How YouTube's modest new movie rental service could radically change the movie business.

Commentary about business and finance.
Jan. 29 2010 10:59 AM

YouTube as Video Store

How the site's modest new movie rental service could radically change the way Hollywood does business.

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Yet at the same time, movies are no longer truly scarce or expensive to make. If you're willing to set aside special effects or name-brand actors, the costs of making a film have gone way down. Still, as things stand, a filmmaker needs to find a distributor if he wants to reach anyone outside of the festival circuit—because only distributors have the relationships with exhibitors, cable companies, and the stores that do DVD rentals and sales. Most films reach the world through the studios and a handful of other distributors, who decide, in effect, what films make it into theaters and which will never be seen outside the festival circuit or even the editing room. Nearly 10,000 films are submitted to Sundance every year, and of those, last year, a grand total of 53 made it to theaters.

Today, most independent films play at a few festivals and then disappear forever. The average Sundance film from 2008—say, A History of My Sexual Failures,one of my favorites that year—isnearly impossible to get your hands on in any form. Online distribution could change this. It could even change the balance of power. YouTube rental and similar products at Apple and Netflix are the apparent heirs to the DVD market and, as such, have the potential to control the bulk of film revenue. So far, however, the online firms have been more part of the system than a challenge to it. Apple's online store is a virtual DVD store, with roughly the same schedule of release and the same prices. Netflix, unlike Apple, maintains a giant inventory but is also attached to the current distribution system. As Netflix explains on its Web site, "First and foremost, Netflix accepts submissions from distributors with whom we have relationships."

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What's different about YouTube is that it aspires to be an "open platform" for all film, not just a carrier of products already picked up by distributors. In other words, it wants to offer filmmakers an opportunity to leapfrog the distributors and reach customers directly.  A filmmaker, in theory, could use YouTube rental to build up a "viral" base before moving onto a theatrical or cable deal. If a producer can get her film started by reaching consumers directly, the films that succeed will, to an extent never seen before, depend on the decisions of customers, not studios.

That vision is admittedly idealistic, and extraordinarily difficult to reach. A major hurdle for YouTube's idea of an open platform is that distributors, who still hold the power, won't put up with it—that is, they'll refuse to deal with any producer who makes his film available on YouTube. According to Mynette Louie, producer of Children of Invention, one of YouTube's five launch titles, distributors are used to a progression that goes "theatrical, cable VOD [video on demand], DVD, online," and "any deviations from this freaks them out." Distributors, in a sense, want virgin films, not films that have been online. That means it may be hard to use YouTube to get publicity, if the very act of being on YouTube is seen as spoiling the film for any other form of distribution.

There's also the fact that most filmmakers want to make films for theaters, not computer screens. So unless YouTube buys theaters, in some ways its impact may be limited; the theater remains the place where a film earns a reputation, one that eventually leads to DVD sales. That sentiment was captured by filmmaker Galt Niederhoffer, whose film The Romantics, starring Katie Holmes,was one of the breakout films at Sundance. I asked her whether she'd ever consider using YouTube rental. "I've got nothing against YouTube, and I'm not a snob," she said, "but this movie was made for the big screen."

The question is whether such concerns are nothing more than adjustments, mere hurdles rather than deal breakers. YouTube is in this for the long haul—it has a day job—and its parent, Google, understands the power of a business strategy that seeks not to succeed within the system but to try to change that system from its foundations. It may not happen right away, but one day, films may begin their lives small, in the online world, and graduate to the big screen.