Hollywood’s Broken System and the 3 Letters That Will Save It


Hollywood has been broken for years due to a lack of focus on three little letters that should be at the core of any modern business.


But times are changing, and these three letters will be the key to the future profitability of filmmaking at every budget, for every genre, and for studios and indies alike.


For years, what was at the core of the Hollywood economic model for both theatrical releases and home entertainment sales was a laughable marketing process.


TV almost had it right. But even then, they missed the mark.


Wondering what these three letters are?


LTV


LTV is an acronym for the “Lifetime Value” of a customer, or in this case, the Lifetime Value of an audience member.


This new way of thinking around the LTV of an audience member stands to be the revolutionary twist we’ve been longing for at every level.


Studios & Streamers: Think about it for a moment. Let’s take the longest-running franchise in history: James Bond.


Each time a new movie comes out, the distributor has to spend millions of dollars on billboard advertisements, TV and radio spots, you name it. The MPAA reports that studios spend an average of $24M advertising a movie. Indie affiliates average $8.9M.


To get me to see a Bond movie each time a new installment comes out, the distributor has to spend big money to tell me about it. In the case of the 2015 Sam Mendes movie ‘Spectre,’ their marketing budget is estimated to have come in at $245M, the most ever spent on a James Bond film. Stateside, Bond turned in a $70M opening weekend, and it finished with a $200M domestic gross and $680M foreign.


But here’s the thing, the distributor doesn’t ‘own’ a relationship with me, so when ‘No Time to Die’ comes out in November, they have to spend big money yet again to reacquire me as a customer for the next movie.


Essentially, Hollywood throws away millions of dollars marketing each movie every single month because they stop short of building a lasting relationship with the consumer. They are either happy that they got me in the theater seat for that one movie or licking their wounds after they fail to grab my and plenty of other movie theater patrons’ attention.


You only need to look at the amount of abandoned social media pages for movies that were so active in the four weeks leading up to the film’s release, and then posting abruptly stops a few weeks after when the theatrical department stopped all their work and the home entertainment department has yet to pick up the reigns. Building a quality relationship with your audience? No, it’s all about that one sale, and each department is so isolated, focusing on their own agenda, that the overall business model fails to nurture a customer over a 12-month period, let alone a lifetime!


How do I know this? Because one of my businesses, Fanology, a Los Angeles-based digital agency, has spent the last ten years building many of these movie pages for studios and celebrities. Managing millions of dollars in ad spend, growing hundreds of millions of followers, to generate awareness — not sales — but awareness. I’ve seen the dysfunction first hand.


And yes, part of the problem is that distributors don’t own the means of exhibition. They don’t know when you went to the movie theater, they don’t know what types of movies you watched over the last 12 months, and they don’t know which ads drove you there — which is why exhibition is about to go through a major change in ownership (which I go into with this article on ‘The Death & Rebirth of Hollywood’ that I wrote last week).


But that’s only part of the problem. The major underlying issue is company culture and the systems through which these businesses have been built. These Hollywood incumbents already have a huge amount of data at their fingertips. The problem is it isn’t shared between all their business units because customer data isn’t at the center of all that they do. They simply weren’t built this way.


This revolutionary model of actually ‘owning’ movie audiences and mining the associated data to inform business decisions was upended a few years ago by Silicon Valley. Northern California changed the Hollywood game, and Southern California has been scrambling to keep up.


As we see the current round of streaming launches by the likes of Disney, Warner Media, Viacom, etc., what we are seeing is Hollywood marketing teams trying to imitate vs. innovate — focusing on the short term wins that are demanded by studio heads who are, in turn, being dictated to by Wall Street. But for Hollywood to thrive, there needs to be a new rule book. And to understand how this rule book works, we need to turn back the clock on the early days of Netflix.


Once upon a time in the mid-2000s, a small group of Silicon Valley marketing execs created an advertising campaign to get us, the consumer, to buy their service and stop walking across the road to Blockbuster. In my case, I’d seen a number of ads extolling the virtues of creating a list and having DVDs mailed to my house. Then one day, in 2007, I clicked an advert and gave the service a try by paying my first $13.99 which, coincidently, was about the same price I would have paid for a movie ticket in Los Angeles to see some of the biggest hits of that year: Pirates of the Caribbean: At World’s End, Harry Potter and the Order of the Phoenix, Spider-Man 3, or Shrek the Third — note they were all sequels! (More on the need to build brands later.)


