DRI-473: Digital Replaces Film – the Technological Tradeoffs

Economics often seems like a foreign language to the general public, whose grasp of the subject is uneasy at best. Raising the topic of technology illustrates this vividly. The general public’s attitude toward technology fluctuates between wide-eyed wonder and stark paranoia. Economic theory treats it as a parameter – something whose boundaries are tentatively fixed, but allowed to vary conceptually for purposes of analysis. Empirically, economists acknowledge it as the key process behind human progress.

The public intuitively realizes that technology is good, but has a hard time explaining exactly what is good about it. The closest they can come is by citing scientific breakthroughs like the polio vaccine or new products like cell phones. They are sure that it has a downside, though. For one thing, we never can tell when technology will rampage out of control through humanity’s ranks like a maddened bull loose in an antique store. And everybody knows that machines create unemployment by taking jobs formerly held by people.

Economists view the workings of technology in the context of production. Anything product or process than enables us to get more output from the same quantity of inputs (or the same amount from fewer inputs) is a technological improvement. Real-life innovation seldom makes breakthroughs – innovation proceeds in painfully slow, incremental steps. A 2% annual improvement in total factor productivity would be phenomenal. Over many decades, this steady pace of industrial progress has attained our miraculous modern standard of living.

The displacement of workers by machines is not a disaster and does not create unemployment, per se. It frees up human beings to produce more output in relatively labor-intensive sectors. Our life today would be unthinkable in the absence of the substitution of capital for labor that began at the dawn of the Industrial Revolution. Unemployment results from friction created by minimum-wage laws, labor union restrictions, prevailing-wage laws, direct and indirect disincentives to employment created by affirmative action and quota legislation, anti-discrimination statutes, payroll and other taxes and the myriad of other measures allegedly intended to protect the worker. Thus, economists evaluate the ultimate effects of technology by gauging its impact on the volume of goods available for consumption.

There is a tradeoff demanded by technology. It comes not in the form of employment but rather in the quality of consumption. This point of theory cries out for a concrete example. As it happens, we are experiencing it today in America’s leading export industry and artistic gift to the world – the movies. Film – the physical medium of motion pictures for over a century – is being replaced by digital technology.

The Decline of Film and the Rise of Digital

For almost a century, Americans have gone to the movies as a cherished form of popular entertainment. The term “movie” is short for motion picture, a medium that began with the magic lantern shows of the 19th century and evolved into the flickers and shorts around the turn of the century. At first, the movies were silent. When technology developed a way to synchronize the projection of a picture with an accompanying sound track, they began to talk.

Now looked upon as art, movies became “film,” as in “film critic,” “film society” and “film festival.” The word came from the physical stock upon which the photographed movie was developed and printed – silver-nitrate film with 35-millimeter width. (16-millimeter film was a cheaper substitute, manufactured in non-nitrate form – which turned out to be an advantage.) Nitrate film stock possessed ideal viewing qualities, as attested to by older cinephiles today. When perfectly preserved, old black-and-white films are visually stunning.

Unfortunately, nitrate film also had serious drawbacks. First, it decomposed into sludge over decades unless carefully held in cool, dry conditions. (Today’s storage caves are ideal.) Second, nitrate films were highly flammable. Over the years, thousands of films produced by old-line Hollywood studios have perished in fires, along with numerous warehouses and a few employees as well. Even movie theaters experienced occasional fires.

Around 1950, the big studios switched to acetate (“safety”) film. Celluloid film has remained the medium of movies ever since. Until the advent of digital technology, that is.

With the rise of computers and digital technology, the movie business reached a watershed. It became possible to photograph a movie using technology analogous to that used to make home videos. This had revolutionary implications for both the production and the exhibition of motion pictures.

Digital Economies in Motion-Picture Production

Formerly, motion pictures were photographed by craftsmen using sophisticated cameras and the film was rushed to labs for development. On large studio production, the day’s efforts (“dailies”) might be available for viewing late the same night. Re-takes of scenes considered unsatisfactory were scheduled later in shooting – or postponed until after production. Eventually, the rough cut of the film was submitted to an editor or “cutter” for tailoring into a finished product – a process that might take weeks or months to complete.

Today, the movie is shot using digital equipment and stored in a computer. The footage is available to immediate viewing and editing. This not only simplifies and streamlines the editing process but also allows immediate re-takes. The amount of time and money saved thereby is vast.

