Emerging Disruptive Change in the Entertainment Industry

On-Call Report for Sony Pictures EntertainmentDRAFT V3 as at March 18, 2014

Key Findings:

The rise of Cloud Computing – reliable, inexpensive, massive-data storage and deployment to almost any device – is driving change across the entertainment industry greater than anything since the advent of talking pictures. Green-lighting, production, and distribution of filmed entertainment will all be profoundly changed by the Cloud.

Netflix is the exemplar of the new era – already dominating the direct, on-demand downloading of entertainment, and now finding success as a mini-studio.

Yet the technology itself is the least important aspect of this change for studios. As Yury Izrailevsky, Netflix’s VP of Cloud and Platform Engineering, puts it:

“To be successful, and out compete the other players in the market, we have to be great at a number of things. We have to have great content, personalization, device penetration, great customer service, UI [user interface], and so forth. Operating data centers is not one of those things. In fact, it’s a distraction for us.”

Alternatives to streaming – like extended hard-drives for in-home entertainment devices – will be minor forces in coming years, at best. The Cloud is already winning the key races for adoption and anchoring the emerging ecosystem of entertainment technology. There will be more than one Betamax also-ran in the new era.

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The dominance of the Cloud will demand that studios to harness the power of Big Data analytics, synthesizing valuable insights by sifting through data obtained from user statistics and the ever-expanding world of social media.

And most importantly of all, this revolution has already begun.

Netflix’s pioneering use of OTT to distribute content will drive continued growth, and makes Netflix the most potent studio-killer in the landscape.

Netflix’s daring gambit of green-lighting the production of original content based on Big Data analysis of consumer tastes and habits is working.

Fox, Warner Bros., and Disney’s recent investments in cloud tech to distribute content are meaningful, but not necessarily well targeted.

Sony’s own involvement with Ultraviolet, a cloud platform to distribute content to consumers, is a powerful learning opportunity and important to make visible across the SPE org chart.

The massive potential for international growth as broadband continues to penetrate markets abroad, and down to “the bottom of the pyramid” – very low-income people outside the U.S. who will become consumers of produced entertainment – is largely undervalued today.

The Barbell Distribution in the Future of the Entertainment Business

The entertainment business has been in a period of intense, disruptive change for the past decade.

Distribution models have been overturned, sales and payment models are still in the midst of enormous change, and the six major studios, while having avoided a widely-predicted financial decline following a frightening 2012, made 2013 a year of solid financial performance. Yet that success was driven by cost-cutting, reduced film releases, and the rise of non-traditional earnings. A much-needed increase in efficiency has staved off disaster, but the large-media-company business model remains broken.

While the future is uncertain, large companies that deliver entertainment directly to consumers digitally are claiming more of the market, and gathering greater momentum.

HBO’s rise proved that when television is paid for directly by consumers, the quality of the product tends to rise. It is now on cusp of proving that a direct-to-consumer offering like HBO-Go is a viable alternative to distribution through cable network owners, as well.

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And Netflix is demonstrating a robust ability to deliver much of the value of a traditional studio with greater speed and lower cost – all driven by the power of direct consumer relationships, and the data those relationships generate about minute-to-minute viewing behavior and spending choices.

While traditional theaters will likely survive, offering unique value at the end of the spectrum occupied by very expensive, effects-filled films that can only be fully appreciated in the technology-rich, public venue of a movie house, the cost advantage of direct digital delivery will continue to push much of the entertainment spend to the direct providers, like Netflix and even YouTube, which has recently established itself as the go-to venue for release of middle-market popular music.

In this equation the top of the market remains with a smaller network of upscale theaters, the middle of the market migrates to free or near-free delivery over quasi-public networks, and in between a small number of relatively modest-cost, all-you-can-eat subscriptions will fight a hard battle for consumer dollars.

Streaming: Driven more by Price than by Technology

Upstart rent-a-disc-by-mail company Netflix, having already transformed into the market-leader in real-time streaming, has begun a second wave of so-far successful transformation into a mini-studio, producing, acquiring and distributing its own entertainment properties.

A year ago, Steven Spielberg’s predicted that differential pricing at the movie theater will have families “paying $25 for the new Iron Man release, and $7 for Lincoln.”

And today, leaders of a new entertainment market-tracking initiative at the Neilsen Company tell ILO that we are already well into a shift in which families are staying home to binge on four-hour marathons of new shows like House of Cards and formerly hard-to-find old favorites like Dragnet, rather than trekking out to newly released films. Why? One Neilsen project leader says it’s largely about money.

“The technology is just coming to maturity now – so it’s really not hard to do, and you’re not breaking any laws around downloading the wrong thing. And the cost savings is really enormous for family viewing.

“Mom, Dad and two kids out at the Cineplex are going to spend $60 to get in, and God forbid they each want popcorn and a soda. You could be spending $100.