But in the case of Netflix, without any further advertising, they turned that initial marketing campaign that had me pay $13.99 into over $2,300 in monthly subscription fees over the last 13 years. Yes, I may have spent money on Harry Potter branded merchandise, etc., but whenever I did, I did it in many cases because I saw another billboard for the new Harry Potter World at Universal or an advertisement for their King’s Cross experience in London. In the case of studios, they had to reacquire me for each product sale. In the case of Netflix, they developed a direct relationship with me collecting money each month and only had to focus on creating or licensing enough content each month to keep me engaged.


The Netflix subscription model is a game-changer. Sell to a prospective audience member once and provide enough great content to keep me paying every month. The effective ‘break-even’ point for each original movie they create is so much less than a studio because they don’t have to remarket to audiences each time they create a new movie. This model hasn’t only disrupted the movie industry. Think about The Dollar Shave Club which came out of nowhere to upend the shaving industry that was once dominated by Gillette. They are exactly the same models: A low priced item (movie ticket or razor) where the marketing cost would be such a large percentage of the total sales price, so you create a business model that has you own the relationship and increase the Lifetime Value of each and every customer through repeat sales to the same customer.


How much are you worth to Disney? To Warner Brothers? To Lionsgate? What is the Lifetime Value they have attributed to having you as a customer? They don’t know because they don’t have that data, and that’s the problem inherent in our old system.


And this happened with TV, too! They didn’t have solid data around who watched which episodes and what other content they consumed. They were in the dark.


For a number of years, in addition to the digital agency, I led a company that was responsible for the majority of live Twitter chats that actors hosted around their TV shows. Pretty Little Liars, Vampire Diaries, Scandal, Devious Maids, The Walking Dead, you name it. If there was a cast member live chatting on Twitter while the show was broadcast, my team was involved somewhere along the way producing the live chat, diving into the real-time data to help the show trend on social media, driving the more and more elusive day and date TV tune-in, and in some cases, aligning brands around these conversations, producing tens of thousands of dollars per episode for each cast member in sponsorship fees.


During the U.S. broadcast, and with a lead actor answering questions in real-time around the episode on Twitter and Facebook, we’d see all this data coming in from around the world as fans asked questions and commented on the episode. This data told us a lot about the value of fans in each market. There were markets where we saw a lot of activity, but we knew that the network/producers had not yet sold the show in that territory. Many times we tried to talk with the producers/distributors/sales agents about how this data could be used to sell more territories and justify higher prices. But time and time again, the various departments at networks and studios never had a system in place where they could actually get the information to the right people and pair our data with others to make the value of their IP even more profitable.


At the core of all modern entertainment businesses has to be data that comes from owning the relationship with the end-user and understanding what each end-user likes and dislikes so you can serve him or her more content and raise the LTV of each relationship. This brings me back to Netflix and why it is on a very rocky road which nobody is talking about.


Netflix has data on everything you watch; it can market to you every time you log in to the homepage with content their algorithm believes you will like — based on past viewing habits — so you keep paying the monthly subscription. Big tick. Congratulations Netflix! You showed the industry how it’s done. But Netflix has its own problem with the Lifetime Value of its customers.


For 14 years, they have continued to make their $12.99-$15.99 per month (or thereabouts) from me, but they haven’t been able to increase it beyond that. My Lifetime Value curve isn’t an upward curve at all; it’s linear.


That’s not good.


And that’s a big problem that’s going to see Netflix either fall from grace over the next few years or just before that happens, it’s going to become one of the biggest acquisitions in history that makes Disney’s purchase of Fox look like a nice gesture negotiated over a pot of tea. And you’re going to see the most likely purchaser — with the most to gain — as Google.


Now, purchasing a movie theater chain like AMC or Regal (as I talked about in my last article) will undoubtedly help Netflix open up new revenue streams and increase the LTV of each subscriber, but they need to do so much more to compete with Amazon, Apple, Disney etc., and protect themselves against a looming shareholder backlash.


Looking at Amazon, Amazon Prime members spend an average of $1,400 per year on the platform. And that number has only gone up during the pandemic.


You don’t need to be good at math to realize how much more money Amazon makes per customer than Netflix. And because we have been conditioned to purchase other products from Amazon, we are more open to them introducing us to other items that we’re willing to click the “add to cart” button for.


Apple has their computers, music, software that they can ‘upsell’ to their streaming customers (if they can work out how to create enough movie and TV content that really resonates with their customers).


