For years, the entertainment industry tried to fool us -- and itself -- into thinking that it only prospered by giving consumers what they wanted. Thanks to video on demand, we are now discovering what a big lie that was.
The real strategy of the entertainment industry has been to force customers to pay inflated prices to watch the movies and television most profitable for the industry to produce, at times that allowed the industry to rake in the most money, and distributed through channels designed to keep out upstart competition.
Think about it for a minute. Here's an industry that for years got away with providing 22 original episodes of television shows for a 52-week year. An industry that over the years has forced moviegoers to travel longer distances and stand in longer lines -- and once they got in, forced them to sit through 20 minutes of advertisements and pay ridiculous prices for appallingly unhealthy snacks sold in super-sized portions. An industry that makes cable customers purchase 20 channels they don't want to get the one channel they do. An industry that charges the same price for a lousy movie as it does a good one.
But technology now threatens to put the consumer back in charge.
Thanks to TiVo and other Internet-based technologies, people not only can watch what they want when they want to watch it, but they can also do so without having to watch commercials. Suddenly, the whole concept of a prime-time lineup has been tossed out the window, along with an economic model that's been around since Geritol decided to sponsor the Ted Mack amateur hour.
To try to get ahead of this wave, CBS and NBC this week announced deals with satellite and cable providers that will allow customers to watch certain shows anytime they want, for a fee. ABC will join with Apple Computer to allow owners of new video iPods to download portions of some of its most popular shows. And NBC announced that its nightly news broadcast would be available over the Internet once it had been broadcast to the West Coast.
While nobody knows exactly how all this will shake out, several things are already clear. Much less of what we think of as television will be paid for by advertisers, and more by viewers. Television networks will need to hammer out new financial arrangements with local affiliates, which will lose the monopoly they have over distribution of network programming in their area. And the big networks will continue to lose market share, not just to niche cable channels, but to interactive gamers and anyone with a good idea, a studio and access to the Internet.
It's much the same challenge facing Hollywood. Over the years, the major studios have been getting less of their revenue from movies shown in theaters -- the estimate for this year is 15 percent -- and more from home viewing. At first came television's Saturday Night at the Movies, and then Blockbuster, then HBO.
But things really took off with the arrival of DVDs, Netflix and affordable flat-panel TVs. Now cable operators, phone companies and satellite services are rushing to expand their ability to offer customers any movie they want, any time they want it.
As the market has moved in this direction, the gap between when a movie opens in Los Angeles and when it is released on DVD has fallen to four months from six. Already, entrepreneurs Mark Cuban and Todd Wagner have roiled the industry with plans to produce high-quality movies that will be released simultaneously on DVD and at their Landmark Theaters. And no less a figure than Robert Iger, Disney's new chief, has said Disney may do so as well.
This doesn't mean that the oft-predicted demise of the neighborhood movie theater is finally upon us. But it does mean there will be fewer theaters and that those will have a very different economic model -- one that doesn't depend on overcharging for popcorn or giving the studios 70 percent of the first-run ticket price.
The economics of Hollywood also will change. The studios will be indifferent about how you choose to get a movie -- their profit will be the same whether you see it in the theater, rent it or order it up from Comcast. But prices are likely to vary considerably, depending on how popular the movie is, how close it is to the time of release or how much it costs to deliver it through the channel you choose.
More significantly, the way studios compete will fundamentally change. No longer will they be focused on churning out formulaic blockbusters featuring overpaid superstars, marketed extravagantly and pushed through a captive distribution system. Instead, the studios that do best will be those that make, or buy, a wider range of well-done movies for a variety of niche audiences reached through targeted marketing and distribution channels.
There are many ways to describe this new entertainment industry. The ones I like are competitive, efficient and consumer-driven.
Steven Pearlstein will host an online discussion at 11 a.m. today at washingtonpost.com. He can be reached at firstname.lastname@example.org.