The Samurai Embrace

Financial Times
May 2, 2006

by Edward Jay Epstein

The Hollywood Economist

The numbers behind the industry.
One upon a time, the film business was solely about films.
In that era, the Hollywood studios made virtually all
their money from their share of the admission tickets sold
at cinemas.

Nowadays, Hollywood's equation is very different. Most
people watch films in venues other than theatres,
including on their television, computer display, inflight
aircraft screens and iPods. It is these venues, not
theatres, that now furnish over 85 per cent of the
studios’ worldwide revenues. This momentous shift from
theatres to homes proceeded from a series of decisions
made not in Hollywood or New York, but in Tokyo and Osaka.

This reinvention of the film business began in the 1970s
with the engineering by Sony and Matsushita of an
affordable video cassette recorder. Through a process of
ingenious compromises, Sony made its Betamax small enough to fit on top of a TV set and fool-proof enough to be
operated by a child. The Hollywood studios led by
Universal fought for seven years in the courts to prevent
it from reaching the market.

If they had prevailed over Sony, the video rental market
may never have developed, but, fortunately for the
studios, they lost their case in the Supreme Court in
1984. (It was a bittersweet victory for Sony who, in the
interim, lost the format war to the even more
user-friendly VHS format developed by Matsushita.)

The VCR soon became a ubiquitous household appliance,
video stores became a part of the urban landscape and the
new-found flow of money from video rentals proved to be
financial salvation for the very studios that had so
bitterly fought the new technology.

As a consequence, in deciding what films to make, studios
approved projects that had greater potential for huge
video rentals. These proved to be special-effects laden
disaster and fantasy films that appealed to children and
teenagers. Films that did not fit the requisites of video
buyers were given a lower priority and, as it turned out,
these included dramas, comedies and political exposes
intended for an older, more diverse and less-predictable

Next, in the mid-1990s, Toshiba and Sony changed the
Hollywood equation even more radically by substituting a
digital platform “the DVD“ for the video cassette. As
with the VCR, this digital future was resisted by most of
the Hollywood studios who were concerned that it might
kill the video business that had become their golden
goose. But now Sony, which owned the Columbia Tristar
studio, and Toshiba, which was a part owner (and strategic
partner) of the Warner Bros studio, had marshalled enough
power in Hollywood to ensure that enough titles would be
available for the DVD launch. The combined libraries of
these two studios included over 24,000 titles. So, in
August 1995, in a conference in Hawaii, Sony and Toshiba
(and all the other Japanese manufacturers) agreed on a
single format.

Even though most of the other major studios did not
participate, the DVD roll-out succeeded in transforming
films into a retail product. It could be played not only
on DVD players, but on personal computers, game consoles,
iPods and other digital devices. By 2000, Wal-Mart had
become Hollywood's single biggest customer, selling about
a third of all DVDs, occasioning top studio executives to
journey to Bentonville, Arkansas to find out what ratings,
stars, genres and other attributes would help them win
strategic placement in Wal-Mart stores.

As shelf space became the new name of the game, studios
sought to increase their leverage, or throw weight, by
buying up independent distributors (and later
"mini-majors" to get more titles. As a result, six
companies “ Time Warner, Sony, Fox, Viacom, Disney and
Universal“ came to dominate not only all the major
releases but the entire universe of so-called indie
releases. The DVD, with its random access and easy
navigation, also opened up for these companies a rich new
market: boxed sets of TV series. Not only could they tap
their huge TV libraries, but they could invest in original
series, such as The Sopranos, Sex and the City and 24,
which often proved more profitable than films that opened
in theatres.

For the growing home audience, the DVD also made films a
more interactive experience. Couch potatoes could now
change the language of a film, its aspect ratio, rating or
ending; watch additional scenes (which in some cases are
shot for the DVD) or listen to commentaries by directors,
writers and actors, or play a game, music video, or gag
reel. With these bonus features driving a large part of
DVD sales“ one-third of polled DVD buyers said that they
first played the bonus feature“ Hollywood's films became
part of a package.

The next move by the Japanese electronic giants, which
will reach the market later this year, is the
high-definition disc. Pioneered by Japanese television in
the late 1970s, high definition makes the home the
equivalent of a theatre by furnishing film-like images on
a large screen. There are two versions, Toshiba's HD-DVD,
which is less expensive to manufacture, and Sony's
" Blu-Ray", which can hold multiple layers of data. While
both render a similar quality image, Sony's version, which
is supported by all the Hollywood studios, provides two
separate viewing planes. One contains a high-definition
film and the other games (or other feature) linked to each
scene. The idea is that the audience can leave the film
and enter a super-realistic game or vice versa. To take
full advantage of this feature, studios will presumably
make more action films, which lend themselves to games.

Tokyo's technology is not entirely responsible for moving
Hollywood's focus from the theatre to the home, bringing
independent films under the control of the majors, making
mindless amusement-park sequels pre-eminent, or blurring
the line between films and games, but it both enabled and
made profitable these transitions.

By the end of this year, Sony will further push the
digital horizon with the launch of its PlayStation 3.
Despite its juvenile sounding name, it is a
state-of-the-art home server that can connect wirelessly
to TV sets, computers, printers and the internet,
simultaneously run up to nine different kinds of consumer
electronics, play and record high-definition films and
render game characters in frighteningly realistic ways.
The result will be that the world will soon be watching
films, or fragments of them, in a form to which Hollywood
will either have to adjust or relinquish a good part of
its control over the entertainment economy. It is not that
the Japanese set out to change the way the world sees
films, it is that Hollywood lacks imagination in seeing
and taking control of its own digital destiny.

[back to archive]

if you have any comments please reply below:
your email:

Questions? Email me at
This website is still (heavily) under construction. The webmistress can be reached at