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“Or stay at home and it’s already paid for on Netflix. The technology maturity makes it possible – but it’s much more about the money than it is about the tech.

“The prices for entertainment are very divergent right now, and when you can get so much more value streaming directly, that’ll change behavior.”

What Value Does the Studio Add? What Value Does the Distribution Channel Add?

The publishing industry – perhaps a decade further into a brutal industry shift that may offer some reference points for the broader entertainment business – has actually seen something like Spielberg’s prediction about differential prices come true, though with net gains for the niche players (more like Lincoln) and lower pricing power per unit for the blockbusters (like Iron Man).

Mass-market books cost less digitally, and production efficiencies continue to grow in the printing and shipping of physical books in large quantities. So the best-seller in paperback can still cost $9.99 – roughly what it cost ten years ago, with no alteration in price to account for inflation – while the hardcover memoir from a recent Defense Secretary will sell to a small but deeply interested population at close to $40 a copy.

Marquee author Jodi Picoult, whose new books consistently sell in the millions of copies, tells ILO that 2013 was the first year in which she earned more from digital sales than from paper sales of her books – and the first year in many in which her overall income went down rather than up.

“I have to ask myself,” she adds, “what the publisher really adds when the money is migrating away from the bookstore and online.”

Netflix declares that Netflix-as-a-studio and Netflix-as-a-channel add value to the consumer by delivering comparable entertainment for a much lower price, and add value to artists by offering a faster, less complex path to the market. In the world of the Cloud, the Netflix model wins.

HBO offered a content creator like Spielberg an alternative to the traditional studio model that, in 2011 and 2012, was almost as appealing as what the big six offer. Spielberg told an audience in late 2012 that he was an inch away from making the film for HBO when an attractive deal led by Disney’s Touchstone finally came through.

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In 2015 and 2016, would Spielberg have done his deal with HBO – or with Netflix – for Lincoln, instead of working with a major studio? As studios make fewer, bigger-bet films, the answer is likely yes.

In this new world, how can traditional studios and traditional networks learn from the new models and new value that these players offer?

Disintermediation is Here Now: Get Out of the Middle

One compelling answer to this question is to get out of the middle of the market, spending studio-size dollars on middle-of-the-pack films and TV shows. Either go big, or go direct-to-consumer with a model that minimizes cost and moves quickly.

Theaters are likely to remain as viewing venues for the tent-pole films that take advantage of the what can only happen in a theater – the communal display of effects-heavy, communally experienced, big-event films.

The middle of the market is likely to move to direct-to-consumer, or “Over the Top,” distribution models, based on a blend of subscription and pay-per-view, and available on a broad range of digital devices.

Margarita Lam, who recently departed NBCUniversal as VP for operational initiatives, tells ILO that

“Digital distribution will get rid of the middle person, and there’s no getting around that. The model used to be a movie would have a run in theatrical, then DVD, then HBO, then Cable TV.

“That’s not happening any more. Now they’re going to same-day and –date release with streaming, this change of timing is changing margins and business models. But the future will see an increase in direct consumer play.”

Tent-poles, Franchises, and Direct Distribution

Bob Bacon, a leader of merchandising and global consumer-product development at Fox, tells ILO that franchise properties are gaining larger and larger investments from studios – because they offer enduring return on those investments.

And the rise in quality TV programming, he adds, is a big part of the equation:

“There has been a changing emphasis by studios. More and more, they are shifting production to TV, which is easier to franchise.

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“A show is itself a franchise and franchises is where it’s at. Same with movies: instead of waiting 3-5 years between films, that gap is getting shorter for franchise movies.

“It’s starting to blur line between film and TV production. Not only do TV franchises give you more content to work with, it’s far easier to create merchandizing for franchises, and that what TV shows are.”

Direct distribution is franchise-friendly – more so, in fact, than theatrical or broadcast distribution. So expect convergence in the new-media world, in which the franchises that emerge from tent-pole films begin to look a lot like television series, and television series begin to look a lot theatrical releases.

Certainly the difference between the final six-episode half-season of The Sopranos and, say, a six-part series of big-screen releases building from, Die Hard to Die Hard with a Vengeance, is far narrower than the difference between NYPD Blue and Pulp Fiction.

Television shows are gaining in production value, declining in predictable “season” structure, and being parceled out more as a series of unveilings and events and less as a weekly routine.

Martin Scorsese’s comment about HBO’s series “The Wire,” for example – that it’s as good as any film he’s ever seen, and it’s 100 hours long – makes a similar point. Yet the financial investment is far lower (those hundred hours were not within an order of magnitude of feature-film production cost hour by hour), and the staffing rhythm is still more regular and predictable than for feature films.

As direct-distribution continues to pull feature-film production and television production closer toward common operating ground, the staffing practices for films will begin to resemble those of television production.