Sophisticated editing is still a fact of movie life. Now, however, it is mostly done in order to create and insert “computer-generated effects.” Where formerly the dictates of filming an epic movie might have demanded a “cast of thousands,” now people and things can be digitally inserted into the movie to simulate reality. Special effects were used in movies virtually since their origins, but today their scope and sophistication is unparalleled. Again, the time and money saved is enormous.

Digital Economies Motion-Picture Exhibition

The impact of digital technology is just as great on the exhibition of movies as on their production. Today, a movie shot on celluloid film stock must be printed, then transported inside a protective metal shipping canister to every single theater showing the film. The average cost per-print is approximately $1,500. In contrast, the average cost of a digital movie disk is about $150 per copy.

Assume, for illustrative purposes, that the releasing studio will show the film in all 4,000 multiplex theaters nationwide. The total costs per-movie would then be $6,000,000 for celluloid film and $6,000 for the digital disk. Assume an annual industry output of about 200 films. (Although the six major studios produce a smaller total, independent filmmakers make a significant number of films that are released by the studios, who absorb the exhibition costs.) These rough estimates let us comprehend the figures cited by Gendy Alimurung in LA Weekly‘s article “The Death of Film,” which gives annual industry film-print costs of approximately $850 million and delivery costs of $450 million. In a typical year, around a billion dollars would be at stake in a choice between movie media.

The Triumph of Digital; the Demise of Film

For the movie studios, the superiority of digital over film is decisive. But motion-picture exhibition has been geared toward film for a century. Until recently, each theater had a projection booth containing a film projector, into which the physical film was deposited. That projector was operated by a projectionist, who was often a member of a craft union.

In the last ten years, that picture has changed dramatically. The movie studios have begun to subsidize the cost of switching theaters to digital projection, which requires substituting computer technology for film projectors. That runs anywhere from $70,000-$150,000 per screen. The subsidy takes the form of a “virtual-print fee” paid by the studio to the theater for each new digital release over the next ten years. The changeover relieves theater owners of a considerable portion of their labor costs by reducing the number of people needed to show films and eliminating the need to pay wages inflated by union scale.

There is a downside to the transition. Studios will refuse to distribute films from their vaults to theaters that do not make the transition or, more precisely, will make them available only in digital format. Since studio vaults are the principal source of films for revivals, festivals of classic films and repertory houses that specialize in showing older films, this will confront old-line theaters with a Hobson’s choice. Either they must cut their ties to film or risk losing their source of supply altogether.

In the event, digital is winning the battle. By the end of 2012 digital will replace film as the dominant mode of film exhibition. In another three years, film exhibition is projected (no pun intended) to become scarce.

The Real Tradeoff of Technological Innovation

Based on the above, the superiority of digital to film may seem clear-cut. In fact, there are key tradeoffs involved in the transition. But they are not the ones felt by producers, or directors who prefer to work with film, nor by exhibitors who are squeezed by the major studios. They are not really felt on the supply side of the market at all.

The tradeoffs are experienced by consumers of movies. They are the people left out of account in most descriptions of the digitization of motion pictures. Yet movie fans are the ones that the movies are produced for in the first place. Consumers are the yardstick by which economists gauge the value of economic activity.

When movies switched from nitrate film to acetate, the studios were clear winners. They saved on the costs of safeguarding and preserving films. It was movie fans who had to put up with the slight diminution in quality of their viewing experience. As it happened, the era (beginning about 1950) coincided with a trend toward more grit and realism in movies, which probably cushioned the effect of the loss in visual beauty.

Today, digital projection is less sharp and realistic than celluloid film. Movies simply don’t look the same as they used to. Because more movies today cater to the youth market and depend on special effects and fantasy, the loss of sharpness and realism may not be felt as keenly as it might otherwise.

But adults clearly do not find the motion-picture experience as enjoyable as they once did. That shows up in declining theater attendance compared to the heyday of movies in the 1930s and 1940s, when average weekly movie attendance exceeded half the total population of the country. Today, it barely reaches 10% of total population. Of course, that trend began long before the advent of digitization. But the popularity of classic film in venues like cable TV’s Turner Classic Movies channel suggests that the adult demand for film is alive and well; it deserves its say in the battle over digitization.

In addition to the apparent tradeoffs, others lurk beneath the surface. Alimurung notes many of them in the LA Weekly piece. Superficially, digital technology seems permanent. A film is inherently mortal; tiny pieces of the film chip off with each showing, producing wear and tear that will ultimately necessitate preservation and reconstruction if the film is to survive. In contrast, a digital movie is not a physical object, but rather data stored on a computer – seemingly a permanent entity.

