You are where you spend time. And my boys, like the rest of America’s youth, are TikTok. When asked whether they’d prefer TikTok or all other streaming platforms, tomorrow’s business/civic/military leaders pick the former. TikTok is the most consequential Asian import since … Datsun. Datsun was the first Japanese car to register success in the United States. Initially derided as "small" and "cheap," Datsun, and then Honda and Toyota, did to America economically what the Empire of the Sun could not do militarily.
Detroit’s Big Three automakers, arguably the most formidable manufacturing troika in history, had their backs broken, and toggled in and out of bankruptcy for the next few decades, becoming symbols of American decline. Today a similar shit-kicking is taking place. Hollywood’s dominance over film and TV is at risk from another Asian marauder. ByteDance is the Datsun/Honda of the era. Will Hollywood be the next Detroit, an abandoned shell of its former glory? Probably not. In-N-Out Burger, the Hollywood Bowl, and the weather are formidable moats. However, it’s beginning to smell like teen spirit. If teen spirit is an industry that’s coming off a sugar high of cheap capital. The coming withdrawal will feel more like trying to kick an opioid addiction.
1903
The "modern" world began in 1903. The Wright brothers flew the Wright Flyer on December 17, 1903. Henry Ford founded the Ford Motor Company in Detroit on June 16, and the city of Hollywood was incorporated just north of Los Angeles on November 14. The airplane industry expanded slowly, but autos and movies exploded culturally and economically. Both were, for a time, dominated by a small number of companies based in Detroit and Hollywood.
Detroit’s Highland Park, with its own power plant, steel mill, and integrated executive offices, was the model for manufacturing in the 20th century. "Fordism" spread everywhere, in buildings designed by the Highland Park draftsman, Albert Kahn. In the 1920s the USSR hired Kahn to train the country’s industrial architect corps, and the Soviets maintained a formal office at Ford from 1929 to 1935 to learn the ways of Fordism.
By 1930, Detroit was the 4th-largest city in America and its fastest-growing metropolis. After World War II, the Big Three benefitted from years of pent-up demand and massive government investment in the middle class and roads/highways. Also, Detroit had an effective global monopoly, as we had carpet-bombed any German or Japanese region that possessed modern manufacturing capabilities.
Through the 1950s, Detroit was the wealthiest city in the U.S., likely the world. The Big Three (Ford, Chrysler, and GM, all headquartered there) dominated the global auto industry, with over 90% share. They erected one huge plant after another in the Detroit area, surrounding them with suburban developments housing auto workers and their families.
By the 1970s, however, the Big Three, and Detroit, were flailing. American cars had become bloated, dangerous, and unreliable. The Japanese turned rice into sake: Their decimated infrastructure let them start over, build modern facilities, and experiment with new methods. The Big Three, once innovators, had no catalyst for creativity. Industry analysts refer to this as the "Malaise Era." Think Chevy Citation or Ford Pinto. Japanese cars weren’t just smaller, but faster, safer, and cooler. Five decades of decline followed: Chrysler is now a subsidiary of Stellantis, GM declared bankruptcy in 2009, and the combined market cap of the Big Three ($163B) is half of Toyota ($316B), and a quarter of Tesla’s ($733B).
Golden Age
The first chapters of Hollywood’s story parallel Detroit’s. The City of Angels was Detroit West in many ways. Alongside automobiles, movies were icons of cultural and economic relevance through the 1930s. The industry pivoted to support the war effort in the 1940s, producing propaganda films and newsreels and selling war bonds. The industry reaped the benefits of the Allied victory, as Baywatch and Iron Man are essentially selling the American dream, built on the premier victory of the twentieth century.
Hollywood also faced challenges at midcentury. Again, a smaller car showed up. Television was more accessible, more varied, and cheaper. By the 1960s, Hollywood films were increasingly out of step with the culture — projecting 1950s imagery of white people as biblical characters or shooting savage Native Americans onto a world of race riots and sexual revolution. Audiences turned to James Bond, the Beatles, French New Wave cinema, and anything Brigitte Bardot.
Studios faced economic troubles, and many were taken over by financial buyers and conglomerates. Hollywood was on the precipice of the same foreign dismantling the Detroit automakers were about to experience. Sidenote: I bought my first stocks, 12 shares of Columbia Pictures (NYSE: CPS) at $16/share, when I was 13 years old living in Westwood, CA. I thought Close Encounters of The Third Kind was AWESOME (#truth). Ironically, Columbia was sold to Sony 12 years later. CPS didn’t get me to economic security, but four decades of investing in stocks have. But I digress.