One LA-based feature-film producer told ILO this: “When Sony or Paramount says that they’ll stop making features and they’ll only make the world’s best television, you can bet that those television shows they make are going to look a lot like feature films. That’s already happening, and probably a good thing.”

Over the Top

At the heart of direct-to-consumer entertainment distribution is “Over-the-Top distribution” – or OTT.

This refers to the direct distribution of content via the Internet without a multiple system operator (broadcast or satellite network) being involved.

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In one OTT model, studios put digital copies of content into a “digital locker” stored on their private cloud service.

A customer purchases the rights to the copy at a retail location—Wal-Mart or Target, for example—and redeems the code online at the studio’s website. The customer would then have access to the content to download or stream on a variety of internet-connected devices.

HBO-Go: Pricing Unlocks the Future

Consider HBO-Go. HBO uses the service to run an OTT distribution model parallel to its channel distribution strategy which remains the source of the vast majority of HBO’s income.

With the Go service, users have to verify that they currently subscribe to a traditional cable package that includes HBO. Only then are they allowed to stream HBO shows directly to their personal devices.

While management at HBO distributors deny the threat – a Senior Vice President at Cox Communications, for example, tells ILO that there is zero risk in the model for Cox – industry observers, and even a top Turner Broadcasting technology executive speaking privately to ILO, acknowledge that HBO-Go is validating a new model.

“Today,” the Turner executive tells ILO, “we know that if we offered all of our subscribers the Go service as an alternative to getting HBO through a cable subscription, a majority would take that option at about $10 a month. We’d go out of business with that price point. But when that gets to $30, we’re in a new world. $30 works.”

OTT is likely to take shape along three different orientations:

Method Mediated Distribution (Aggregator)

Hybrid Distribution (Aggregator + Retail)

Direct Distribution (Studio to Consumer)

Control of Digital Locker

Studio / Aggregator Studio / Aggregator Studio

Control of Rights

Studio / Aggregator (rights may revert to aggregator)

Studio/Aggregator Studio

Development of OTT

Aggregator Studio / Aggregator Studio

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platform

DirectTV’s SVP for Strategy and Innovation Frank Palase believes that studios will begin with the first two, “mediated” or “hybrid” distribution methods:

“In the future,” he tells ILO, “a studio will have a platform of cloud-based services. You offer services to Wal-Mart or Target for electronic sell-through, and consumers redeem their “proof-of-purchase” for content elsewhere, so distribution model may shift.”

HBO-Go is in that mode right now.

Most observers recognize, though that direct distribution, over the top, will prevail over time.

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Big Data: The Age of Analytics

Talk to leaders at Netflix, and you’ll hear very little emphasis on their technology strategy – important as that is. The technology is an enabler of emerging entertainment business models, but will never be a differentiator over the long run, we hear from just about every in-place leader technology-driven entertainment firms.

Proprietary data, and smart approaches to parsing it, are far more cherished as tools for long-term competitive success. Analysis of consumer behavior at large scale can offer the possibility of profound insight into predicting future consumer choices. Traditional studies see this too – NBCUniversal, as an example, has just announced the construction of a $17 million technology center in New Jersey to usher in the next generation of technology focused on cloud computing and big- data analytics.

Tom Harrison, Chairman of the Diversified Agency Services Division at Omnicom Group, says, “Big Data isn’t fashionable. It’s important. It’s here to stay, and it’s fundamentally changed things.”

Big Data, Green Light

Netflix is already using its top-notch data analysis to drive production decisions.

One real-world example of key observations that led to programming decisions at the company:

- Kevin Spacey films and shows were being viewed more often than expected among key subscription decision-makers, Netflix analytics revealed.

- Shows that brought viewer to the U.S. White House brought a statistical pop among the biggest spenders in the customer base.

Thus the appeal of Netflix series House of Cards – a Spacey vehicle that leaves him in the White House (as VP) as the second series begins.

Netflix Chief Content Officer Ted Sarandos notes specifically that viewer data pointed to a ready-made audience for director David Fincher, star Kevin Spacey, and D.C. politics (but only if they include lots of visuals of the White House).

Amazon is using its parallel data to drive production and acquisition of new shows as well.

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Social Media and the Narrowcast Future

“Traditional media do not ferret out the consumer the way a digital/social media campaign might. The specificity of social media has analogs in medicine as well—medical researchers look for the lock-and-key specificity of an enzyme. The difference between old media and digital media is the difference between broad-brush approach and molecular approach” – Tom Harrison, Chairman, Omnicom Diversified Agency Services

“The old idea was to become part of consumer’s day: a kid wakes up in Simpsons bed, brushes teeth with Simpsons toothbrush, etc., and with adults, the best way to reach out is through an entertainment icon or a sports icon or a corporate brand. But now social media gives us an opportunity for true saturation like we haven’t ever seen before” – Bob Bacon, VP for Consumer Products, 20th-Century Fox

Chinese social network Weibo has over 500 million registered users. One entertainment executive we spoke with was blunt: “It’s all about social media in China these days—if you don’t have a Weibo site, you’re nothing.”

