The Future of Film: How Technology and Audience Habits Are Rewriting Hollywood
With Blair Westlake, Former Chairman Universal Television, and Dan Martin, Eleven Canterbury Program and Relationship Manager
Summary
The entertainment industry is undergoing a seismic shift. Few understand it better than Blair Westlake, a former senior executive at Universal Television and Microsoft Media & Entertainment Group. In this episode of Conversations With the Experts, Blair offers an insider’s look at how technology, streaming, and changing audience behaviors are reshaping Hollywood’s business model.
He breaks down the long-term decline of movie theater attendance, the end of the DVD era, and how the rise of streaming platforms has permanently changed where and how audiences engage with content. Blair also explores the financial challenges studios now face, from ballooning production budgets to shrinking profit windows, and what it will take to rebuild sustainable success in this new landscape.
Looking ahead, he discusses how artificial intelligence may revolutionize the industry, once again streamlining production, reducing costs, and transforming creativity itself.
Transcript
Dan Martin: We’re going to talk about movies today and how they have changed. Luckily, I have an expert in the area. Blair Westlake was chairman of Universal TV and Studios. At Microsoft, he created the Media and Entertainment department and was responsible for all the relationships with the media and entertainment people, particularly the record labels.
So, Blair, when we think about movies, it seems to me it’s kind of an industry that’s fading. I go to the movies, and there aren’t that many people in the theater. What happened?
Blair Westlake: Well, it’s a good question. In some respects, it’s painfully simple. The movie business, and there are various components of the business, I’ll draw a distinction. There’s the theatrical exhibition business, which is the making of a movie with the intention of its initial exhibition being in a movie theater.
For a hundred plus years, that was how all movies started as far as the public seeing it. And that business has been under stress for some time. Stress as in declining attendance. If you look back, the exhibition business, people buying movie tickets, has been in a steady decline every year for the last 25-plus years, COVID aside, though COVID certainly accelerated and exacerbated it. But it’s the number of tickets sold, when you really analyze an industry, a movie industry, that’s what counts, because the increase in ticket prices just obfuscates what is actually occurring.
In fact, one of my old bosses used to crassly refer to it as butts in the seat are really what matters. So that’s been on the decline. The movie business, until the VHS and Beta cassettes came along, was struggling. It was really a two-source revenue. It was the making of the movie, putting it in the theater, and eventually, a movie might, depending on the movie, make its way to television, and a studio would earn money from a secondary exhibition on television. But that was it.
Along came the VHS and Beta, which terrified the industry. My own company, which I worked for for 20 years, was so concerned that it went so far as to sue Sony. It was the famous Universal Studios versus Sony case. Disney joined, but as a very passive plaintiff, and tried to stop it. Ultimately, the Supreme Court ruled that it was perfectly legal. I’m summarizing a long opinion, but that was the bottom line. So, it gave the studios a second wind. Huge second wind. The only drawback was that it was the rental business. And, under the First Sale Doctrine, as it’s known, the studios didn’t participate in the revenue from renting the movie. Only the video cassette rental company did. And at that point, nobody was selling video cassettes. Well, then, along came DVDs, and DVDs became, with the brilliant thinking of a man named Warren Lieberfarb, who ran Warner Home Video at the time, a sell-through business as opposed to a rental business.
So, the studios were participating in the revenue from every DVD sold. And it was great because Walmart, for one, the biggest big box retailer in the world, was willing to sell them at a loss leader. They sold them for at or below what they actually paid for them to bring customers into the store. They knew people would throw a bunch of other things in their cart in addition to the DVD, and they were willing to basically make no money or lose money.
Well, in 2005, the DVD business capped out. It hit its peak. The greatest number of DVDs ever sold was in 2005, and then it started declining every year after that. That, of course, meant fewer dollars coming into the studios, obviously, and along with the decline of people actually going to the movie theaters, there was that decline, coupled with the fact that the cost of making movies has traditionally been higher than the Consumer Price Index, CPI.
So, you’ve got your costs going up faster than even the CPI. Your costs are going up while your revenues are going down. You don’t have to be an economist to know those two really don’t correlate. Add to that the fact that, most people would agree, some of the great movies of the past, in terms of the creative juices that went into writing, have been on the decline. I recently asked ChatGPT what the greatest films of the last six decades, of each decade are. And when you look back and you see films like, Dr. Zhivago, Gone With The Wind, and so many films, and then you start looking at more recent movies that are making money today, which are remakes and sequels, and there’s huge fatigue that occurs with consumers seeing remakes and sequels.
So, you’ve got this combination of spiraling costs, declining revenues, and fewer people going to movie theaters, which is the reason movies are made. And then, in 2007 when I was at Microsoft, we launched Netflix on Xbox, which was the first device to have connectivity between the television and the internet, other than people jerry rigging it around.
That was 2007, a long time ago, and the world changed, and people got accustomed to streaming and paying at that point, 7 or 8 dollars a month, now 20 dollars in some cases, depending on your subscription. Along with that, you have 50- and 60-inch high-def monitors, and a boatload of people are saying, This worked for me. I’m willing to stay home. There are a lot of reasons, which I don’t need to get into, as far as people’s views about the state of movie theaters and the experience of having people talk and use phones and all the rest. So, as I say, it’s painfully, in one sense, kind of simple.
