SPUR considers high-speed rail vital not just for the ecological imperative of providing a viable alternative to car and air travel but as a crucial step toward realizing the economic potential of enhanced access and exchange across the state. The dynamic interaction between two of California’s most important economic clusters — Silicon Valley and Hollywood — is among the most exciting examples of the potential of such cross-pollination. The conflict and convergence between these areas forms a backdrop to the ongoing debate about whether or not we can afford high-speed rail.
A clash of clusters (and cultures)
On August 10, 2011, Apple surpassed Exxon Mobil to become the most valuable company in the world, with a market capitalization of nearly $555 billion as of this writing. This achievement stems not just from the success of Apple’s approach to product design but from Apple’s pioneering use of design to bridge the distinct expertise of the entertainment and technology industries.
California has the great fortune of serving as the home for two major innovative economic clusters described in the shorthand of Silicon Valley and Hollywood. “Silicon Valley” denotes the broad set of technology-related industries located in the Bay Area from San Jose to Santa Rosa, spanning fields as diverse as Internet search, semiconductors, software, gaming and social media. This economic region has the highest proportion of tech jobs in the country — more than four times the national average, according to Forbes — and is home to 49 percent of California’s patents and 12 percent of the nation’s (a marked increase since 1990 from 25 percent and 4 percent, respectively). “Hollywood” refers of course to the Los Angeles basin’s cluster of entertainment-related industries in film, television, music and publishing and is the nation’s single largest export sector and the most globally competitive. With more than 35 out of every 1,000 workers employed in arts, design, entertainment and media occupations, the Los Angeles metropolitan area has the highest concentration of entertainment workers in the country.
For most of their existence, Silicon Valley and Hollywood have been essentially distinct from one another. Silicon Valley produced technologies that were sold to other businesses while Hollywood developed content that was sold to consumers through the industry’s proprietary distribution channels. But over the past 15 years, since the emergence of the modern Internet, there has been a growing clash between these two clusters over the way people access movies, books and music — what some would call “culture” and others would call “content.” The result has been a struggle over revenue, distribution channels and control.
Out of the clash, we are now witnessing the emergence of new business models that bridge the divide between creation and distribution, integrating both sides of the product delivery equation and connecting people to entertainment and information in new ways. The new system is built upon a deepening integration of Silicon Valley and Hollywood.
Exploring the dynamics of competition and convergence between Hollywood and Silicon Valley presents a case study in creative destruction and economic development, a harbinger of important questions concerning the future of the export engines that make California an international economic powerhouse. It also provides vital context for understanding the economic importance behind one of the major planning decisions of our day: the effort to build a high-speed rail system across California. The economic clusters of Northern and Southern California would benefit from being functionally closer because of high-speed train service. As the two economic regions further integrate, the train that will connect them calls into question whether California is two megaregions or actually one.
During its brief run from February of 2000 to July of 2001, Napster was visited by more than 25 million users, who flocked to the website to share and download free music. Proprietary content, traditionally disseminated by a central owner, was being replaced by the many-to-many exchange structure of the Internet. The implications were quickly felt beyond the music world. The replacement of licensed distribution channels with open platforms and the switch from the shipping of physical inventory to the distribution of electrons — for which the marginal costs of extra sales is essentially nothing — opened up a world in which independent, amateur and user-generated content proliferated. At the same time, the limited bandwidth and programming slots of television and radio were challenged by the infinite set of content channels made available through the Internet.
New cultural forms, from the mashup to the blog, proliferated. Artists, writers, academics and amateurs — anyone with anything to say — had a new platform for expressing themselves (albeit with varying capabilities of reaching an audience). The resulting explosion — and subsequent devaluation — of content significantly undermined the business models of the content providers centered in Hollywood and New York. The entertainment industry had made its money by withholding content with the purpose of increasing its value. The Internet, by contrast, was an ecosystem of abundance, and Silicon Valley firms benefitted by creating programs and products that allowed consumers to access this abundance, often for free. As content increased, so did the value of Silicon Valley’s tools. Before 2005, “media and entertainment” as industry categories of venture capital investment barely registered in the Bay Area, but in 2006, media and entertainment grew to about 8 percent of all venture capital investment in Silicon Valley. (In 2011, they were about 5 percent, the same as IT services.)