The implications of social media for a major studio like Sony are significant. Sony will surely house a group of meaningful size tasked monitoring social media and creating actionable insights from that work.

Furthermore, Sony will likely establish a visible presence in national and international social media.

“Social media will be central everywhere, but especially in China. I am constantly stunned by how little western execs understand China, really all of Asia. It’s woeful!” – U.S.-based studio executive, with global business-development duties.

“Right now,” he continues, “our effort abroad is woeful. No interest in or consideration of local culture. Others who go over there leave it up to some local guy without proper resources or a thoughtful approach. But if you know what you’re doing, and really pivot into social media, you’re going to be set. As soon as people who get it come to power in the studios, you’ll see a shift. Once the next generation comes in, there will be a massive shift.”

Investing in staff to listen to customers – and non-customers – as they talk about SPE properties in the social media ecosphere is vitally important.

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At one end of the spectrum, staff who can engage and monitor technology-driven providers who can scan vast quantities of social media will be import for high-level mapping of activity. But trained listeners and advocates are equally important, operating at the ground level and listening more than they talk.

Boston University’s Susan Fournier recently offered this advice in the Harvard Business Review:

“Be sure your social-listening analyses make their way out of the marketing-research department and into the wider organization, including leadership circles. Don’t let the information stay bottled up in the departments that collected and “own” the data. That means establishing a common analytical currency and language throughout the company so that managers can take action and be held accountable. One company we worked with created a Center for Digital Excellence to coordinate data on a vast brand portfolio. The company tied the digital indicators to bonus compensations, signaling C-level commitment to the program. It’s that kind of high-level integration that enables companies to focus efforts and resources effectively, creating value for the firm.”

A number of independent film producers have proven highly skilled at social listening – Participant Media and Aspect notable among them. Paramount has been building a team reputed to be more effective than most in capturing value from social networks for key distribution and promotion decisions.

Jason Aspes, a global creative director at Ogilvy & Mather, has been heavily involved in social campaigns for clients ranging from Coke to the IHG hospitality group, and points out that “social media promotion and social listening are serious disciplines, and a few shops are very good at them. I think you’re already seeing some strategic acquisitions of small promotion and production companies specifically to capture the talent there.”

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Cloud Computing: An Overview

One of the best examples of cloud computing is Google’s Gmail service—something most Internet users are familiar with. Storage of data takes place remotely, any technical IT issues are handled off-site by Google, and users only have to download a web browser to run Gmail.

Public cloud services like Amazon Web Services – serving corporate users including Netflix, the CIA, and News Corporation – provide very fast, highly-dispersed and rapidly scalable delivery of data to millions of potential users. Cloud computing allows the almost instantaneous ability to scale capacity up or down by using virtual servers, hosted on multiple networked computers.

Adrian Cockcroft, Netflix’s Developer of Cloud Architecture, famously asserts that “Speed at scale breaks everything,” meaning that the cloud’s unprecedented combination of speed and scale renders the traditional entertainment business paradigm obsolete.

Because Cloud Computing allows very high speeds of data transmission, and allows for the building out of large scale quickly and relatively cheaply, all the rules are changing.

Yury Izrailevsky, Netflix’s VP of Cloud and Platform Engineering, puts it succinctly:

“Netflix is the world’s premier service for enjoying movies and TV shows. To be successful, and out compete the other players in the market, we have to be great at a number of things. We have to have great content, personalization, device penetration, great customer service, UI [user interface], and so forth.

“Operating data centers is not one of those things. In fact, it’s a distraction for us.”

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Netflix: The First Media Juggernaut of the Cloud Age

Cockcroft provides slides on the evolution of Netflix’s computing needs over time that demonstrate how fundamental the cloud revolution has been:

While this diagram might seem confusing at first, the important point is that eight out of ten of Netflix’s core services were handled by physical datacenters (the gray boxes). These datacenters suffered from the limitations Cockcroft has identified: they were expensive to maintain, inefficient, and slow and costly to scale.

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All the gray boxes (physical datacenters) have been replaced with orange boxes (cloud services provided by Amazon). The only non-cloud components are 3rd party Internet switches and the customer device itself. The transformation has been complete, allowing Cockcroft to proclaim, “Netflix is now 100% on cloud.”

Apparently others are listening: the list of studios that are using cloud technology to distribute digital content includes Disney, Fox and SPE itself.

Warner Bros. has recently streamlined their digital supply chain with a cloud-based solution (Pega Cloud) to provide visibility into the critical path of new film releases across international digital and physical media supply chains.

20th Century Fox has partnered with HP’s public cloud service and Disney has purchased a private cloud featuring joint technology from competitors CloudStack and OpenStack.