Disney has long-established merchandising, retail outlets, theme parks, and licensing deals that increases the LTV of their customers — if only they would place a clear customer relationship management system at the heart of all their business units so they could really track all the touchpoints!


What does Netflix have? Its monthly subscription price and a merchandising division that is barely two years old. While Netflix showed us the value of focusing on an entertainment audience’s LTV, they will be at a big disadvantage over the next 18–24 months that could risk their entire model unless they make some pretty big moves.


So why is Google the most likely purchaser? Google has tried a number of times to get in on traditional entertainment and failed — mainly because they threw money at the established Hollywood producers who, in many cases, simply didn’t understand the platform they were creating for, and partly because they couldn’t risk the ‘real’ investment and oversight needed to launch a major division that is going to report long term loses during quarterly earnings calls before they see an upside. But the big key as to why Google will eventually buy Netflix is Google’s cloud platform.


Google’s cloud platform provides servers, storage, and networking for the web. This technology is where movies are stored to stream to your laptop, where your cloud email is stored, websites are hosted, etc. The market leader for these services is Amazon’s AWS. In fact, AWS is Amazon’s top performer bringing in a record $10 billion in revenue and accounting for 13.5% of Amazon’s total revenue. And guess who hosts all their movies and runs all their streaming through Amazon?


Netflix.


Yep, and don’t think the irony has gone unnoticed that the more Netflix customers stream content, the more money Amazon (a key Netflix competitor) makes through their cloud platform division! But the opportunity for Google to finally get in on the professional side of streaming content (they have the user side buttoned up with YouTube), and switch all of Netflix hosting costs on to their own servers cutting hundreds of millions off streaming delivery costs and bolstering Google’s own cloud platform growth, would put Google in a great position against Amazon and Facebook (its two biggest competitors).


But with all this being said, embracing the LTV of a customer and putting it at the center of all business units isn’t only for big corporations. Savvy producers stand the most to gain.


Indie Producers: The problem with most indie producers is that they understand the old business of Hollywood, but they don’t understand the business of brand building and selling a product to a consumer.


In today’s world, producers have the ability to sell their films directly to an audience at the touch of a button, either building platforms themselves or uploading their content to rev share platforms such as Amazon Prime Video Direct or Vimeo on Demand. And this is nothing new. These opportunities have been around for many years. Still, most filmmakers who go this route often do so as a last resort (believing that a distributor pickup is their golden ticket — which in most cases it is not) and end up completely disappointed because they are expecting these self distribution platforms to expose them to an audience. That’s not what these platforms are about. They are simply a mechanism to distribute. It’s up to the filmmaker to market and bring the audience to their movie (regardless of the platform), and that’s where another three-letter acronym comes into play — CPS.


If you make a movie and try to advertise it on Facebook, I have no doubt that through effective audience targeting, you can find an audience that will at least engage with the trailer (then it’s up to the quality of the product to convert the sale). But the marketing Cost Per Sale (CPS) is going to cost you more than you can charge in rental/purchase fees to get your movie out there. We’re back to that catch22 of movies having such a low price point that marketing them becomes almost impossible unless we are working on a massive scale.


The way Facebook, Instagram, Snapchat, Google, etc., works is that you can place advertisements and effectively only pay for them when you convert a sale. But these platforms want to show ads that will make them the most amount of money. So if you’re willing to spend $50-$100 per sale, all your ads will be shown over your competitor. And you’ve got to remember, movies aren’t just competing for ad space with other movies they are competing with car manufacturers, pharmaceutical companies, you name it — all of whom have higher-priced items that can afford to pay the ad platforms more per sale. At Fanology, there are plenty of clients where we’ve built companies around beauty products, cars, bikes, food products, where we’re able to spend $30k-$50k per week on social media ads and convert that to an initial income of $300-$600k, as well as a monthly recurring income stream through upsells and partnerships.


Now, we’ve also built a number of campaigns for indie movies that grew highly engaged communities which producers were then able to show to buyers like Walmart to help generate sales. The best types of indie movies were always the genre-based movies and those that had a clear audience to speak to — a clear brand identity that matched a focused audience segment. A particular favorite was faith-based films due to the ability to partner with existing loyal and active communities in different churches around the country, which were then able to transfer their brand equity over to the movie at a very low cost. Having said that, our grassroots organic indie film work was all at a time when you could grow your following organically on social media and drive them to action on a third-party platform through a post on your feed. But that time has passed, and it’s why indie film distribution is impossible on your own, unless…


You knew there had to be an unless, right?


