Does anyone remember Blockbuster and Hollywood Video? I assume most of you do, but wow, doesn’t it seem like forever ago when we actually had to drive to stores to get movies to watch at home? What a drag that was!

Yet, just 15 years ago, that was the norm and those two firms were the titans of video distribution, so much so that federal regulators at the Federal Trade Commission looked to stop their hegemony through antitrust intervention. But then those firms and whatever “market power” they possessed quickly evaporated as a wave of Schumpeterian creative destruction swept through video distribution markets. Both those firms and antitrust regulators had completely failed to anticipate the tsunami of technological and marketplace changes about to hit in the form of alternative online video distribution platforms as well as the rise of smartphones and robust nationwide mobile networks.

Today, this serves as a cautionary tale of what happens when regulatory hubris triumphs over policy humility, as Trace Mitchell and I explain in this new essay for  National Review Online entitled, “The Crystal Ball of Antitrust Regulators Is Cracked.” As we note:

There is no discernable end point to the process of entrepreneurial-driven change. In fact, it seems to be proliferating rapidly. To survive, even the most successful companies must be willing to quickly dispense with yesterday’s successful business plans, lest they be steamrolled by the relentless pace of technological change and ever-shifting consumer demands. It is easy to understand why some people find it hard to imagine a time when Amazon, Apple, Facebook, and Google won’t be quite as dominant as they are today. But it was equally challenging 20 years ago to imagine that those same companies could disrupt the giants of that era.

Hopefully today’s policymakers will have a little more patience and trust competition and continued technological innovation to bring us still more wonderful video choices.

[OC] Blockbuster Video US store locations between 1986 and 2019 from r/dataisbeautiful

The war among the states to see who can lavish the film industry with more generous tax credits in their attempt to become “the next Hollywood” continues, and it is quickly descending into a classic race to the bottom. A front-page article in today’s Wall Street Journal notes that the tax incentive bidding war has gotten so intense that it is hollowing out the old Hollywood labor pool and sending it on a road trip across the America in search of tax-induced job activity:

As film and TV production scatters around the country, more workers…  are packing up from California and moving to where the jobs are. Driving this exodus of lower-wage workers — stunt doubles, makeup artists, production assistants and others who keep movie sets humming — are successful efforts by a host of states to use tax incentives to poach production business from California. […]  Only two movies with production budgets higher than $100 million filmed in Los Angeles in 2013, according to Film L.A. Inc., the city’s movie office. In 1997, the year “Titanic” was released, every big-budget film but one filmed at least partially in the city. The number of feature-film production days in Los Angeles peaked in 1996 and fell by 50% through last year, according to Film L.A. Projects such as reality television and student films have picked up some of the slack. But overall entertainment-industry employment has slid. About 120,000 Californians worked in the industry in 2012, down from 136,000 in 2004, according to the U.S. Bureau of Labor Statistics. The labor migration has arisen in part because California hasn’t competed aggressively on the tax-break front, officials and executives say, while states like Georgia have made efforts to grab a sizable chunk of the industry. More than 40 states and 30 foreign countries are offering increasingly generous and creative tax incentives to lure entertainment producers.

On one hand, hooray for labor mobility! But seriously, this stinks because this labor shift is taking place in a wholly unnatural way, with a complex and growing web of tax inducements leading to massive distortions in this marketplace. While proponents will insist these programs are job creators for the communities that win, in reality, they are really just job reshufflers that net limited jobs at that. Meanwhile, the costs to their taxpayers grows as more and more state and local governments jump in this game. It’s classic “smokestack chasing” activity, except in this case the firms probably didn’t even create that many jobs while they were there and then you don’t even have a factory left when the firms leave town!

If things continue like this, it probably won’t be long before some “innovative” state or local government leader gets the idea of actually just paying some film producers cold hard cash to come set up shop in their area. Hey, at least that way the programs would be on-budget and nominally more accountable!

