Clash of the Titans: Evolving Roles for Silicon Valley and Hollywood

If Hollywood sometimes believes that it’s the center of the world, then Silicon Valley is a firm believer that it’s the center of the universe.  That’s why the storyline that is happening in the storytelling business is fascinating to watch, because Silicon Valley (broadly speaking, the technology world) believes that to grow revenues and keep shareholders happy, it needs to be in the content business.

Advertising Revenue as the Holy Grail

Everywhere you look, tech firms are getting into content, directly or indirectly.  The latest example is Intel’s push into the cable business.

This all began with Google boasting a $275 billion market cap, powered by its strength in the advertising business.  Forget for a second that Google remains the only ad-supported tech company; it also managed to leverage that golden goose to expand into other businesses and encroach on Microsoft and take on Apple, so others are envious.  As Google acquired YouTube and needed to fine-tune its advertising strategy by morphing from a performance-centric ad platform to a branding-focused one, it has led to a radical shift in the landscape.

Considering its pedigree, it’s not necessarily surprising to see Hulu evolve into a producer. Netflix’s evolution to a content producer is also not necessarily shocking, if you study the history of the studios.  But what is more revealing is the change of philosophy at tech firms.  Google’s YouTube remains an aggregator (even though it has directly underwritten $100 million worth of content).  But its YouTube Live and Google’s acquisition of Zagat suggest that the future might hold a director’s chair in Google’s future.

Then what to say about Microsoft, which basically just made a 180-degree turn?  If you haven’t figured it out, consider this: after unloading its ad tech platform Atlas to Facebook and essentially getting out of the ad tech business, Microsoft is now getting back into the content creation business after hiring CBS exec Nancy Tellem.  Considering that Microsoft paid $6 billion for Atlas’ parent aQuantive in a largely defensive move to counter Google’s $3.1 billion acquisition of Doubleclick, this is a monumental shift in strategy.

New York’s Role as Underwriter

And what about the Big Apple?

Of course, it’s hard to talk about the center of the earth or universe without thinking of New York City.  Historically, Wall Street laid claim to being the center of our galaxy, but its recent downsizing in the past decade suggests that another industry in the Big Apple may lay claim to that title: Madison Avenue.

Until the Web came along, television was a dual-revenue stream business with subscriptions and advertising.  While we’re seeing some traditional media companies experiment with paywalls and subscription models (either to maximize revenues or for mere survival purposes), the fact of the matter remains: the Web will remain a largely free, ad-supported medium.  As such, the companies that are creating direct or indirect barriers to their content and brands will simply not maximize value relative to those who give it all away.

It might not be surprising that one early pioneer of the Web — AOL — isn’t betting on technology but rather, content. According “to AOL CEO Tim Armstrong: Silicon Valley is a ‘pig pile’ where every company is copying every other company,” writes Dan Mitchell in Fortune. “Everyone is putting out the same services, the devices have become more commoditized, and the platforms are the same,” Armstrong said in a recent speech.

Falling Ad Rates and Cable Business Challenge

Despite falling ad rates and fragmentation of mindshare, Armstrong remains steadfast in his belief that content, “more than gadgets and more than platforms, will be what drives communications technology,” writes Mitchell, positioning AOL to be, as Armstrong notes, the “arms dealer to Silicon Valley.”

We shall see.  But when you consider that uber-aggregator Netflix is now spending $3 million to $4 million for each episode of various shows and getting into content creation in a big way, you have to wonder if Armstrong is onto something.  Then again, if Armstrong et al are betting big on content in the hopes of attracting ad dollars, then it’s worth noting that advertising is changing in every way possible. CAA TV literary agent Peter Micelli “believes that Netflix’s focus on Big Data to guide viewers to content is a big advantage,” writes Andrew Wallenstein in Variety. Micelli notes that Netflix is “not spending $40 million a show on a marketing campaign. They have a guy in a room who writes an algorithm.”

Lower Cost of Production

Fair enough.  But if that means that for every show or movie, there’s $40 million in lost advertising, then perhaps everyone needs to rethink their content strategy to shrink it to reflect the times.  Spending $4 million per episode sounds great if you want to tell the world you’re serious about the content business, but that doesn’t make it a sustainable strategy.