image old feature film equipment

What digital transformation can learn from the Hollywood Studio System

The past still matters in our digital age

If anything, we should be learning as much as possible from the industries of yesteryear to understand how they used new ways of working and technology to drive competitive advantage.

One example that provides such insight is the so called “Studio System”, where major Hollywood studios dominated the North American film industry during the first half of the last century. The ways they achieved this and how this “Golden Age” came to an end could help shape an organisation’s competitive strategy today. Here are some ideas…

Value chain dominance

The major film studios owned or controlled the production, distribution and exhibition of films in North America during this period. They achieved this vertical integration of their value chains by effectively combining mass film making technology with a production line approach to content creation.  This meant they could lever significant economies of scale to control costs end-to-end to deliver sustained profitability.

However, their competitive advantage was contingent upon them being able to maintain a monopolistic position with limited government intervention. This led to a federal antitrust suit that forced these studios to give up control of film distribution in the late Forties – effectively ending their monopoly of the North American market.

Today we can see examples of companies being scrutinised about how they leverage digital capabilities to exert ownership or control over value chains. For example, Internet search engine providers have recently been challenged by the European Union about alleged anti-competitive behaviour in the way they handle product search results.  They also find themselves subject to other forms of government intervention relating to their collection of personal user data.

The drive for value chain dominance is set to continue with the expected explosion of Internet of Things (IoT) predicted for 2016. This technology potentially enables a company to capture and use data solely to control any aspect of the customer experience end to end. Consequently to mitigate the risks of government intervention, such a company may wish to embrace game theory approaches such as “coopetition” – collaboration with competitors to deliver IoT services in mutually beneficial ways – to avoid being perceived as monopolistic.

The captive audience

At the height of the “Studio System” era, collectively the major film studios were producing over five hundred feature films a year. Such production at scale was essential in meeting audiences’ thirst for new content (especially given they had limited choice for entertainment apart from studio-controlled cinemas). But such volume of throughput made it difficult for the studios to maintain consistent quality – A grade pictures would often be exhibited to audiences with lower quality budget “B movies” to help drive sales of both.

This cost focus, non-differentiated approach to producing high volume content became a key strategic issue for the majors as the popularity of television surged in the Fifties.  Audiences now had more entertainment options and became increasingly discretionary about their viewing habits.  Television was a “disruptor” – it was materially cheaper to produce quality TV content (and easier to distribute) than film. The majors now faced an unforeseen challenge that exposed their films to materially greater risks of being financial flops as audience demand for higher quality content rose and their switching costs to this rival media channel was virtually nil. The “Studio System” would never recover from the impact of television.

Many of today’s companies face a similar challenge – the risk of competitors stealing customers by using disruptive technology to lower switching costs while simultaneously trying to exploit the same approach themselves to cost effectively deliver quality products or services to sustain market share.  We can see this in the once monopolistic Telco industry, where 3rd party digital-enabled video, voice and text messaging data service apps have arguably decimated incumbents’ revenue from their own telecommunication services.  As a result many existing players are aggressively adopting Agile ways of working to diversify into new digital markets (from app development to over-the-top content).

Is the effective adoption (and adaption) of Agile by companies essential to them delivering as the disruptor and market incumbent simultaneously to drive profitability?

The talent advantage

Many quality actors (or “bankable stars”), directors and writers were contracted to work only for specific film studios during the “Studio System” era.  Effectively a barrier of entry, such a move enabled a major to exploit (or sweat) these assets to their full commercial potential with no risk of them being poached by competitors.

But as the majors lost their control over distribution and the competitive pressure of television grew, these assets increasingly became their main source of differentiation.  Unsurprisingly “the talent” themselves exploited this position through demanding higher salaries and a profit share from their own pictures. Such a move impacted the majors’ ability to turn a profit, further contributing to the demise of the “Studio System” and the emergence of new business models for the North American film industry.

Today a lack of digital talent is a major risk for many companies – with notable examples being the limited labour market supply of experienced DevOps, Data Scientists, Agile Coaches and User Experience Designers. This highlights the critical requirement for organisations to adopt a resource-based view on digital strategy to help grow their existing people capabilities and leverage external market opportunities to pro-actively address skills gaps.

Although such resources are perhaps not “Hollywood Stars”, the scarcity of such skilled talent can mean they can be relatively expensive resources to hire and retain. That’s why it’s essential for an organisation to have an effective talent management function to manage these cost challenges and develop capabilities in-house to reduce long-term dependency on external labour supply. Without such an approach, a company could face spiralling wages not dissimilar in impact to the effect felt by the majors of the “Studio System” era.

If you would like more information about how Digital Transformation can benefit your organisation please contact the Sopra Steria Digital Practice.

Published by

Mark Howard

Mark advises on user centric digital service design & transformation with a focus on tangible business benefits realisation. His passion is helping organisations to transform how their people use digital ways of working to interact with users to deliver an seamless, integrated customer experience. Mark’s recent private sector experience includes delivery of a mobile application prototype for a European business services company and advising a major UK high street retailer about using enterprise social media tools to drive competitiveness. Mark has 10+ years consultancy experience advising blue chip Telco, FMCG, Retail and Pharma clients as well as UK Central Government. Mark holds an MBA from Open University.