But the cultural and market changes brought on by free access to so much online content meant that the music industry had entered a permanent cat-and-mouse game of chasing illegal music downloads. Newspapers and print media soon began to suffer similar disruptions. And with the advent of YouTube in 2005, coupled with the increasing bandwidth of household Internet connections, the same dynamic would emerge for television content.
The innovations unleashed by Silicon Valley firms challenged the business models of the entertainment industry and other content providers in at least four major ways:
1. By lowering the costs of production through cheap desktop software, Silicon Valley enabled many more people to become producers. This has led to more user-generated content, whether in the structured form of Wikipedia or the less organized amateur offerings on the Internet, which continues to challenge the value proposition of the corporate content creators.
2. At the same time, as distribution moved from physical to virtual channels, many more people could become distributors. Compared with traditional book publishing, the costs of publishing a blog are negligible. To greater or lesser degrees, the same is true for every new digital form of content distribution.
3. Stemming from these changes, the traditional gatekeeper role that content publishing industries had played began to erode. The music and film industries had been able to concentrate vast resources into a select group of artists, cranking up the “star maker machinery” to generate hits. But the open architecture of the Internet made it possible for artists and writers to find audiences for more niche content. Whereas the old business models emphasized selling a relatively small number of hits to a mass audience, new technologies made it profitable to sell many more kinds of cultural content to a larger number of small audiences — the so-called long-tail of the bell curve distribution of demand. Obscure books, music, movies, websites and blogs on every topic; Myspace pages for musicians; and YouTube channels for video content opened up an endless array of publishing channels. Social media, which enables friends to recommend articles, websites, songs and shows directly to one other, is increasingly becoming the way people decide what content to consume. All of this is radically changing the editorial functions of the professional gatekeepers, who once served as the primary filters between content producers and potential audiences.
4. The new platforms created by tech companies also began to provide direct competition for the advertising revenues that had traditionally supported the television, radio and newspaper industries. Craigslist eviscerated the classified-ad market, spelling the undoing of daily newspapers. Search-based advertising (beginning with Google’s AdWords) became dominant. And social media websites, Facebook chief among them, came to provide serious competition for consumers’ discretionary cultural and entertainment consumption time, as well as for advertising dollars. Finally, the fragmentation of audiences into millions of websites made it more difficult to effectively bundle audiences together to sell ads.
Different sectors of content and entertainment providers have responded to these changes in different ways. As entertainment attorney Jonathan Handel put it, “Traditional media companies are slow to adopt new technologies for fear of cannibalizing revenue from existing channels and offending powerful distribution partners.” But the dynamics of creative destruction have begun sweeping away those companies that have not effectively reacted to disruption.
The newspaper industry will probably never recover from the combined blows of Craigslist, Google and the Internet itself. Even in 2010, a relatively good year for most sectors of news media, print newspapers continued to decline, losing 6.4 percent in revenue according to a Pew Study. Publishing continues to struggle against the Amazon/Apple/Google juggernaut. Magazines are increasingly shifting budgets and staff from print to online. In the case of music, it should be noted that the erosion of the music industry’s power has not necessarily been bad for musicians. While mega acts might make less money, it appears that many more musicians have been able to find an audience because of the proliferation of ways to connect with potential fans. But for the music publishing companies, the urgent problem became how to get consumers to pay for music rather than downloading it for free. The industry was slow to adapt to the changing dynamics, and ultimately the solution to the problem was found not by the music industry but by Apple, which is now also tackling film and television distribution. Apple’s iTunes represents the first, and thus far most successful, integration of new technology with content. With the launch of the iPod in 2001 and the iTunes music store in 2003, it finally became easy for consumers to pay for music — and ultimately TV, movies and other applications. Today, fully 70 percent of digital music sales take place through the iTunes store, amounting to 28 percent of all music sales.
