We at CIOBEE often manage business consultancy and Business transformation projects which lead us in some or another way in part or in the whole to digital transformation of the given business. The issue is often that the customer does not go beyond the digitization or at the digitalisation part, not taking the efforts of goin the last mile. The reasons are quite different, but one of the most comon ones is the confusion about the terms themselves, believing to have already crossed the finishline while being just half way there in reality.
So lets take an exciting journy, back in time almost a century and whach the the story of three words: Digitization, Digitalization and Digital Transformation and their appearance in the history of Hollywood, the outcomes they generated, and their consequences to us: having a look on that, how we may can extrapolate the key-learnings to our own actual businesses.
Just like in a Hollywood movie, we focus on three key elements a hero needs to go through: the setting or correction of the past, the actions performed with regards of optimizing the present, and working on shaping the future.
We will also have a look on a journey of a company, that starts back in 1997 with a 40 USD fine and a Job crisis – and ends up in a 120BUSD net worth Company in 2022 having subscribers in more than 190 countries of the world, and consuming 15% of the today’s internet bandwidth worldwide.
Let’s begin with the words of John F. Kennedy, who said once: “Written in Chinese, the word 'crisis' is composed of two characters. One represents danger and the other represents opportunity.”
Indeed, the Chinese word for crisis, Wei-Ji, has two parts, where Wei means Danger and Ji means Opportunity. Very wisely, because those two were always the driving factors for adaptation, invention and prevail in history.
And this was not different in the history of Hollywood either.
After the beginnings, the Golden Age of Hollywood is dated to the years of 1930 through 1945. In those 15 years, more than 7,500 features were released, with movies like “The Wizard of Oz”, “Casablanca”, “King Kong” and “Gone With the Wind”.
This all have been made possible by the invention of the Lumiere Brothers back in 1895. That was the year when they registered their invention which could project a moving picture on a silver screen, giving the illusion to the audience of watching actors not being there at all, just like they would be on stage in the theaters. This went so well, that in 1896, the Lumière brothers screened their short film “Arrival of a Train at La Ciotat Station” so realistic, that the audience broke into a panic, screaming and running for their lives as the locomotive on the screen seemingly headed straight toward them.
The success was preprogrammed. Additional inventions led to even more success and established the movie industry. Other ones were rather disruptive to newborn movie business, or at least as it was at that time – until they were discovered being more drivers and not enemies to the entertainment business.
One of those inventions was a newly patented technical device from a Hungarian engineer, Kalman Tihanyi, who created the first cathode beam tube in 1926. Just one year later, a 21-year-old inventor named Philo Taylor Farnsworth who had lived in a house without electricity until he was 14 successfully demonstrated television in San Francisco, which was built on that technology. This was so disruptive to the traditional movie business that it led to the first huge crisis of Hollywood in the 1950s.
It took almost 20 years of recovery, until Hollywood reached its next renaissance between 1967 to the early 1980s, with movies like Bonnie and Clyde, The Graduate, Rosemary's Baby, Night of the Living Dead, The Wild Bunch, and Easy Rider and of course… Star Wars.
Yet at the end of the early 80s another crisis begun to rise: another invention started to roll out – that put and end of this glimmering era.
Although the world's oldest, renting-out-copies of movies for private use, was opened by Eckhard Baum in Kassel, Germany in the summer of 1975 for renting of Super 8 films, it was not widely used by the public.
But when in 1975 Sony developed the Betamax videorecording system, it changed everything: in 1982 only six percent of U.S. homes had VCRs, by 1986 this number grew to 33 percent in the United States. And It even got worst, when JVC released the first VHS machines 1977 unleashing the simple good quality recording of movies at home.
The increase of video recording also brought about concerns about illegal copying of copyrighted material and a decline in cinema attendance. The big ones tried to stop this trend, and in 1976, the Disney Corporation and Universal Studios sued Sony in the U.S. courts for providing the means for their copyrights to be infringed. It took a while since Hollywood realized the necessity to reconsider the business, they believed they are in, shifting their understanding of their business from the movies and cinemas to the entertainment business.
Finally, the first professionally managed video rental store in the U.S., Video Station, was opened by George Atkinson in December already in 1977 at 12011 Wilshire Boulevard in Los Angeles. And like bushfire, video rental stores opened one after the other in the entire word. People started to rent movies, watch them at home instead of going to the cinema. The train of the Lumiere Brothers could not be stopped anymore.
But this was not always flawless.
In 1997 a guy named Reed Hastings received a $40 fine for renting the movie Apollo 13 and returning it six weeks late. This inspired him to think up a service that allowed one to order a movie online and get it sent to his address by mail saving the time and effort of getting to the sop and picking up the movie in person.