Fork in the Road
This is where the stories diverge. Unlike the Big Three, Hollywood did not experience a generation of collapse. What did it do differently? In a word: quality. The industry adapted and started making better movies. They turned the keys of the kingdom over to young filmmakers and actors who weren’t squeamish about sex or violence and had something to say about the crises and traumas of the time. Midnight Cowboy, The Godfather, and Jaws were the Datsun 240Zs of their time, but produced by American studios. In the 1980s the studios discovered the power of the "blockbuster," the special-effects-driven dramatic film tied into fast food marketing campaigns and action figures. These film-based enterprises were the first zero-to-a-billion-dollars businesses to be built in 24 months, or less. The Hollywood ecosystem didn’t just survive, it thrived.
Hollywood remains the economic and cultural capital of entertainment, and the "Hollywood" studios are still the major players. In 2023 the top eight studios by U.S. box office receipts were all based in L.A. (though several are owned by out-of-state companies), and enjoy a combined 86% market share.
Sequel
Storm clouds are gathering, again. The most obvious issue is the movie theater, which, despite analyst predictions of an explosive post-pandemic rebound, has underwhelmed. One out of every five moviegoers has disappeared since the pandemic, and, last year, U.S. box office revenue amounted to just $9 billion. Hollywood was happy to report that number was up 20% from 2022. The fine print: It’s down 20% from 2019. As in the 1960s, the battle in entertainment is between screens — the big screen is struggling to fight off challenges from TVs and now, phones.
Of that $9 billion, Greta Gerwig and Christopher Nolan accounted for 10%. Barbenheimer’s success has been widely recognized as the saving grace of Hollywood, scooping up 17 nominations and seven awards at the Golden Globes. People think this is a good thing. In reality, the industry is becoming more concentrated as the big-budget, high-production-value projects collect an increasingly greater share of dollars and the rest of Hollywood is left behind. In 2003 the highest-grossing movie (Finding Nemo) made up 3.5% of domestic box office revenue — this year that number doubled, to 7%. Put another way, movie inequality is mimicking income inequality … getting worse.
The apparent strength of the Hollywood "studios" masks the international nature of their operations and the decreasing importance of the L.A. basin to moviemaking. Netflix has led the way. The company is based in California’s other industrial crèche, Silicon Valley. But it’s part of the Hollywood ecosystem nonetheless, with a quarter of its employees in L.A. and a flagship office on Sunset Blvd. It also understands the future is not in California, but everywhere else. The company will spend $2.5 billion on Korean content over the next four years, and it’s increasing investment in Brazil, Spain, Italy, and other countries, while "pulling back" on overall spend. (Translation: It’s reducing budgets for U.S. content.) There are now five Netflix offices in the U.S. and 24 internationally. Of its subscriber base, 69% resides abroad, up from 45% in 2016. The ecosystem is evolving to accommodate this shift. A third major film studio is opening in New York City this year, Wildflower Studios, but with a twist. The brainchild of Hollywood royalty and NYC native Robert De Niro, Wildflower plans to offer the entire production ecosystem under one roof, a "Hollywood in box" that can be replicated globally. Globalization means fewer jobs in L.A., not just for actors, but also for prop masters, makeup artists, and film editors.
Bangkok-based directors aren’t the only ones coming for Hollywood’s jobs — so is AI. The industry is a cornucopia of AI use cases. You could spend $80,000 on a good sound designer, or you could spend $1,000 for an annual subscription to an AI tool that does slightly inferior work. Slightly. With production budgets tightening, producers will select the latter, not because they want to but because they have to. Six months ago we thought it was the writers who’d be affected by AI. We now know it’s everyone. Even the National Association of Voice Actors is bracing for impact.
Who’s the Boss?
Hollywood’s real boss, however, is Big Tech. Apple and Amazon have become studios themselves, but the bigger threat is from substitution, not competition. While Warner Bros. Discovery reported a net loss of 700,000 subscribers across its streaming platforms in its latest earnings report, Mark Zuckerberg casually dropped that Reels has increased Instagram usage more than 40% since launch. Forty percent engagement growth in less than three years on a platform with more than 2 billion users. This would be headline news for WBD or Disney — for Meta it’s a footnote. The ascendance of Instagram, TikTok, YouTube, and the talent pools they’ve inspired, is hard evidence that the future of entertainment will be user-generated. YouTuber MrBeast collected 4 billion views from his videos in 2023. At an average video length of 16 minutes, that’s 1 billion hours of viewing time generated by one man — 30% more than what Netflix captured this year on its most watched show, The Night Agent — filmed in Vancouver.
