Tinsel Town, Innovations and Emerging Revenue Streams

In 1888, Thomas Edison decided he wanted to create “an instrument that does for the eye what the phonograph does for the ear.” He set one of his designers, W. K. L. Dickson, to the task of creating “moving pictures.” Edison’s team took advantage of a phenomenon known as persistence of vision – the ability of the human eye and brain to process 10 to 12 separate images per second and to perceive anything more than that as continuous motion. By 1892, they had created the Kinetoscope and, by 1893, Edison’s Black Maria Studio was cranking out the first “movies.” With the commercial success of Edison’s The Great Train Robbery in 1903, an industry was born.

The history of the film industry shows a pattern of innovation that is now commonplace across many industries. A new technology allows for the creation of a product that never existed before – in this case, the motion picture. As products become more mature, the focus of innovation shifts away from developing new products to developing new and better ways for customers to consume existing products.

The next major film industry innovation occurred in 1927 when movie mogul Harry M. Warner was approached by his brother Sam with the idea of making movies that added sound. Harry’s initial response was, “Who the hell wants to hear actors talk?” (Did he know DiCaprio was coming?) But Sam Warner saw an opportunity. Beset with financial problems and the market crash, Harry gave in and produced the first talking picture, “The Jazz Singer.” Almost overnight, this disruptive technological innovation transformed the marketplace and took Warner Brothers from the brink of collapse to an industry success story.

With the inception of talkies, the film industry settled on a standard frame rate of 24 frames per second (fps). In the early 30’s, Technicolor introduced Process 4, which made it easier to produce color films. The box office success of movies like “The Wizard of Oz” and “Gone with the Wind” pushed the industry towards color and, in the late 40’s, a breakthrough innovation from Kodak made color film much more affordable.

In the late 70’s, Star Wars brought CGI to the mainstream. While there have been a few incremental changes since then, such as surround sound, enhanced 3-D, and digital projection, the basic product is still a series of pictures, shot at 24 fps to simulate motion with a soundtrack and maybe some CGI thrown in to keep us awake.

This pattern of disruptive innovation followed by incremental improvements has played out in reverse on the consumption side. The Kinetoscope quickly gave way to projection systems that brought us the movie theatre and, for about 50 years, the only way to see a movie was to see it projected on a screen in a theatre. Innovations were incremental; better projectors, better sound systems and padded chairs all made the experience more enjoyable, but you still had to go to a theater to enjoy a movie. That began to change with the advent of television, where networks and independent broadcasters discovered movies were an economical way to fill broadcast hours.

The pace of innovation quickened with a new piece of technology – the home video player. Studios partnered with electronics manufacturers to develop a device that would create a new revenue stream, allowing them to distribute movies directly to consumers through direct purchase or rental (remember the neighborhood video store?). At the same time, cable networks like HBO and Showtime created new distribution channels. People who had stopped going to theaters were now consuming films again at home. The industry was reaching new customers and markets and creating new revenue streams.

Innovation continued with another consumer technology breakthrough − digital video. Digital video had been around since the space program in the early 60’s, but new data compression methods and the DVD provided a portable medium to store the gigabytes of data needed to reproduce a movie. And it opened the door for a disruptive innovation in consumption, Netflix (named a Revolutionary in the latest Recurring Revenue Innovator e-book). The DVD made it possible to deliver a movie directly to your mailbox without a trip to the video store. The digital revolution has continued and accelerated. Today, with the near-universal availability of high-speed internet, you can consume movies through set-top boxes, smart video players, computers, tablets, and smart phones any time and almost anywhere.

The film industry is now roughly 120 years old. The first 80 years of its history were marked by a series of technology changes (projection, sound, color, CGI) that created the product we know today. But whether it featured Dorothy and Toto or Magneto and Professor X, it’s still the same basic product; a story told through moving pictures and sound. The last 40 years have been marked by disruptive innovations in consumption of that basic product. What’s interesting to note is that each of those innovations created a new market and multiple new revenue streams.

Similar patterns are emerging in other industries, with recurring revenue monetization models providing a platform for disruptive innovations in distribution and consumption. From the music industry to medical devices and from automobiles to travel, innovative companies are tapping into recurring revenue models to generate new and predictable cash flows in order to reach new customers and markets, and to create competitive advantage. Something to consider as you think about your next business innovation.