Anyway, I’ve documented the cost of this ruinous race to the bottom in my essay, “State Film Industry Incentives: A Growing Cronyism Fiasco,” which documents the economic evidence about just how inefficient these programs are in practice.  I later expanded that essay and included in my massive paper with Brent Skorup, “A History of Cronyism and Capture in the Information Technology Sector.” Warning: It makes for miserable reading if you care about fiscal accountability and good government. Maybe somebody will make a movie about this racket someday! (But don’t hold your breath.)

P.S. For more on the corrupting influence of cronyism on American capitalism, please visit this Mercatus Center page for a comprehensive set of studies on the issue. Also, check out this outstanding paper by my colleague Matt Mitchell (“The Pathology of Privilege: The Economic Consequences of Government Favoritism“) and this excellent recent book on cronyism by Randall G. Holcombe and Andrea Castillo. And here’s a little slide show I put together on the costs of cronyism.

A new article by Peter Caranicas and Rachel Abrams in Variety entitled, “Runaway Production: The United States of Tax Incentives,” notes how “[Motion picture] Producers looking for a location weigh many factors — screenplay, crew base, availability of stages, travel and lodging — but these days, first and foremost, they consider the local incentives and tax breaks that can reduce a production’s budget.” In other words, when every state and local government dreams of being “the next Hollywood,” they are willing to shower the entertainment industry with some pretty nice inducements at taxpayers expense.

But these programs are growing more controversial and some state and local governments are reconsidering the wisdom of these efforts. The article cites my Mercatus Center colleague Eileen Norcross, who points out the most serious problem with these programs:

Other arguments against incentives hold that they don’t help the states that offer them. In March, the Massachusetts revenue commission issued a scathing report on the state’s tax credit program, which stated that two-thirds of the total $175 million awarded in 2011 went to out-of-state spending. “The critique is that while they appear to bring in short-term temporary activity to a state or community, a lot of those benefits flow to the production companies,” says Eileen Norcross, a senior research fellow at George Mason U. “The people who are hired locally tend to be (in) more low-wage service industry jobs. It provides a temporary economic blip on the radar, and then it’s sort of fleeting.”

Eileen is exactly right.  I have previously covered this issue here in an essay entitled, “State Film Industry Incentives: A Growing Cronyism Fiasco,” which was later expanded and included as a section in my 73-page forthcoming law review article with Brent Skorup, “A History of Cronyism and Capture in the Information Technology Sector.” In those articles, I noted that all the serious economic reviews of these programs find that there is no evidence these tax incentives help state or local economies. And there are many other problems with these tax inducements, including the fact that they open up the door to more meddling in content decisions by government officials and to serious abuse by fly-by-night scam artists looking to take advantage of state-sponsored cronyism schemes.

As I noted in concluding my earlier blog post in this,

In sum, film tax credit cronyism puts taxpayers at risk without any corresponding benefits to them or the state.  Glamor-seeking and state pride seem to be the primary motivational factors driving state legislators to engage in such economically illogical behavior. It’s like “smokestack-chasing” for the Information Age, except in this case you don’t even have a factory left in town after your economic development efforts go bust. This cronyist activity benefits no one other than film studios. States should end their film incentive programs immediately.

This ongoing series has focused on the growing substitutability of Internet-delivered video for traditional video distribution channels like cable and satellite.  YouTube has recently begun exploring adding traditional television programming to its staggering catalogue of mostly amateur-generated content.  

But now YouTube is going one step farther by exploring  the possibility of signing Hollywood professionals to produce “straight-to-YouTube” content:

The deal would underscore the ways that distribution models are evolving on the Internet. Already, some actors and other celebrities are creating their own content for the Web, bypassing the often arduous process of developing a program for a television network. The YouTube deal would give William Morris clients an ownership stake in the videos they create for the Web site.

This kind of deal would make Internet video even more of a substitute for traditional subscription channels—thus further eroding the existing rationale for regulating those channels.  