Well, unless you come at distribution with a Silicon Valley mindset and try to take on the big boys at their own game, increasing the LTV of each customer that you are able to convince to watch, rent, or purchase your content.


One such person who has done this extremely well is Ty Bollinger. Never heard of him? Ty achieved a high LTV that enabled him to scale his business with a documentary series called ‘The Truth About Cancer, ’ which has reportedly grossed over 20 million dollars. Never heard of it? I’m not surprised, hardly anyone in Hollywood has. What about his other docu-series ‘The Truth About Vaccines’ or ‘The Truth About Pet Vaccines’? Yeah, not many people have heard about them either, but did you notice the pattern in the names? He’s building a brand. A brand where you can sell multiple products one after the other and drive a higher Lifetime Value around each audience member you bring into your world. And he’s not just doing that by raising his overall cart value like Amazon is able to do, he’s also able to do this by charging way more than most audiences are willing to pay for content.


Now before you discount this model because of the brand titles or the fact that they are documentaries and not scripted, know that this has worked in a number of genres. It’s just that this was one of the most successful I could find that nobody has ever heard of.


Additionally, I’m not in any way endorsing the actual documentary or the message contained therein. What I find fascinating is the way in which he is selling!


Here’s how he does it…

  1. He gives his 7-episode documentary series away for free. Yes, you heard me right. He gives it away for free if someone registers on his website. Immediately he owns the relationship directly with the audience so that he can remarket future content to them. He understands that owning that relationship is the most important thing of all.

  2. As soon as you sign up, you have 24 hours to watch the first 2-hour episode. After the first 24 hours, the episode disappears so you can’t watch it anymore. The next day Ty releases episode number two, which is only available for 24 hours. The next day episode three… you get the idea. If you miss an episode, you can’t watch it again.

  3. On each episode page, the audience has the chance to buy the whole season to watch when they want plus, as a bonus, if you buy a copy you get an extra copy to share with a friend; you get uncut interviews, MP3 recordings and a few other bonuses — if this sounds like the old DVD trick to get you to buy a disk of a movie you’ve already seen, then you’re right, that’s precisely what it is — bundling extra content to increase the perceived value.

  4. When you click to “buy,” the price is $147 for the digital copy, $247 for the physical copy, or a special of $247 for both. And that’s not a typo; he’s playing with perceived value pricing which will convert buyers at a higher percentage for the more expensive option.

Now, this is for a controversial documentary series that solves an immediate need, but when producers start treating their movies as a product and put as much effort (if not more) into building a brand and a business around their career vs. working to ‘deliver’ movies, amazing things can happen.


Walt Disney himself did this around his animations of a little mouse with big circular ears building a family brand where people knew what to expect. Carl Laemmle did this around ‘Classic Monster’ horror flicks with his Universal brand. Upstarts treating movies as a business and building a brand isn’t anything new; it’s just that most people don’t want to do the sheer amount of work necessary. But the rewards can be huge.


And the keyword here for building a sustainable and scalable LTV of your audience is the word ‘brand.’ For years we’ve heard people complaining about the movie industry and its rehashing of old stories over and over again. But the reason why they do it is because the properties have mass ‘brand’ appeal.


If the indie world wants to make the movies it wants to make and build profitable businesses, then filmmakers, producers, writers, directors, actors, have to build their own direct to consumer brands. They have to work to attract their own audience so they can justify spending $50 to acquire an audience member because they know that they have enough product — movies, merchandise, TV shows, books, you name it, that each customer is going to make them ten times that. It’s simple business, and that’s something that many in the entertainment industry don’t like to look at.


There have been two key players that have held talent back from doing this in the past. The first was the studios themselves as they held talent under contract, not wanting them to get too much power and usurp their position — but just look at what Chaplin, Pickford, Fairbanks, and Griffith were able to do with United Artists when they stepped away from the studios.


Then it was the agencies.


Actors had a brief period over the last ten years where they could have built these businesses for free with their organic social media. Agencies scuppered that opportunity in fear that if talent had their own audience then why would they need the agency to negotiate their deals and get them jobs? Ultimately, the agencies would lose their all-important power.

We saw it time and time again at Fanology where representation would dismiss the idea of talent launching their own direct to consumer brands (unless the agency had a good stake in it as with the likes of Funny or Die). They would advise their clients that such a move would make the client look desperate or cheapen their value in the marketplace because it suggests the talent isn’t good enough to get a traditional endorsement or overall production deal with a corporation that was willing to pay them upfront for their brand alignment.