I happen to believe, and I think a lot of people do, that once people get out of a habit of doing something, whatever it may be, it’s really hard to get them back in the habit. It’s why subscription services try so hard to keep you connected to them, because they know once you turn it off, it’s really costly, and with churn, it’s a very expensive proposition for companies in the subscription business. They really want to keep you, and some companies have gone so far as to make it so difficult that they’ve ended up getting sued and taken to court by the Federal Trade Commission because it’s so difficult.
Dan Martin: I think you’re talking about my experience trying to get rid of Cox Cable.
Blair Westlake: And there it is, yes. There are many experiences, and there was even a law that was supposed to have gone into effect, which unfortunately was tossed after it was ready to be enacted. I’ve forgotten the term for it, but the law was to go into effect, I think it was this year, to allow any consumer to turn off a subscription in a matter of a couple of clicks. And I say this in big quotes, “mysteriously,” the law was not fully enacted. So, consumers are still facing the same problem that they had before, which is, in some cases, jumping through huge hoops to get out from underneath a subscription.
Dan Martin: That’s clearly why they want to do subscriptions. But it seems to me, Blair, that what you’ve said is that we have a business where the whole business model has vanished. Everything is changing. And, traditionally, that’s really hard for management to deal with. The media and entertainment business has had changes in the past. They’ve had managers and people who could deal with it. Do we have any of those?
Blair Westlake: Well, the challenge, as I see it right now, is that for multiple decades, really from the seventies to the last few years, there has been some technology in the offing or implemented, like VHS and the internet on some level, that afforded these companies a new source of income.
The business of, say, 2010, just to pick a round number, the movie business had roughly seven windows between the theatrical window, all the way to a second pay-TV window. And movie studios kind of looked at movies in terms of, can I make it? Can I break even, make money in what they call the seven-year ultimate? Well, the problem now is that there really are only two windows to speak of, meaningful windows. I mean, there used to be a network television window, so you could see a movie on CBS, NBC, ABC, Fox. There was the home entertainment window, physical goods, DVDs, VHS. Those are basically gone.
So, you’re down to two windows: the theatrical release, which almost no movie, very few movies ever break even on a theatrical release. I mean, I haven’t seen a recent number, but it would be a small percentage of movies that make enough money in their theatrical release for a studio to break even. Because remember, only about half the money winds up in the studio’s hands. Then you’ve got the streaming services. And the streaming services, generally amongst the larger studios, are affiliate companies of the motion picture studios that make the movies. And so, it’s really money moving left to right on the columns.
Those streaming services, some of the richest paid TV deals of two, three decades ago, a movie on a pay TV service, which would be the first window after the home entertainment window, a movie might, might, if it was a hugely successful movie, might earn 20 or 25 million dollars. Well, that was dollars in 2000, which should be equivalent to about 35 million dollars today. Well, there’s no streaming service paying 35 million dollars for a movie that started in a movie theater. So, the challenge, stepping back, if one did a Harvard Business School review, I think what somebody would say is, “Well, you’ve either got to take your costs way down, which kind of begs the question of where AI fits into this, or find a new source of revenue.” The studios are not in the business of inventing technology. So, they’re really beholden to some third party or parties to come up with the new technology.
And I think for the foreseeable future, you really have to ask, can you bend the business of making only four or five movies a year, which is the number per studio? The numbers are shrinking. I mean, roughly, and again, some would take me to task for this, but across the board, only about 5% of movies ever actually break even, and that’s something that really makes it a tough business. There are very few products in the market where such a small percentage of the product you make actually makes money, forget the jokes about Hollywood accounting, I mean, makes money.
Dan Martin: It reminds me, I worked in the oil business. It’s a very capital-intensive business. You spend a lot of money, a million dollars a day drilling a hole in the ground, and it may come up with nothing. This is the same kind of business. You have a huge amount of money creating a movie and marketing it. In the oil business, there’s a lot of science and geology, but it doesn’t always work. I think the movie business has a similar kind of challenge.
Blair Westlake: And the time lag, too. I just saw a clip this morning of a new AI-created animated film called Critterz, ending with a “z”, that OpenAI is funding, that’s reportedly costing somewhere just south of 40 million dollars to make. It’ll take about nine months, and it’s supposed to premiere at the Cannes Film Festival next year. Well, you know, Pixar should be worried. A Pixar movie can take two to four years. Those movies don’t tend to fall out of favor in terms of taste the way your live-action movies do. But you know, a movie like that is way, way over 40 million dollars to make and way over nine months to make. And time is money. And the thing is, as I alluded to with scripted films, tastes change, and what’s appropriate changes. Appropriate, maybe, is not the best word, but what is appealing to the average consumer can change over two or three years. And from the time a movie is greenlit to the time it opens in the theater can be easily two years.
And so, there are all these things; it’s a longer discussion about how AI will fit in. I’m certainly not in any way thinking that AI, left to its own devices, is going to make movies. For one thing, you can’t even copyright a film that doesn’t have a material amount of human involvement in the creation. So, nobody’s going to probably put much out that fails that test for fear it will fail the copyright test and the film will be public domain the day you open it. But there are implications, both good and not so good, in terms of what AI will be able to do to facilitate some of the changes needed.
Dan Martin: We have an interesting time ahead of us. There’s an opportunity for innovation and for different thoughts.
Thank you very much, Blair. I really appreciate you making the time. I always enjoy speaking with you and appreciate it.
Blair Westlake: You’re welcome. I thank you for having me.