But what’s even most interesting about this development is that YouTube’s interest seems to be driven primarily by the possibility of reaping greater advertising revenues on such professional content than on its currently reaps from its vast, but relatively unprofitable, catalogue of user-generated content:  

YouTube’s audience is enormous; the measurement firm comScore reported that 100 million viewers in the United States visited the site in October. But, in part because of copyright concerns, the site does not place ads on or next to user-uploaded videos. As a result, it makes money from only a fraction of the videos on the site — the ones that are posted by its partners, including media companies like CBS and Universal Music. The company has shown interest in becoming a home for premium video in recent months by upgrading its video player and adding full-length episodes of television shows. But some major television networks and other media companies are still hesitant about showing their content on the site. The Warner Music Group’s videos were removed from the site last month in a dispute over pay for its content.

WASHINGTON, March 13, 2007 – The Electronic Frontier Foundation on Tuesday released a paper about the entertainment industry’s move to take copyright controls global.

The report is the result of EFF’s participation in a closed-door session of the Digital Video Broadcasting Project (DVB), the predominant global standard for digital television. (America uses a different digital standard that supports high-definition.)

EFF’s report documents the extent to which the DVB consortium has signaled its assent to copyright control technology. EFF called these a series of “unparalleled restrictions” on consumers’ rights to enjoy lawful digital content. These include “enforcing severe home recording and copying limitation,” “imposing controls on where you watch a program” and “dictating how you get to share shows with your own family,” according to EFF.

America’s transition to digital television makes use of a different standard, created by the Advanced Television Systems Committee. The ATSC standard did not have any copyright controls. But at the insistence of motion picture studios, ATSC added a technology described as the “broadcast flag.”

A U.S.-based standards organization known as the Broadcast Protection Discussion Group, a subgroup of the Copy Protection Technical Working Group, released a specification governing the broadcast flag in 2002.

In November 2003, the Federal Communications Commission imposed a requirement that all television manufactures implement the broadcast flag by 2004. In 2005, the D.C. Circuit Court of Appeals struck down the requirement on the grounds that the FCC lacked jurisdiction. The motion picture industry has since unsuccessfully pressed for legislation re-instating the requirement.

“We have made a number of policy mistakes in the U.S. by giving a lot of power over technology to entertainment companies,” said Seth Schoen, staff technologist at the EFF. “This is the next battleground, and the Europeans are being asked to repeat these mistakes within their own technology and regulatory framework.”

Schoen said that the copy-control technology, called Content Protection and Copy Management (CPCM), would place strict limits on home recording conducted on digital video recorders and other electronic devices. Although the American “broadcast flag” would have imposed restrictions on legally sharing copies of digital movies, the flag did not restrict the number of copies a user could make of a digital movie.

But because the DVB technology governs cable, satellite and broadcast transmissions in Europe and elsewhere, the new copyright controls approved by a DVB technical committee could also affect Europeans’ and others’ ability to watch pay-television programs on their computers.

“In Europe, there are people creating TiVo-like systems on their computers that receive pay cable and satellite systems,” said Schoen. Such technologies are strictly limited in the U.S. because cable companies refuse to approve technologies that do not meet the anti-piracy specifications of CableLabs, the industry’s research consortium.

The new copyright controls within CPCM would restrict the ability to see pay-TV on computers, said Schoen. Implementation of other controls could also be triggered by ratification of a Broadcasting Treaty currently under negotiation by the World Intellectual Property Organization in Geneva.

To attend the technical meetings in which the DVB copyright controls were discussed, EFF was required to pay a 10,000 Euro annual admission fee. It received a grant from the MacArthur Foundation to do so, said Schoen.

The Copy Protection Technical Working Group in the U.S. requires participants attending its standards sessions to pay a $125 per-meeting fee. Although CPTWG claims to be an open forum, reporters are barred from attending.

A spokesperson from the Motion Picture Association of America did not return a call seeking comment on the EFF report by the time of publication.