Amazon Web Services itself stems from Amazon’s decision to move its flagship marketplace entirely to cloud in 2010-2011. AWS customers include NASA,

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the Obama Campaign, Pinterest, Kempinski Hotels, and the CIA – among many other vastly data-intensive enterprises.

Of all the data received by US Internet users during peak use times, Netflix’s streaming service represents 1/3 of that data—clearly an example of success at scale.

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The Future of Cloud Services and the Delivery of Digital Media

Fox Home Entertainment President Mike Dunn recently endorsed the concept of a “digital bridge”: collaborating with electronics companies to create internet-capable DVD players with hard drives large enough to store ultra-high-definition content. The goal of these devices would be to provide consumers with high performance, on-demand content within the next year or two.

However, according to a VP at one major studio told ILO, “extended hard drives are dinosaurs. It’s all about streaming.” He believes that extended hard drives are already obsolete. No matter how much they can store, they can’t store as much locally as the cloud can remotely.

Another studio business-side executive pointed out to ILO that consumer behavior has already adapted to the rhythms of Cloud-based on-demand streaming.

“Technology is changing the relationship between consumers and media companies because it is changing consumer appetites. We already see these changes in adult consumers, but the impact on the younger generation will be huge. What these consumers now expect is not traditional television and its linear schedule. They expect on-demand access to a virtually endless inventory of content.”

Disney’s Digital Copy Plus; Wal-Mart’s Vudu, and others

Recently, Disney announced a cloud-based initiative called ‘Digital Copy Plus’ which allows DVD buyers to download digital versions of the DVD in a format that is compatible to iTunes, Amazon Instant Video, etc.

Wal-Mart’s Vudu offering is similar, allowing consumers to convert their physical DVD/Blu-Ray libraries into more portable digital files, for a charge.

This kind of bet-hedging – linking physical purchases to on-demand downloading online – is clearly a transitional phase, and will fade quickly. The less investment in systems to support it, the better.

SPE’s Bet, So Far

Sony has played a lead role beginning in 2011 with UltraViolet, a free, cloud-based “digital rights locker” that allows users to stream a movie or a TV show by adding it to their online collection along with a ‘proof of purchase.’

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When a consumer buys a movie or a TV show from a participating retailer on DVD or Blu-ray, Ultraviolet allows the consumer to download a digital copy and stream it on the consumer’s smartphone or tablet.

More than 70 rights-owning companies now participate, including NBCUniversal, Warner Bros., Paramount Pictures Group, Fox Entertainment Group, DreamWorks Animation, and Lion’s Gate.

Ci, a new cloud-based editing studio from Sony Media Cloud Services, is a powerful professional-side complement to UltraViolet, offering media professionals, video editors, and other users a high-capacity, scalable, collaborative service for digital media editing.

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Ultra High Speed Internet: The Arteries of Future Media

Adding to the pace of change is the second major disruptive technology on the horizon: Ultra High Speed Broadband. If cloud computing is the beating heart of the media future, Ultra High Speed Internet services are the arteries that will pump content to consumers—after all, the revolutionary services provided by cloud computing are useless if they cannot be delivered to consumers at sufficiently high speed.

Currently existing broadband services represent a significant area of growth for consumer spending in terms of both absolute spending and percentage growth:

Leaving aside consumer spending, broadband will represent 10% of growth of all media spending over the 2012-2017 pe3riod, according to McKinsey.

The only category of total media spending projected to grow faster than broadband is digital advertising, but keep in mind that the ability to deliver that advertising to consumers depends on their access to broadband connections.

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Data at the Speed of Light: Fiber Optics and the Exponential Growth of Speed

Even if broadband services remained at current rates of data transmission, their increasing share of consumer spending and increasing market penetration would make broadband a revolutionary force. But as a high-placed executive at Fox said to us, (repeating the point multiple times for emphasis), “The most important new technologies over the next five to ten years have to do with streaming. Extended hard drives are already dinosaurs. With today’s users, and certainly for future consumers, their content will be downloaded. Distribution of content will be limited by the capacity for streaming. Google and other companies are currently testing their own networks that are one hundred times faster than anything we have. That kind of speed is a game-changer.”

When our source at Fox mentions “networks one hundred times faster than anything we have,” he is not speaking in hyperbole.

The growth of internet connectivity speed over the last decade has increased so quickly it is difficult to imagine. The following chart provides a useful visualization of this growth:

In 1994, data was transmitted with the relative speed of an ant.

In 1997, the velocity of data transmission had increased to the cruising speed of a Greenland shark. By 2002, it had reached the speed of an Olympic sprinter. By 2005, it had reached the speed of a bullet train.

Average Broadband Speeds, 1994-2012 (source: Nielsen/Norman Group and Comcast)

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By 2008, it had reached the speed of a bullet.

And by 2012, it had reached the speed of a futuristic space-plane—compared to the ant of 1994, the Internet of 2012 is moving at Mach 7.2.

