Thursday, June 24, 2010

Why VHS didn't kill the Movie Theatre

If you're a teenager or older, you'll almost certainly have first-hand experience with VCRs and video tapes. If you don't remember them, they're big things that have been replaced by DVR's, but which you could buy movies on, like with DVDs. They were in most peoples homes throughout the late 80s and the 90s. Yet they were nearly wrestled out of peoples hands around thirty years ago, because of the fear of an industry. Let's first look back at the late 70s to understand why.

In the late 70s there was a kerfuffle between Sony, and the movie studios. It concerned the BetaMax VCR Sony made (and to a lesser extent the JVC/Phillips VHS system). There were concerns that with these machines, people would undermine advertising (argument A), making the amount that could be charged for them drop, reducing funding for TV stations and networks. It would also mean that movies played on TV would have to cost more for the stations, because people will record them, and keep them, and watch them instead of, say, going to the cinema (Argument B). There were also concerns that since the recorders were mostly made outside the US, the importation of them would hurt the balance of payments (Argument C). Also, making movies is a risky business, and the government should do all it can to make it easier to be profitable (Argument D).  It was nicely summed up by Jack Valenti (head of the MPAA) in his testimony in front of Congress in 1982.

I've marked the three arguments A, B, C and D, and colour-coded them Magenta, Orange, Green and Blue in that order (as above). Now, if we examine Jack's testimony to congress on this subject, we can easily pick out these arguments. (It's a bit long)
<Excerpt from Congressional transcripts, Monday April 12 1982>

Mr. VALENTI. I have my man prompting me, point 675 of the gross revenues of a cable system for the use, for the privilege of using copyrighted material. So, what we are asking has nothing to do with shattering precedent. It doesn't collide with fair play at all. All we ask is this principle that you used in cable copyright be linked to the video cassette recorder and its control, the blank tape. I hope I am not moving too fast for this audience.

Now, let me tell you something about the high-risk business that we are in. This may be one of the most precarious business enterprises which a man or a woman can enter. Movie making is a high-risk business. Let me cite you some examples. The average film costs $20 million. That includes negative costs, advertising, promotion, prints, distribution costs -- $20 million.

Mr. Eastwood might want to talk about the cost of his current film. Eight out of ten films -- now, listen. These two statistics I am going to give you are really the nerve center of the statistical summary that you will have. Eight out of ten films do not retrieve their investment from theatrical exhibition.

Mr. RAILSBACK. Is there any water over there?

Mr. VALENTI. Six out of ten films -- Mr. Railsback, I am going to tell you, when people think about that, they don't ask for water, they ask for brandy.

Mr. RAILSBACK. That is what we really have in there.

Mr. VALENTI. And 6 out of 10 films do not retrieve their total investment period. Now, what are you going to do right on top of that? There is going to be a VCR avalanche. Exports of VCR's from Japan totaled 2.57 million units in 1981. No. 2, the United States is the biggest market. No. 3, February 1982, which is the latest data, shows the imports to the United States are up 57 percent over 1981. This is more than a tidal wave. It is more than an avalanche. It is here.

Now, that is where the problem is. You take the high risk, which means we must go by the aftermarkets to recoup our investments. If those aftermarkets are decimated, shrunken, collapsed because of what I am going to be explaining to you in a minute, because of the fact that the VCR is stripping those things clean, those markets clean of our profit potential, you are going to have devastation in this marketplace.

Now, is this all? Is it going to get any bigger? Well, I assure you it is. Here is the weekly Variety, Wednesday, March 10. Head1ine, "Sony Sees $400 Billion Global Electronics Business by the Decade's End," $400 billion by the decade's end. In 1981, Mr. Chairman, this United States had a $5.3 billion trade deficit with Japan on electronic equipment alone. We are going to bleed and bleed and hemorrhage, unless this Congress at least protects one industry that is able to retrieve a surplus balance of trade and whose total future depends on its protection from the savagery and the ravages of this machine.

Now, the question comes, well, all right, what is wrong with the VCR. One of the Japanese lobbyists, Mr. Ferris, has said that the VCR -- well, if I am saying something wrong, forgive me. I don't know. He certainly is not MGM's lobbyist. That is for sure. He has said that the VCR is the greatest friend that the American film producer ever had.

I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.