The film and television industries appear to be doing better than the music industry. As media reporter Brooks Barnes noted in the New York Times, “instead of Hollywood suffering its own Napster moment…several differences have allowed video content to weather the storm.” Having witnessed the music industry lose control of its inventory, film and TV industry giants have fought vertical disintegration by pioneering new means of distribution. Same-day release and increasing on-demand options have helped stem piracy. Cable services are being expanded to allow viewers to watch shows on any device — provided they are subscribers. And video industries benefit from the simple fact that video requires much more bandwidth than audio, so the culture of file sharing never overwhelmed movies and TV to the same degree as it did music.
Nevertheless, as household bandwidth increases and the costs of production decrease, we may see the very same dynamics unfold for movies and TV that have already transformed the music industry. In 2007, Viacom sued YouTube over content piracy, but by 2010 TV industry giants, including Warner Bros., Sony and NBC Universal, were agreeing to license their content through YouTube. Many different firms are competing to become important distribution channels for online video content. And just as cable TV channels like HBO moved up the value chain from distributing content to creating their own content, online distribution channels like YouTube, Hulu, Yahoo and Netflix are increasingly developing their own original content in partnership with professional writers, producers and entertainers hired from Hollywood, further merging the worlds of Silicon Valley and Hollywood.
Bridging the “Great Divide”
One of the major lessons from the career of Steve Jobs, the former CEO of Apple, is the value to be had from bringing together the cultures of Silicon Valley and Hollywood:
When I went to Pixar, I became aware of a great divide. Tech companies don’t understand creativity. They don’t appreciate intuitive thinking, like the ability for an A&R [artist and repertoire] guy at a music label to listen to a hundred artists and have a feeling for which five might be successful. They think that creative people just sit around on couches all day and are undisciplined, because they’ve not seen how driven and disciplined the creative folks at places like Pixar are. On the other hand, music companies are completely clueless about technology. They think they can just go out and hire a few tech folks, but that would be like Apple trying to hire people to produce music.
I’m one of the few people who understands how producing technology requires intuition and creativity, and how producing something artistic takes real discipline.
Apple and Pixar were the first, and perhaps the most successful, companies to successfully integrate Silicon Valley and Hollywood. Today, many others are following in their wake.
In this new ecosystem, the core competencies of Hollywood have had to adapt. Zack Zalon, founder of Los Angeles startup incubator Elevator Labs, is one of the emerging generation of L.A. entrepreneurs pioneering an evolved role for entertainment within this converging economic landscape. Others, like former Myspace chief executive Mike Jones, are working to provide the infrastructure for a uniquely Los Angeles innovation culture to thrive in “Silicon Beach,” as some have taken to calling L.A.’s emergent tech corridor. Jones’s Science Inc. provides access to investment capital and strategic mentorship, which used to be difficult to find outside Silicon Valley.
Hollywood has the competitive advantage of being full of the creative types whose artistry Jobs correctly identified as essential to creating successful products. In the new cultural landscape of infinite content, it’s up to the audience, not the executive, to decide what’s worth watching. And Los Angeles, the beating heart of American popular culture, has always had a unique ability to give shape to American dreams with a special poetry that eludes techies and cellphone video uploaders.
There will continue to be high-profile conflict between Hollywood and Silicon Valley as the entertainment industry tries to enact legislation to keep control over the means of distribution of content and as new technologies emerge. But the dominant dynamic is one of convergence, as the new tools for content distribution, centered in Silicon Valley, find enormous economic value by being joined with the creators, talent, producers and directors who populate the entertainment industry centered in Los Angeles. Among its numerous benefits, high-speed rail could further facilitate this fruitful collaboration.
 Steve Jobs," by Walter Isaacson (Simon & Schuster, 2011)