According to his friend Marc Randolph, the story is a bit different, but still has some lessons learned: due to a looming merger of the company where they both were working with another firm would leave them both out of a job, so Marc said Reed to come up with an idea that would save them both.
I don’t know if they knew the quote of John F. Kennedy mentioned at the beginning of our story, yet the crisis was given. So – after a couple of desperate e-commerce ideas like surfboards, custom-built baseball bats, personalized dog food, and home-delivery shampoo - the danger and the opportunity they had to face with gave them motivation for founding their company in 1997 in a small California city called Scotts Valley.
Marc heard of a new product invented in Japan called the DVD. He realized DVDs would soon replace VHS Cassettes as the home viewing standard. After a bit of brainstorming in the car on Highway 17, Reed was sold on the idea. Soon after Marc and Reed walked into a store in Santa Cruz, bought a CD of Patsy Cline's greatest hits, and mailed it to Reed's house to see if it arrives intact.
This way they crafted a successful business model: a subscription-based service with no due dates or late fees and unlimited access to content at $19.95.
What they needed for this, was just successful putting together 2 out of the 3 pieces we have mentioned in the beginning. The first one was the digitized content which allowed them to rethink the past by going from analogue to digital. The second one was the optimization of the present by inventing the proper digitalized processes based on the digitized content coming from the first step.
Due to these, in 1999, their video library expanded to 3,100 titles and they had 239,000 subscribers. This grew to one million in 2001 and to 6,3 million in 2006 generating more than 80USD.
But this was not the final solution. The last piece was still missing from the 3 puzzle pieces.
They could have been stopped here, as many organizations do. But going that last mile - which has already been prepared by the first two: by “correcting of the past” and by “optimizing of the present” - was the final missing piece for the real reshaping of the future: the creation of the new digital business model. Without that, we probably would not even remember them today.
So, in 2007, next to sending DVDs by mail, they started streaming the content, establishing the movie streaming business, delivering movies directly to TVs, computers, and tablets.
And this was something new.
In 2010 they changed their focus to streaming, as Reed told the investors, "Three years ago we were a DVD by-mail company that offered some streaming. We are now a streaming company which also offers DVD by mail."
Today Netflix – because this is the name of the company Reed and Marc registered in 1997 – hits 209 million subscribers in over 190 countries. It has more than 15,000 titles across all its international libraries and earns over $25 billion in annual revenues.
Finally, Hollywood also recognized the chances behind the new business model, and – as usual after a natural phase of resistance – Hollywood Giants like Disney also started developing their own digitally transformed business. They realized that streaming provides them with an additional sales channel, and even saved them by providing the necessary business continuity during the Covid pandemic when cinemas remained empty during the lockdowns.
But – besides the journey through the history of Hollywood and the movie industry – what could be our key takeaway out of this story?
As mentioned, Crisis – in general – has always two sides: danger and opportunity. Danger can manifest itself in several ways and aspects. Opportunities are based on dealing with the issues of the past, the present and for shaping the future. In our modern, digital age, these can typically be addressed the 3-D package of the Digital approaches: the Digitization, Digitalization and Digital Transformation. The most important is, not to mix them and to know that those are not synonyms, but representing the 3 phases of changing the past, the present and the future, as mentioned above:
“Digitization” fixes the past by applying technology, by creating a digital representation of physical objects or attributes, like movies became their digital representations first on DVD-s and then in the cloud.
“Digitalization” perfects the present by enabling or improving processes, leveraging digital technologies and digitized data, like the possibility of sending those on DVD via mail to the recipient.
“Digital Transformation” unleashes the real innovative possibilities and creates the future by transforming the business building on the opportunities enabled by the digitalization: a new business model which was not there before, as Netflix did with creating its streaming services.
Of course, all these can and even should be quite disruptive in both sense of the meaning of the word: they cause turbulence and igniting panic among the others in the traditional business arena where the disruptor is coming from, and they certainly revolutionize the business around them at the same time.
As time goes by, the change will never end. Some may can try to work against that, experiencing the disruption as danger, some others may try to catch up with the change and see the opportunity and be revolutionary disruptors themselves.
As we have seen, Hollywood’s giants have chosen the second option so far. Which seems to be proven being the right choice for them. The question you have to ask yourself is what you should do about it. Since… what other approach could you choose at all, anyway?
Sources:
https://www.gregverdino.com/digitization-vs-digitalization-vs-digital-transformation/ ; https://www.makeuseof.com/how-when-netflix-start-brief-company-history/; https://www.history.com/news/how-tv-killed-hollywoods-golden-age; https://mroche.umwblogs.org/impact-of-the-vhs/; https://en.wikipedia.org/wiki/Video_rental_shop