• by Diane Mermigas , May 28, 2010

The fourth Shrek film recently fell far short of projected opening weekend box office sales -- and some theaters were selling tickets for a record $20. Was the culprit Shrek fatigue, an unrealistically inflated value proposition or a flood of competing entertainment choices?

Try all of the above.

The situation underscores the dilemma vexing Tinseltown and other media mired in a system of ROI assumptions at odds with today's digital realities.

Films and television are being produced and are competing as if it was 1980. They are setting themselves up for perpetual economic shortfalls that cannot be sustained. They are not in sync with the interactive behaviors and preferences of consumers and marketing partners. The film industry provides a clear example.

The collapse of consumer spending on DVDs resulted in a -4.3% decline in annual revenues in 2009 at the film divisions of majors, such as Disney, Time Warner, News Corp., Viacom and Sony. It was the second consecutive annual decline and the third in the past five years, according to a Bernstein Research report.

Hollywood studios responded with deep cost cuts, reduction in the number of films produced, a giant leap onto the 3D bandwagon and increased reliance on hit franchises such as Shrek.

The strategy has failed to hold up as studios continue to ignore the fundamental shift in consumer habits and values. Many consumers are content to view films and other content on video game consoles and Web sites, and prefer more social interactive pastimes. Consumers have demonstrated they will judiciously spend their time and money on what is most relevant.

The means of accessing content and communications has become as important to them as the end product. It's all about the entire interactive experience, which is why Apple has become the most valuable media and tech-related player with a $222 billion market cap.

That said, there is little about either film or television that is truly interactive.

Shrek Forever After generated a mere $71.2 million its opening weekend, nearly half of the $122 million generated by the launch of the third Shrek film three years earlier. The addition of 3D technology failed to drive the fourth Shrek film as it has Avatar and Alice in Wonderland, suggesting the premium-priced fad is wearing thin.

Even as the global box office (which saw revenues climb 7.6% last year) offsets deteriorating home entertainment trends and as the post-recession rebound in ticket sales temporarily boosts revenues, studio executives should focus on how to reposition their businesses digitally.  Instead, they respond to competitive challenges through a waning business paradigm.

The same phenomenon also threatens television. There is little evidence in this spring's upfront unveiling of new series and ad pricing that the broadcast networks comprehend their marginalization. Each of the Big 4 continues to spend as much as $3 billion annually producing and marketing new programs, most of which fail. They have yet to figure out how to solicit paid revenues for their content online, settling instead for retrans fees from cable operators, as long as they remain in a competitive position to pay them.

Never mind that the Big 4 continue to lose 6% of their audience every year and are struggling just to make up the 20%-plus revenues lost last year during the depths of the recession. With audience and advertisers' fragmentation eroding any hope of substantive organic growth, there are no efforts being made to reinvent the broadcast TV network model.

Genuine change at the Big 4 could include producing and selling programs on demand across all platforms, accelerating interactive content across all screens wrapped in social media, and loosely employing a Google-like auction for the pricing and placement of commercials.

Those prospects surely have not been lost on Comcast executives who will face having to radically revamp or dismantle NBC TV's losing ad-dependent business when it becomes 51% controlling owner of NBC Universal next year.

Earlier this week, reports surfaced (which the company denied) that Disney has been negotiating to sell its ABC TV Network to private equity. It is a viable option, given that all broadcast TV networks will increasingly be a drag on overall corporate earnings with diminishing returns and fading brand value.

The economic impact of playing by old rules in a new world will become even more profound as media companies seek to buy and sell assets (think MGM) whose worth has been thrown into question by the digital transformation. 

With more than $160 billion in ad spending and more than $800 billion in corporate enterprise value at stake, according to Needham analyst Laura Martin, film and television players need to make a full-blown commitment to getting in the digital game with a bottom-up overhaul. It's increasingly evident that just nibbling around the edges of change is not an option.