Hollywood is shifting north to Silicon Valley and Seattle

Big data has improved the quality of content created by new media SVOD corporations like Netflix and Amazon. By combining production and distribution, these companies have fundamentally altered the economics by eliminating the middleman distributor. Consumers are cutting the cord to cable providers now, movie theaters are at risk of being obsolete with rise of VR.

Big data has transformed content creation. Netflix has an extensive database of viewing patterns quantifying customer tastes to create better content. Amazon adopting a slightly different strategy by commissioning multiple pilots and letting viewers vote (by watching) which shows are funded further. These incumbents have a huge advantage over traditional media companies who without access to this rich data and feedback loops from their viewers are at a disadvantage when it comes to creating better products.

According to a study by ABN AMRO, about 26% of Hollywood movie studios' worldwide income came from box office ticket sales; 46% came from DVD sales to consumers; and 28% came from television (broadcast, cable, and pay-per-view). By combining production and distribution, the new media corporations eliminate the middleman and retain the majority of the revenues. Netflix has picked up shows like Arrested Development and Longmire which were no longer profitable on broadcast/cable. In addition, Netflix has financed first season shows like Marco Polo with a massive 90MM budget while Amazon’s new motoring shows with the Top Gear team for a very expensive at $250M over 3 seasons

These big budget flagship shows are strategic for acquiring users globally. Netflix has 45M subscribers in the US and 75M worldwide as of Q4 2015 producing revenues of $6.7 billion. Amazon (prime) is not far behind with 40M subscribes in the US. Their market sizes are limited by the number of broadband connections worldwide which is growing annually. Amazon might unbundle their SVOD services in markets where they do not have a significant presence otherwise.

If virtual reality lives up to its promise and provides a better movie watching experience, it will surpass watching movies on the big screen in the next 5-10 years. The main driver for VR will be economics; when a film is released, everyone will be able to download and watch it the same day accelerating monetization. 

In summary, the old media companies will be unable to compete with the new media companies. The next decade will see consolidation where traditional companies are acquired by the incumbents who with increased number of subscribers and revenue. VR will meet and then surpass current movie watching experiences leading to the decline of the movie theater.