I sat down earlier this month with Chris McGurk, chairman and CEO of Cinedigm and a long-time Hollywood veteran, to talk about the state of the business and where it’s going. Along the way, my former MGM boss wanted to talk about where we’ve been, and how that should shape the thinking of entertainment companies going forward. In a few words, change is constant. If you’re not rethinking, you’re sinking.
“The one constant has been a profound change on a recurring basis, caused by new technology that goes all the way back to talkies, TV, color TV, cable, satellite, VHS, DVDs, streaming …” McGurk said. “In the face of continued technological change, if you don't rethink your business every year or every two years, and be prepared to fundamentally pivot your business, and do the right thing for your business in the face of naysayers and traditionalists who want to continue to save their job and save their business, you're going to die.”
The setting was the opening keynote of the OTT.X Fall Summit in Los Angeles, a gathering of dozens of companies focused on streaming, particularly the niche services that have proliferated in recent years. And McGurk had three pivotal moments where he was personally involved in Hollywood’s dramatic evolution the past 30 years.
The first example was in the early 1990s, when McGurk was CFO for Disney Studios, and Jeffrey Katzenberg dispatched him to a warehouse in Emeryville, California. There, Steve Jobs was holed up after being kicked out as Apple CEO, and having shuttered NeXT Computer, in arguably one of the lowest points of his storied career. All Jobs had left was a small computer-animation company called Pixar, which wanted Disney to distribute its first feature-length movie.
“So the first thing I said [to Jobs] was, ‘You know, some people at Disney don't want to do this deal because they think getting involved in [computer-based animation] is blasphemy,’” McGurk recounted. “And he looked at me and he said, ‘You know what? Some people at Disney are idiots.’ And he actually added, you know, an ‘F’ word to it. But I tried to be polite.”
Jobs then spent an hour “in typical Steve Jobs fashion,” explaining why those traditionalists actually were idiots ignoring technological transformation. Using a whiteboard, Jobs broke down animation’s economics, the scalability and efficiencies of 3D computer animation, and why Disney needed to evolve beyond the 2D cel animation that had built its reputation over the previous half century.
“So we went back (to Disney), and we debated it,” McGurk said. “And we got in the CGI business because it was the right thing to do for the company, the naysayers be damned. And you saw what happened.”
Toy Story went on to smash box-office records for an animated movie, earn three Oscar nominations (and a “special achievement” Oscar for director/co-writer John Lasseter) and spawn multiple sequels. Arguably, McGurk said, Toy Story and the technology that enabled it transformed not just animation but the entertainment industry as a whole.
His second example came while McGurk was chief operating officer of MGM, after a run as a senior executive at Universal Pictures.
It was Kirk Kerkorian’s third run as MGM’s owner. McGurk was brought in to help turn around the studio, which had been losing “losing tens, if not hundreds, of millions of dollars because they were trying to compete in the traditional theatrical way with the other major studios, even though they were very, very undercapitalized.”
The new team focused instead on acquiring film libraries, and the burgeoning market for DVDs of its 4,000 movies and thousands of hours of TV episodes, including the James Bond, Rocky and Pink Panther franchises. The DVD revolution enriched all of Hollywood, but perhaps no studio more effectively mined the opportunity than MGM.
“And then, when 2005 came along, Kerkorian called us in and said ‘Hey, guys, guess what? DVR penetration in the U.S. is 95%. In Western Europe, it's approaching that. It’s time to sell the company for a lot of money,' " McGurk said. “And we sold the company for $5 billion to a consortium headed up by Sony, [Comcast] and some private-equity firms. They took over the company and two to three years later, they went bankrupt because they went back to the old traditional, theatrically focused business that we had shied away from.”
Kerkorian, one of the 20th Century’s great if under-sung moguls, personally realized $2 billion from the deal (half of it tax free; have your accountant call me). More importantly, McGurk said, Kerkorian understood that newer technologies were about to decisively end the DVD gold rush. It was time to move on, before everyone else figured out the gold mine was largely tapped out.
Flash forward to 2017, and McGurk had become CEO of Cinedigm, a company previously focused on helping movie theaters convert to digital projection. As that transformation plateaued, the company had shifted to streaming, with “three or four” highly focused subscription services. But competition was getting stiffer, with Netflix and Hulu beginning to invest in expensive original programming, not just licensing old shows.
“We began to see that, possibly, that was a losing proposition for us, because we were a little guy,” McGurk said. “We had a really good group of executives … who were willing to step back and say, ‘Hey, what are we going to do at this point?’ We saw the rising cost of the subscription business and content and marketing costs. But we also were looking at the growth of connected TVs, new technology, and how that really enhanced the lean-back experience sitting there, like you traditionally watch TV, where consumers would be much more willing to sit through ads when they saw streaming.”
That led to a big pivot, away from subscription to ad-supported services. By 2018, Cinedigm had launched its first FAST channel. Now it has 30 ad-supported FAST and AVOD channels, including the Bob Ross Channel, Fandor, the Elvis Channel, Dove, Bloody Disgusting and ScreamBox. Those latter two, horror-focused services have also spawned about 20 podcasts.
“It really has worked to our advantage,” McGurk said. ”I think we've had eight straight quarters, maybe more, of triple-digit advertising growth. And it's really been the engine that's propelled our business now.”
Looking forward, McGurk said it’s pretty clear that advertising will continue to drive growth, especially as international expansions try to reach audiences with less disposable income for pricey subscriptions.
“I think it's a given that the ad dollars flowing into the streaming business are going to continue to escalate and make the ad-supported business the fastest growing business out there,” McGurk said. “It's just a given that those dollars are going to flow away from traditional TV and basic cable, and into streaming.”
But also coming is fewer big, general-appeal services, as the financial strain of competing overwhelms some. McGurk said he expects two of the big ones, and a lot of niche services, won’t be around within just a few years.
“I think the the six major streamers right now are losing $10 billion” combined per year, McGurk said. “So there has to be consolidation. And you know, there are some obvious candidates to be consolidated that I won’t point out, but those that have huge debt loads, and are actively thumbing their nose at the creative community, because they can't, they can’t.”
For its part, Cinedigm is making like MGM in the late ‘90s, building a library beyond the 46,000 titles it has, especially looking for international rights beyond North America, and strong local operators to help drive overseas expansions.
But McGurk closed on a strongly hopeful note, saying it’s the best possible time for indie creators willing to take advantage of the new opportunities provided by new technologies and niche streaming services.
“You've got hundreds of opportunities to get access to eyeballs for your content,” McGurk said. “And I think that's a great thing.” ■
