of their favorite VHS movies, their entire movie collection is now probably resting on a smaller shelf next to their TV. DVDs now offer at least two hours of extra footage and bonus material that attract buyers because of the extras that come along with DVDs. People are much more likely to wait and buy the DVD, rather than going to see it in theaters because with DVDs they can watch it as many times as they like. The wait for the DVD release also gives people a chance to hear friends talk about the film and whether it’s worth even seeing.Major Hollywood studios have started to recognize this trend and are cashing in on it. Studios are more willing to finance films that are sure to flop in theatres because of the return from DVD sales. Such films as Harold and Kumar Go to White Castle and Kung Fu Hustle are films that eight years ago probably would have never been given a chance. But with the knowledge that production costs can be recouped in DVD distributions, studios seem more likely to fund box office flops in the hopes of the film paying for itself in DVD sales. This trend is supported with evidence of the countries newfound love of DVDs, where people are buying older, classical Hollywood films on DVD now. The DVD distribution of classic films is a trend in its own and it is working for many studios.

  • Mary-Kate Tate

    Quality in Entertainment

    As the years go by and the world’s movie library grows, there is an increasing amount of quality movies available on DVD. Sony’s recent purchase of MGM shows that it recognizes this growing catalogue and sees it as a valuable investment. Fifteen years ago, I think it was possible to watch all of the “classics” in one lifetime. Since then, the amount of quality movies produced has grown at such at rate that my children could never hope to watch every “classic”. People now look to DVDs as a way of uncovering a part of the vast amount of movies available. I think Sony’s purchase is a smart one and should make their investors very happy.

  • That is a great tip especially to those fresh to the blogosphere.
    Short but very precise info… Appreciate your sharing this one.
    A must read article!

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