The VCR avalanche, I told you about that. Now, what about the VCR owners. Now, from here on out, Mr. Chairman, I am going to be speaking about a survey done by the Media Statistics Inc., which is a prestigious firm out of Silver Spring, Md. We, meaning the MPAA, did not commission this survey. We bought it after it was done when we heard about it. So, this was not a case -- we have commissioned a lot of things, but this is not one of them.

Now, I want to tell you about it because I think it is absolutely fascinating. This survey was taken in October 1981. It is the newest and freshest data available. Here is what it says. Median income of a VCR owner is between $35,000 and $50,000 a year. Not a lot of what we call today the truly needy are buying these machines. One-third of all the owners have incomes of more than $50,000. Now, here is the next one: 87 percent, 86.8 percent of all these owners erase or skip commercials. I have here, Mr. Chairman, if you are not aware of how this works -- this is Panasonic. This is a little remote control device that you use on machines. It has on here channel, rewind, stop, fast forward, pause, fast advance, slow, up, down, and visual search, either going left or right.

Now, let me tell you what Sony says about this thing. These are not my words. They are right straight from McCann Erickson, whom you will hear from tomorrow, who is the advertising agency for Sony and here is what they say. They advertise a variable beta scan feature that lets you adjust the speed at which you can view the tape from 5 times up to 20 times the normal speed.

Now, what does that mean, Mr. Chairman? It means that when you are playing back a recording, which you made 2 days or whenever -- you are playing it back. You are sitting in your home in your easy chair and here comes the commercial and it is right in the middle of a Clint Eastwood film and you don't want to be interrupted. So, what do you do? You pop this beta scan and a 1-minute commercial disappears in 2 seconds.

Mr. RAILSBACK. Is that all bad?

Mr. VALENTI. If you are watching a Clint Eastwood film it is the most cheerful thing you can do. However, if you are an advertiser who has paid $280,000 a minute to advertise, he feels a very large pain in his stomach as well as in his checkbook because it destroys the reason for free television, the erasure, the blotting out, the fast forwarding, the visual searching, the variable beta scans. the technology is there and I am one who has a belief that before the next few years the Japanese will have built into their machines an automatic situation that kills the commercial.

Being advertised today in all the video magazines, and if any of you take video magazines, here is a marvelous little device called the Killer. It eliminates those black and white commercials. You put the Killer onto your Sony and it automatically takes out the commercial. You don't like the Killer, try the editor. The editor will do the same thing. It will wipe out commercials.

The technology is there in my judgment, in the next several years, where an integral part of the machine will be automatic Killer. But you don't need that now as long as you have this. Indeed, when my son is taping for his permanent collection, he sits there and pauses his machine and when he is finished with it, he has a marvelous Clint Eastwood movie and there is no sign of a commercial. It is a brand new movie and he can put three of those on one 6-hour tape.

Now, the average --

Mr. KASTENMEIER. May I interrupt, Jack, on that point?


Mr. KASTENMEIER. And it is a point that just occurs to me. Actually, the advertiser doesn't pay for a taped replay of any program of that sort. He pays only for a live telecast, where his commercial appears and no matter how it is deferred, he doesn't pay for the deferral because that person wasn't there watching it the first time, presumably it is missed for commercial --

Mr. VALENTI. Mr. Chairman, I am going to defer that question because I have at this table Mr. Eliasberg, for 34 years a practitioner and a student of research in what Nielson and Arbitron present to networks and advisers, what they pay for and what they don't pay for. And rather than me, race over, take time, may I defer the question to Mr. Eliasberg.

Mr. KASTENMEIER. We will defer that question.

Mr. VALENTI. And he will be able to handle that for you even much better than I will.

But at any rate, that is a very relevant point that you make and it will bring it out, what the problem is and you will see that as you get into the future, this becomes a devastating problem for both advertisers and producers, who will get less for their programs on the air and that is what I am talking about. When less revenues are available to the networks and less revenues are available then to the producer -- Mr. Ferris and his people will tell you, oh, the marketplace will adjust, as if some tooth fairy hovers over the place and says whenever you lose here, we will be glad to pay for it. Nobody pays for value they don't receive and that is an axiom of the business marketplace.

