This essay is adapted from a TEDx talk I gave in 2011.
In the Mayan calendar, 2012 was predicted to be the end of the world. A Hollywood movie was made about it. I’d like to propose that it will actually be the world of home entertainment that will face its day of reckoning next year.
How I Got Into the Entertainment Industry
About eight years earlier, I co-founded BitTorrent Inc. According to film industry research, our software was being used to deliver about a million movies a day. That wasn’t exactly what the software was designed to do, and it obviously didn’t make the film industry very happy. But I saw an opportunity: as a large distributor of movies — I could take a deeper look into the entertainment industry.
I’m not an industry insider. I’m a tech geek. So I did what any curious outsider would do — I asked everyone I could about how the business actually worked.
The Value Chain
What I found was a complex set of relationships stacked like a ladder between a piece of creativity and your living room. Creators — actors, writers, directors — work with producers who provide the financing. Producers work with studios that handle marketing and distribution. Studios work with massive companies that own the physical real estate — cable systems, retail chains, theater networks — to make entertainment available. And at the very bottom of this ladder, invisible to most consumers, is the device you actually watch it on.
A few truths governed this world. It’s not what you know, it’s who you know. A small number of taste-makers — the people who can put you on prime time television or cast you in a movie — are genuine kingmakers with the power to create instant worldwide celebrities. The successful players optimize scarce real estate: the broadcast spectrum only supports a certain number of networks, and the shelf at Walmart only holds a certain number of titles. And all of that real estate — laying cable in the ground, building stores across the country — costs tens of billions of dollars.
Then Came the Internet
The internet disaggregated all of it. Every member of the value chain suddenly had the ability to reach audiences directly by putting up a website, no longer beholden to the stakeholder sitting to the right of them. The cost of making content was rapidly declining — camera and editing technology was widely available and cheaper than ever, which meant more voices and more creativity. We could no longer rely on one person sitting in a high-rise in New York to determine what we’d see or hear. Search engines and social networks were already stepping in as the new editorial layer.
The billions of dollars in physical real estate were no longer a competitive advantage, because the cost of moving bits around was quickly approaching zero. This was the phenomenon that was near and dear to my heart — and the reason that BitTorrent and other peer-to-peer technologies had accidentally fallen into the role of entertainment distribution. Whether the industry made something available or not, if you wanted it, you could get it. Nothing really stops the flow of information on the internet.
And that device — the one that used to be invisible — suddenly had profound new meaning. The device became the gateway.
The Pattern: Physical Media’s Predictable Collapse
This could be very bad news for the home entertainment industry, which had placed all of its emphasis — all $40 billion of it — on physical media distribution through three standards: the CD for audio, the DVD and Blu-ray for video.
Not too long ago, the CD lost its relevance. Were people not listening to music anymore? Of course not — thanks to portable music players, consumers were listening to more music than ever. But the professional standard had been replaced by a consumer standard: the MP3, which compressed the same content into about one-seventeenth the footprint.
The same thing happened with DVD. Around 2007, DVD experienced the same peak the CD had hit several years before. We were consuming more video than ever, but the DVD wasn’t how we were getting it. Thanks to compression technology like DivX, people could get movies at a fraction of the original file size.
The film industry got clever. They put their best minds together and — after a format war between Blu-ray and HD DVD that lasted longer than it should have — settled on Blu-ray as the messiah. It contained so much information, they reasoned, that it would take too long to download. People would keep going to Walmart and buying it the old-fashioned way.
But the beginnings of a new consumer standard for HD were already emerging on file-sharing sites around the world: an open-source codec called x264, roughly one-seventeenth the size of a Blu-ray disc. It wasn’t widespread yet, but the distributed communities around the web were coalescing around it.
Two Laws That Predicted Everything
I proposed two vectors that determine when a consumer standard overtakes its professional counterpart: collectibility and portability.
There’s a law in the tech industry called Kryder’s Law that describes how much data you can pack onto a hard drive. When I plotted the growth of hard drive capacity against format sizes, a striking pattern emerged. When the CD peaked, you could fit about 350 albums’ worth of MP3s on an average hard drive. When the DVD peaked, you could fit about 350 DivX movies on an average hard drive. So when would you be able to fit 350 x264 Blu-ray equivalents on a drive? The answer pointed straight to 2012.
The portability vector told the same story. Nielsen’s Law describes how internet access speeds grow over time. When the CD peaked in 2001, you could download an album of MP3s in about 30 minutes. That same 30-minute threshold appeared at the peak of the DVD market. And when would you be able to download an HD movie in 30 minutes? Again: the end of 2012.
The Brave New World
So what did this mean? It meant we’d all have these bright, beautiful, big-screen TVs in our houses — but we might not be using them for physical media. The sooner the entertainment industry could come to grips with the end of this world, the sooner it could start making plans for a brave new world — a world where not just the traditional distributors of entertainment could reach the display, but where anyone could reach the display.
The evidence was already there. Companies that figured this out were doing really, really well. The sooner the industry could accept the inevitable, the less painful 2012 had to be.