The ROI on entertainment investment is increasingly the inverse of the screen size it’s produced for. Theaters are dying, streaming to televisions is maturing, and user-produced 45-second videos on phones are crowning new royalty. This week’s Golden Globes felt like a retirement dinner for Pan Am pilots in the seventies, basking in their fading relevance.
Bite-size content has inherent advantages: It’s cheap to produce and easy to consume, with platforms such as TikTok offering a frictionless lack of choice. Netflix watchers spend 78 hours per year just deciding what to watch — TikTok lets you spend that time watching. And its staggering signal liquidity makes it better than you are at deciding what you want to watch.
Survival
The species that survive are not the smartest, strongest, or fastest … but the most adaptable. Hollywood and its biggest players will survive, because they’re demonstrating remarkable agility. In sum, there are too many players spending too much money, and their business is under attack from players that better foot to a younger consumer’s tastes. However, in just 24 months, we may witness a historic consolidation that halves the number of streaming options. The industry used the strike(s) as an armistice to cease the arms race of spending. Amazon’s streaming group announced layoffs, and Netflix, for the first time, has not increased its content budget in two years.
Look for Warner Brothers Discovery (WBD) and Disney (DIS) stocks to outperform the market. The champagne and cocaine of cost-cutting and pricing power, as a function of consolidation and cloud cover from NFLX, which raised prices earlier in the year, will result in long-absent earnings growth. Both equities, priced at decade-long lows, are springs wound tightly from a stream of bad news that will jump on any signs of renewed growth.
NetVibe
The most agile player is the company that used to mail DVDs and pulled off one of business history’s great pivots to become the most valuable studio in history. I don’t know Ted Sarandos well, but I do know he reads this, so …
Ted,
I hope this message finds you well.
NFLX should partner with a deep-pocketed AI firm (e.g., Anthropic), horny to demonstrate differentiation in an increasingly crowded field, and launch a TikTok competitor (e.g., NetVibe, NetBeat, NetReal). When you acquire content, negotiate the rights to parse it into bite-size clips. Your business has the largest block of cheese (i.e., content) in history. Slice it more thinly and charge 10x for it. The deft use of your technology and capital could create a viable competitor to TikTok that has tangible differentiation. I want to watch The Crown, just not all of it. You tried this before but were too early and too timid. Think remixes, not highlights. TikTok is an evolutionary platypus of snippets and retakes — Netflix should be the king of that jungle. This is, in my view, the ripest opportunity in media, and tech.
Ties That Bond
I bond with my boys (13 and 16) over Premier League Football and original scripted television. We just finished Squid Game (I know … late) and are on the first season of The Last of Us. Zombie apocalypses are not my cup of tea, but I think Pedro Pascal is a movie star (Narcos … trust me), and my sons were excited about it. Episode 3 of Season 1 is a formidable piece of content that accomplishes what all media attempts: It made us feel something. The episode, telling the story of a survivalist/prepper who takes in a wanderer, depicts (powerfully) their unexpected romantic relationship. Nick Offerman (Parks and Recreation) and Murray Bartlett (The White Lotus) are outstanding. The prepper (Offerman) is incredibly talented, assembling a compound that not only electrocutes wayward zombies, but also has running water and a working farm that provides the foodstuffs for the gourmet meals he prepares.
Stay with me here.
Author Richard Reeves introduced me to the concept of surplus value. In sum, a boy becomes a man when he provides more value than he consumes. I love this. Young men who are experiencing suicidal ideation repeatedly use the word "useless" when describing themselves. Offerman’s character is the definition of surplus value. But here’s the thing, that’s just half of what it means to be a man. Offerman, in a powerful scene, says he is finally satisfied because his partnership, and caring for his partner, gave him purpose. I’m writing a book on masculinity and have struggled with a decent definition that’s aspirational and doesn’t present gender roles and stereotypes as a zero-sum game. And this helped. I’d offer that being a man is acquiring the skills and strength so we can take care of, and advocate for, others. Our purpose is to protect and love others. That’s what men do.