Some bucked the system and became powerful entrepreneurs themselves, such as Jessica Alba and Gwyneth Paltrow (albeit using their brand power in other industries vs movie/tv sales). But most bowed to the almighty agency and held out for a studio or network deal for their production company or that ‘face of…” deal with a major beauty brand. For those that got these deals, what they actually traded for a pair of short term golden handcuffs was their future freedom. A future freedom that would have come from owning their own audience when they would need them the most — when their shows were taken off the air or when the number of scripts being hand-delivered in manila envelopes started to trickle.


You see, agencies are driven by the upfront 10% and monstrous packaging fees that come from ‘controlling’ their talent roster. They just aren’t interested in a possible payout in 5–10 years by which time the agency might have been fired by the client anyway. And they certainly aren’t interested in putting in a huge amount of work to build their clients’ businesses without an equity stake in the long term upside because, for agents, it’s a numbers and scale game — quick touchpoints with an extensive roster closing upfront deals that produce large cash windfalls that give the agency team more power in tinsel town, and perhaps more importantly, more power within the agency itself. For what will be left of the big agencies in 12–24 months, this will be one of the most significant changes we will see: smaller, more focused client lists.


But as I have said before, the agency’s power is dying.


Producers are poised to take their place.


But these producers have to become real entrepreneurs and talent (filmmakers, writers, directors, actors) have to be willing to make long term partnerships with those that are behind the scenes, partnerships that aren’t just based on a ten percent payday that can go away at any moment. Just as with Chaplin, Pickford, Fairbanks, and Griffith, today’s filmmakers and talent have to build businesses together and businesses that have clear and identifiable brands that add up to more than the sum of the parts, having the ability to live on past any single project.


And don’t mistake me citing United Artists as an example to mean this process is only available to ‘A’ listers. This is available to all in the industry who have an entrepreneurial mindset. You don’t need millions of direct-to-consumer relationships to recoup a series of $500k-$1M ‘on-brand’ movies.


Doing this, entrepreneurial-based independents will not only be able to sell directly to the consumer and build a bankable LTV on their audience (either already in existence or through paying for a new niche audience via digital advertising or co-branded partnerships), but they’ll also be able to negotiate a stronger position with other distributors/exhibitors because they bring sales — they bring an audience — they bring true value to the table.

At the same time, many of these exhibitors (AMC, Regal, Cinemark, Cineplex etc.) will undergo such enormous changes over the next two years — as streamers jump in to purchase them out of bankruptcy — that we’re going to see dramatic changes in the way screens are booked.


Technology companies will bring their programmatic ad buying magic to movie theaters and producers will be able to bid on screen times around the country at the touch of a button — in some cases cutting out the old distributors — buying up remnant time slots with minimum guarantees. Producers will be able to do this with a fair degree of confidence knowing that they will be able to make profitable revenue per screen as a result of the data points derived from owning their audience and being able to direct them to the movie theaters without spending money on broad and expensive advertising. In turn, the exhibitor is happy because it can take a cut on the ticket sales and sell more food, drink, and merchandise than they otherwise could with a screen sitting empty or playing a four-week-old movie early Saturday morning to only 8 people.


But whether you are an actor, producer, filmmaker, writer, author, network, studio, streamer… you name it, the list goes on… If you’re going to be relevant in the future of Hollywood, you’re going to have to fully own your audience relationship, learn everything about them through the data collected at every touchpoint, and build a strong, measurable, upward curved LTV around each and everyone of your audience members.


Changes are happening across the board, and it’s those with the courage to fully embrace the changes and build powerful brands around focused audiences that will win. Just as with Ty Bollinger, many of us may never know many of these future success stories because they have been so successful in catering towards their niche that they had no marketing waste to those of us that wouldn’t care for the product. But just because we haven’t heard their name, seen the billboards, or been exposed to their trailer five times a week over a three week period, doesn’t make these producers and projects any less successful. In fact, on a return on investment basis, you may find many of these to be the most successful businesses in our industry.


With the Silicon Valley-induced changes going on in the film and television industry, we are about to have a lot less emphasis on the agency-led smoke and mirrors of the ‘show’ and a lot more emphasis on the ‘business.’ That’s what’s going to make this industry we love so much more profitable. That’s what’s going to broaden the type of content that is available — content that can have such an enormous impact on a group of people that it can change minds, spark new ideas, and transport those that need to be transported to another magical world where the troubles of their day-to-day life can be left behind.


So with that said, how are you going to build your LTV-focused brand? What’s your next move?


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