This comparison is deceptive. With controlled storage, films can last forever if shown on a limited basis. On closer inspection, digital movies are found to be shockingly ephemeral. For one thing, computer formats change frequently, thereby necessitating digital transfer of the movie as well. This might not be too onerous for the most popular movies, but the purpose of movie preservation is the stewardship of a cultural heritage. After all, over half of all films produced are now lost due to decomposition or dislocation. This includes many famous classic films from the silent era. To make matters worse, digital movies physically deteriorate faster than do films, particularly if not shown regularly. To top it off, digital equipment is much more fragile than film projection hardware. The latter can survive for decades; digital equipment tends to be shorter-lived, more fragile and more expensive to replace.

Oh, one more minor detail. Every computer user shudders when remembering how easy it is to blow away a data set. Well, that’s just about how easy it is to destroy a digital movie.

The End of Movies?

The possible implications of these tradeoffs are disturbing indeed. They imply that the short-run attractions of a full changeover to digital technology could – in the long run – eventually destroy the movie business altogether. The costs of frequent changes in formats could eat up the immediate savings of the change, driving theater owners from the market. The costs of digital transfer could make the maintenance of film libraries prohibitively expensive, limiting movies to first-run exhibition and leaving viewers of TCM with nowhere to turn. The market for new movies has become increasingly dominated by movies targeted at the young. Most of these movies do not turn a profit from ticket sales per se, but rather from concessions and merchandising tie-ins.

This is not a scenario of a healthy industry with a bright future. It is possible that the movie business may become – may already be – a dying industry.

The jobs lost thereby would be recovered elsewhere, sooner or later. But the value lost would never be recovered. This is the real cost of technology. It has always been there. The disappearance of hand-crafted goods replaced by assembly-line production, the demise of soda-fountain soft drinks superseded by the bottled variety, the loss of farm-fresh produce in exchange for the ability to feed regions, nations and the world – this is the true price we pay for the rise in our standard of living.

Traditionally, the gain has been well worth the cost. Consumers have been more than willing to sacrifice the slight loss of quality for the huge increases in quantity made possible by technology. Unfortunately, the activities of government today impair the ability of consumers to make an informed choice.

Government Subsidies to Movie Production

For decades, European moviemakers have been subsidized by their national governments. The rationale for this practice has been twofold. First, it has been deemed necessary to offset the “unfair” advantage enjoyed by Hollywood movies, which were generally preferred to the domestic product. Second, it has been justified as a way to preserve national culture, which would otherwise decay and deteriorate. This policy has not produced better European movies, whether evaluated critically or commercially – a fact that has not brought an end to the subsidies.

In recent years, U.S. state governments have significantly subsidized the production of motion pictures. Here, the rationale has been different. It is “economic development.” Ostensibly, motion-picture production has “multiplier effects” on local economic activity that miraculously create economic value that is many times the value expended on the subsidies. Once again, the facts do not conform to the theory behind the subsidies. The Keynesian logic behind the government-expenditure-creates-secondary-multiplier-income-and-employment-gains has conspicuously failed national governments around the world ever since the 1960s. Most recently, it has failed the Bush and Obama administrations, whose stimulus and quantitative easing policies have done little if anything to ease the burden of recession in the U.S. State governments do not possess the power to create money, nor do they possess the fiscal powers of national governments, so there is even less reason, a priori, to expect them to successfully wield this policy instrument even if its theoretical effectiveness were conceded. In reality, there is no evidence that state government subsidies to motion-picture production actually promote economic development.

Subsidies have given us the worst of both worlds. They have made producers dependent on government for survival without giving consumers a better product. The imminence of federal budgetary collapse in Europe, with the U.S. trailing along in the wake, makes it likely that these subsidies will not long survive. This will ill-equip movie producers to respond to the long run challenges posed by digitization of movies.

Rx: Consumer Sovereignty

Is the loss of quality associated with digitization counterbalanced by its advantages? Only consumers can answer that question. But to answer it, they must be asked. That is, they must control the choice between film and digital. Alas, at the very time when the survival of the movie business depends on delivering value to consumers, the attention of movie producers has instead been diverted to short-term considerations – strong-arming theaters into digital conversion and lobbying for government subsidies.

Pharmacists are taught to be on guard against “interaction effects” caused by concurrent ingestion of prescription medications. Movie lovers can only pray that the mix of technological innovation and government subsidies will not prove fatal to their favorite pastime.

Brad Furnish
Chief Economist
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