The average number of cassettes per household -- this is fascinating -- Mrs. Schroeder, was 27.7, 28 cassettes. Now, if you are just time shifting, all you are doing is you are away from home and you are taping something and you come back and you watch the commercial, then you time shift, you don't need 28 cassettes. You need one cassette or at the most two. Why do you have 28? Why? Because of the next line. Seventy-five percent have a permanent collection. My own home, we do it in our on home. I know about that. Anybody that has a VCR, talk to them, and I ask you to use your own commonsense, Mr. Chairman, Mrs. Schroeder, Mr. Railsback, just think of you as human beings. If you had the power to sit on a playback of a recording and you could wipe out the commercials or not wipe out the commercials, what would you do? You would do exactly what you said, sir. That is terrific. Of course. We all do it.

But when you do it, you strip away the reason for free television. Now, let me --

Mr. KASTENMEIER. Jack, let me ask you. Do you consider yourself and your family infringers when you engage in that practice?

Mr. VALENTI. I consider myself and my family believing what the plaintiffs in this lawsuit said and they said publicly, they have said it to the press, they have said it to the lawyers, they have said it to the courts. They do not intend to file any actions against homeowners now or in the future. I mean, that is obvious and they have said that publicly, Mr. Chairman, so I believe them. As far as I am concerned, I am going to continue taping because the plaintiffs have said they aren't going to do anything to me. I am not committing any crime. They know that.
Jack Valenti
Jack Valenti - Mastermind,
 or Moron?

Mr Robert Kastenmeier was a Democrat from Wisconsin's 2nd District. Tom Railsback was a republican Congressman representing Illinois' 19th district. Jack Valenti was, of course, head of the MPAA from 1966 to 2004. There's quite a lot more, and you can read it all at at cryptome

Is that all true? Well, let's look at the arguments.
  1. Advertising is a tough business. You have to make a clip that attracts and hold's peoples attention. Fast-forwarding an advert is no different from getting up and leaving the room, to make a cup of tea or visit the toilet. In fact, it's better, since that at least see some visuals. Clearly it's then up to advertisers to make adverts that entice even at 20x speed.  Also, despite it being almost 30 years later, and with vast improvements in computing power, and TV signals sent digitally, there's still no way to have adverts automatically removed. It's probably POSSIBLE now, thanks to DVRs and extensive processing, but not liekly, since as soon as it started, advertisers would be trying to break the system. I can see that, because I bothered to look at, and understand the technology. I'm not an expert on  the technology, nor do I head a massive lobbying firm central to the industry, and certainnly hadn't spent 16 years (at that point as head of that.
  2. Unless people take the time to remove the commercials, they're going to still be on the tape. Which means as something is replayed, the adverts are seen again, at NO cost to the advertiser. If the adverts are edited out, well, someone's had to sit there watching with the pause button, meaning someone watched the adverts. So, if anything, the cost for the advertising would go UP. Growing up, we had almost a complete collection of Carry On.. films, recorded from the televison; all of them had the adverts still in. Everything from ELS (a furnature store), and the British Rail privatisation, to the promotion of the 'Warrington-Runcorn' business area and the Barratt Helicopter adverts. My Favourite was the Volvo 340 advert, which is why my first car was identical to the one in this advert (even down to the caved in front, at the end).
  3. As we have seen more recently with the car industry,because the brand is based abroad, doesn't mean it has to be made abroad, or that only overseas companies could make them. Encourage factories to be built in the US, companies like Zenith to not only start making them, but make the BEST and they can sell those overseas.
  4. Finally, the risk is a part of the business. If you make a loss, either the business isn't worth doing, or you're not doing it right. In either case, complaining that because your business is run so badly, and as scant attention is paid to the profitability, anyone threatening to reduce the profitability shouldn't be allowed to is protectionism. It's "we're bad, but make us the only game", and it's not good for anyone. In the end, the VCR made it LESS risky, as it provided another market, this time of pre-recorded tapes, without adverts, giving the industry a long-tail sales market that was responsible for a large chunk of income - in 1987, rental income was $5.25 billion, the box office income was only $4.2 Billion.
The strongest evidence that most of what was claimed is total bunk, is very simple. Despite getting NONE of what it wanted back then, the movie industry is not only still going, it got bigger, vastly bigger. It's almost as if Valenti was telling any lie he could, trying to incite any fear possible, to try and obscure the facts. Gee, telling lies to convince politicians that don't look at the facts - nah, that'll never happen....

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