But consider that this incredible speed achieved in 2012 is 305 Mbps (megabits per second). The fiber optic services of the future promise to deliver data at rates of at least 1 Gbps (gigabit per second). That means the broadband networks of the future will be more than three times faster than our Mach 7.2 space-plane. Those speeds would not fit within the scale of the chart above. Additionally, these 1 Gbps networks would only be the first generation of fiber optic broadband—network speeds in the future will only increase.

“The delocalized data provided by cloud services is the wave of the future,” said the VP at Fox quoted above, “but the factor of most critical importance is the speed and reliability of infrastructure to deliver this digital content.”

So far, providers like Amazon Web Service are delivering the speed and reliability with remarkable consistency.

Fiber to the X: Opportunities and Obstacles

The implementation Ultra High Speed Broadband at scale has a number of challenges that must be met before it can fulfill its ability to radically increase average Internet connection speed. The first of these major challenges is physical in nature: how do consumers access this Ultra High Speed service?

To understand where the opportunity for growth of fiber optic services lies, we must first slog through some technical language. The fiber optic services of the future are known as “Fiber to the X,” a generic term for broadband network architecture that contains fiber optic cable in the “last mile,” the part of the network responsible for delivering connectivity to consumers.

The idea behind “Fiber to the X” is that the closer “X” gets to the user, the faster speeds will be.

So “Fiber to the Neighborhood” (FTTN) runs an optical fiber line into a box located in a neighborhood, though it still may be miles away from individual consumers. Connections to individual users from this box proceed along normal copper wires. While the copper wire slows the connection speed down, the user is physically so much closer to the optical fiber that speeds are dramatically increased compared to normal cable modem speeds.

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Faster still is “Fiber to the Curb” (FTTC). Here the box is located closer to the consumer—not miles away, but within a few hundred feet. Copper wires still connect the individual user to the switchbox, but since the user is closer to the optical fiber, speeds are higher.

Even faster than FTTC is “Fiber to the Home/Fiber to the Premises” (FTTH/FTTP), which runs the optical fiber line directly into the user’s home or business, and faster yet is “Fiber to the Desktop” (FTTD) which connects a user’s computer directly to the fiber optic cable.

At this level of proximity to the user, fiber optic services are regarded as “future-proof,” meaning that at these speeds, performance is more likely to be limited by the capacity of a user’s computer than by network speeds (which approach or exceed 1 Gbps).

Google’s Ultra High Speed Broadband service, Google Fiber, has already begun its rollout in Kansas City, Missouri. Other cities are soon to follow: Austin, Texas, and Provo, Utah, are next in line. However, the service has a significant obstacle to its implementation: it costs a lot of money to deploy these cables, since Google Fiber is an FTTP service (compared to AT&T U-Verse, which is FTTN, and consequently much slower than Google Fiber). AT&T has its own 1 Gbps service, which it is rolling out in Austin in what can be seen as a direct challenge to Google. However, these Ultra High Speed services have not yet reached national scale in the US, and appear to be a few years away from achieving the saturation necessary to make them viable competitors to current broadband services. According to executives at Fox and NBCUniversal we’ve spoken with, the difficulty and cost of expanding these high-speed networks are a concern.

But Wireless Might Win

Frank Palase, at DirecTV adds serious concerns about the viability of Fiber-to-the-X:

“Go look at Verizon, they stopped rolling out fiber to the home. They’re looking at wireless broadband as the future. It’s expensive to dig up the ground. More and more, development will be on the wireless side. More and more will be going into video compression algorithms.

What you’ll continue to see is speed increasing with wireless: 3G, 4G, LTE. They will focus there. Fiber will be in their back-hall networks, but it’s too expensive going to the home, as both Pac Bell and Verizon found out and stopped rolling it out. It’s a great technology, but until someone figures out how to dig up the ground and put it in more cheaply, it won’t be the predominant force.”

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Interestingly, some countries have taken the initiative to expand Ultra High Speed broadband to large segments of their populations and encountered similar problems with Fiber-to-the-X. New Zealand, for example, has undertaken a massive expansion of FTTH broadband service via a public-private partnership with the goal of reaching 75% of the country’s population by 2019. Similarly, Australia has undertaken construction of a National Broadband Network, which was originally intended to reach 93% of Australians, though that figure has currently been scaled back to 22% with a new government taking office. Both of these projects have been beset with cost overruns and political wrangling, and a drop in price of copper wire has added to the relative expense of New Zealand’s project.

However, with an increasing consumer appetite for streaming content on computers, tablets, and internet-connected TVs, the need for high speed streaming data will only increase over time.

Public Policy and Ultra High Speed Broadband

As the example of Australia’s NBN demonstrates, government policy will have a significant impact on the Internet connectivity speeds available to consumers. This does not just apply to Australia, of course. Government policy in the US will play a vital role in shaping the future of high speed Internet in a number of important ways.

Perhaps the most central way that government policy will affect the future shape of high speed Internet is the concept of Net Neutrality. Currently, Internet providers cannot privilege any data by granting it greater bandwidth. Providers must remain “neutral” in their allocation of bandwidth. However, a preliminary finding in Federal Court stated that broadband providers are not “common carriers,” and therefore the FCC has no jurisdiction to enforce Net Neutrality rules. This has far-reaching implications, particularly for the delivery of entertainment content. Large studios such as SPE could leverage their relative size, power, and purchasing ability to ensure their content is delivered at greater speed and higher definition than that of their competitors, leading to a fight for the higher tiers of broadband speed between content providers. In fact, reports have already surfaced of Verizon purposefully

Percentage of TVs Sold with Internet Capability

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slowing down access to Netflix and Amazon cloud services, though Verizon denies the charges.

An executive from NBCUniversal contacted for this report emphasized how important the decision on Net Neutrality is to the future of high speed internet from the perspective of a content provider: “The question is whether or not the big studios will be able to leverage broadband bandwidth to better distribute their content, or not.”

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The HR Implications of a Cloud-Based Future

Frank Palase, Senior VP of Strategy and Innovation at DirecTV, tells ILO that cloud technology will have significant impact on the hiring practices at all studios.

“Cloud computing will be at the heart of everything they’re doing. Whether it’s distributing their content, licensing, analytics, even video editing, digital production, post-production, it will be on cloud. And they will need the people who know the cloud to do it.”

Palase describes his ideal situation for a traditional studio going forward:

“You need to unite technology aspect under one leader, so you have one leader looking at tech over both retail and engineering. You don’t want too many people pushing the direction of tech.

“You want one CIO who’s running the show, who has philosophy of running everything on a single platform. That way you can maximize investment and stay focused. Otherwise you can get pulled between different technology groups.”

The critical question according to Palase, “is, do you build your own tools for home video processing and artwork? Somewhere like Sony will spend a lot of money creating digital studios. Do you buy that suite on the shelf? Do you use open source? Or do you have your own team do it? Any way you go, you’re going to have to have the engineers who can design and run those services.”

The New World of Entertainment HR, as Seen by the Netflix Chief Talent Officer

Patty McCord, former head of HR at Netflix, describes the issues she faced during Netflix’s move from traditional computing to cloud technology, in a recent Harvard Business Review article:

“If you’re in a fast-changing business environment, you’re probably looking at a lot of mismatches. In that case, you need to have honest conversations about letting some team members find a place where their skills are a better fit. You also need to recruit people with the right skills.

“We faced the latter challenge at Netflix in a fairly dramatic way as we began to shift from DVDs by mail to a streaming service. We had to store massive volumes of files in the cloud and figure out how huge numbers of people could reliably access them. (By some estimates, up to a third of peak residential internet traffic in the U.S. comes from customers streaming

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Netflix movies.) So we needed to find people deeply experienced with cloud services who worked for companies that operate on a giant scale—companies like Amazon, eBay, Google, and Facebook, which aren’t the easiest places to hire someone away from.”

McCord continues by describing the unconventional strategies she implemented in order to attract and retain talent:

Compensation. “Our compensation philosophy helped a lot. Most of its principles stem from ideals described earlier: Be honest, and treat people like adults. For instance, during my tenure Netflix didn’t pay performance bonuses, because we believed that they’re unnecessary if you hire the right people.

“Many HR people dislike it when employees talk to recruiters, but I always told employees to take the call, ask how much, and send me the number—it’s valuable information.”

Options for options.” If employees wanted stock options, we reduced their salaries accordingly. We believed that they were sophisticated enough to understand the trade-offs, judge their personal tolerance for risk, and decide what was best for them and their families. We distributed options every month, at a slight discount from the market price. We had no vesting period—the options could be cashed in immediately.”

Invest in in-house data analytics. Frank Palase, speaking from his experience directing IT and innovation for DirecTV, suggests that there is no substitute for an in-house data analytics team that is world-class, and career-focused on entertainment.

He points to Netflix as the exemplar. Amazon, by contrast, is less focused on industry-domain knowledge, and seems slow out of the gate in getting value from mapping data against entertainment offerings. On the consumer products side, by contrast, Amazon has staffed heavily for data analytics, and sees the benefits hour by hour as it optimizes the variables of price and promotion on its main site.

Omnicom’s Tom Harrison adds that “Employers should be looking at different people to analyze that data: not just statisticians, but people who can look at it in many different ways to find that actionable insight. Consider the difference between ordinary person doing a roundtable focus group vs. an anthropologist applying a more structured and scientific approach. That’s what they should aim for.”

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HR Implications of High Speed Broadband

As new generations of high-speed broadband emerge, Sony may be required to offer its digital content in a variety of file formats for different channels of distribution: one format for cable distribution, another for OTT, and another for wireless broadband.

Performance Points for Interoperability Across Platforms

The staffing implications are two-fold – more technology staffing required to execute multiple, parallel formats (or more staff required to supervise outsource vendors to do that work) – and, more importantly, hiring and retention of staff who are by nature and training more flexible in their capacity to move from standard to standard, and platform to platform, in their work.

Paul Strassman, former Chief Information Officer at Xerox who has spent a decade as a consultant to the U.S. Department of Defense on data management policy, advises that making interoperability everyone’s job is widely overlooked, and that with the advent of big data, the entertainment business, like the defense department, “has to give every employee, every professional, who has anything to do with data and information, a score – how good are you and moving what you do from this platform to that one, from Unix to Linux, from a wireless platform to a direct-fiber platform.”

Strassman continues:

“Don’t hire the best guy in the world at formatting rich data for wireless – hire the best guy and moving rich data from platform to platform.

“You need very high level technology people working with HR to build a measure that you can use to tag everyone who touches the data with how good a job they do making that data work well on different platforms. If you don’t do that, then everything fragments, and you’ll lose speed in the marketplace.”

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Accenture’s Vision for the Future of Staffing in Entertainment

Francesco Venturini, Global Managing Director of Accenture’s Entertainment and Media consulting practice, points to a number of significant staffing strategies that he sees arising from the fundamental changes ahead for broadcasters and studios:

- Staff for customer service and consumer data analysis. Broadcasters do this now, but not well. Studios don’t, but will have to.

- Consolidate. Any distinction between engineering, IT staff needs to be removed. Pulling down barriers between IT and customer-service staff where they exist. As far as possible, bring the technology leaders into all strategic planning functions.

- Outsource more. Look at finance, HR, facilities and technology application development and move as much of it as possible out of the organization.

o Venturini writes, in a 2013 report, that “an industrial approach to all non-core, back-office (HR, finance and administration, some areas of technology). Costs can be reduced through partnership with specialized providers regulated by clear service level agreements, or in some cases (i.e., large conglomerates), using a shared service model to capture economies of scale.”

- Focus on reducing idle time for studio capacity. New media and new distribution will be enlarging demand for the things that only a real studio can do, but institutional habits will push those demands away; instead, they should be embraced, and models for supporting bottom-up development experiments should be embraced. (Putting YouTube serial producers on the lot when facilities are underutilized holds great promise- though every instinct of the organization will push the other way).

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Appendix

Human Resources Implications:

Staffing at Studios will change, most visibly on the distribution and production sides of the business.

Hiring and retention practices for staff who are more technology-fluent will have to compete with pure-tech employers (many of whom, like Netflix, will be looking more and more like hybrid entertainment companies).

Patty McCord, Chief Talent Officer at Netflix until 2013, outlines a number of actions she took as Netflix consciously shifted toward a more tech-oriented hiring and retention model.

Employees can choose the proportion of option-based compensation they prefer.

Employees are made highly aware of an A+-only retention policy, modeled on McKinsey’s up-or-out culture (“Employees and the whole world know that even the people we let go are extraordinary.”)

There is no vesting period for options, or other incentives to retain key staff other than love of the work and love of the company.

Understaffing and outsourcing everything possible are core practices.

Relying on Amazon Web Services for the execution of all Netflix streaming is an HR decision as much as a technology decision. The Silicon Valley culture of specializing and doing only what a company does best drives the decision.

The org chart will be leaner, with more critical value distributed up and down the chart. As in tech companies and the pharmaceutical industry, the mid-level professional in the post-Cloud studio will add more value to the enterprise than the typical executive in today’s studio model. Contribution to the enterprise per employee will go up significantly. Compensation and retention strategies will have to follow suit – though overall staffing per unit of revenue will be smaller.

The role of the Chief Information Officer will become ever more important – whether or not that title is used.

Technology design and building will be outsourced to an even greater degree than today – but the insight into technology choices, and the capacity of

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emerging technology to follow the habits and dreams of consumers, will be far more valuable in the emerging entertainment business model, and will be best kept in-house.

Disney’s Digital Copy Plus offering is a good model for the kind of platform-agnostic, open standard that protects a branded distribution channel while giving both the studio and the customer more technology choice. It reflects an understanding of the CIO role at Disney, and a syncing up of the CIO function with emerging customer behavior.

Production, planning and distribution are likely to merge as functions, all focusing on real-time data. “Overnights” and opening-weekend numbers will fall away in significance, as immediate visibility of current streaming demand and current viewer behavior become the metrics that will drive decision-making in real time.

Growing investment will be needed in staff to manage outsourced social-media monitoring and insights work, and parallel staff to do that work in-house as well. WPP’s Jason Aspes points out that “social media promotion and social listening are serious disciplines, and a few shops are very good at them. I think you’re already seeing some strategic acquisitions of small promotion and production companies specifically to capture the talent there.”

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