A few years ago, Peter Dekom was a hot commodity in Hollywood's quirky firmament -- a deal-making attorney. As a partner in Bloom, Dekom, Hergott & Cook, he helped propel clients like John Travolta, George Lucas, and Ron Howard into the ranks of the super-rich and guide corporate clients like US West in navigating the Hollywood seas.

As CEO of Viacom and chairman of Universal Studios during that time, Frank Biondi was one of the most respected executives in the media business. Though fired from his last two studio jobs (not an uncommon occurrence in Hollywood), he netted exit packages of around $40 million.

Both men have since left the traditional businesses they were in to dabble in the new-media space. Both are now advisers and investors in Hollywood's off-kilter plunge into technology. Mr. Biondi has invested in companies like AtomFilms, FlyCode, and Intertrust Technologies. Mr. Dekom consults for an eclectic group of clients, including Hong Kong's the Shaw Group and Hollywood's Regent Entertainment. His harsh views on Hollywood are waiting to be published as a book entitled Content Is Garbage.

What is the state of Hollywood's digital transformation? Peter Dekom: Hollywood is run by middle management. It's still an industry of relationships. In a world where chief technology officers dictate policy, chief technology officers in entertainment companies probably have offices near the janitorial closet. The structure is so completely out of whack and old world that if it doesn't change, the value of these structures will drop so low that modern companies will pick them up for a song. The industry either fixes itself or it decimates itself. There are people in Hollywood who would rather die of thirst than go and get their own cup of coffee. There are people at AOL who are worth $50 million who have never had a cup of coffee brought to them by an assistant.

Frank Biondi: There are a lot of people in the middle management who are fairly skilled and bright, and have done a lot of homework on it. The problem is getting their vision into an active mode. And what I mean by that is -- now, let's say I'm the head of technology or the head of business development at Studio Y, and I have a business plan to have our product out there electronically. I go to my boss, and he isn't as up to speed as I am on the issue. I'm nervous, because if he's wrong, the library, the backlist, it's all out there and it's free. The business is gone, that's the nightmare scenario. So what is he going to do in that kind of situation if he's middle management? He kicks it up to his boss, who goes through the same thing. It ultimately winds up at the chairman or CEO level. Whatever their skills, and there are a lot of them, they're probably not the right people to be making that kind of decision. They're not familiar enough with the technology.

Are consumers in control at this point?FB: Right now the conversation is pretty much about what the [studios and labels] own and what they want to do with it. It doesn't really deal with the consumer, partially because almost none of them deal directly with the consumer today. They deal with middlemen -- theater owners, pay TV, key television networks, what have you. The great irony is that they won't talk to them about adopting some of these new technologies. Almost universally they say, "We think we can do that ourselves." Their great dream is to get rid of the Blockbusters of the world, get rid of the theaters of the world, so they can capture the wholesale markup. What the industry has never liked is a retailer.

PD: It's clear that if you don't give the consumers what they want, they'll find a way to get it their own way. If you go to record stores today you'll see something you've never seen before. Little teeny mini-albums that hold four or five songs. Maybe even one cut. That didn't happen before. So the music business is beginning to get it. But it won't work when BMG goes out and says you have to sign up with me and I'll get you all the music you need. The question is, can someone come up with an economic model that is reasonably priced, probably more subscription-based than pay-per-view? Pay-per-view will be for a very limited premium first-run product as it comes out, and everything else will be a subscription model.

Will consumers eventually have their way and turn all product into free access, with the copyright owners scrambling to find ways to make money at it?PD: No technology-based investor is going to argue that you can absolutely protect a file against anybody. Otherwise you wouldn't have encryption. But from a distributor's perspective, or a copyright owner's perspective, they can find some happy medium where 90 percent of the market is going to deal legitimately. But you also get companies like Intel who look at peer-to-peer processing as an opportunity to create mainframes from network and PCs, so they are designing the next generation of chips to encourage peer-to-peer processing. I don't care what the film business wants, it doesn't matter what the executives care about -- what I see are major studio executives going before Congress begging for piracy protection. What they are really telling the financial community is, "I can't run my company without congressional intervention." Until people start developing the pricing model and Wall Street has confidence that the entertainment industry knows how to handle this on an economically viable basis, content values will continue to plummet. Whenever an industry battles Wall Street, Wall Street never loses.

FB: The copyright owners are in a very reactive mode -- there is no doubt about that. The studios and the labels have been able to sit back and pretty much ride the growth in worldwide demand for their product. You know -- deregulation, globalization, technological improvements, cable, satellites, whatever. They're now at the point where technology is slowly nibbling at their toes, and it's about to take off a leg. They're not sure metaphorically how to respond to it. The question is how many people are going to avail themselves of Napster-like technology to view first-run movies. In my mind, the only way to head this off is if you have your product available for a relatively economic basis. Now, I mean, I didn't try to get into the debate as to what the economic basis is, the market will decide that -- what the proper price points are. But not to be out there, not to have your product available, is like letting a patient get killed.

What might be the new pricing models?FB: Subscription works for most households if it doesn't involve a lot of decisions or a lot of complex technology. If it's much more complex than a cable box, it won't work. It isn't a trap. Yes, you need something a bit more sophisticated, but it has to be simple to the users. I also think it's going to be a long time before the industry rolls over and allows total day and date pricing. They are going to go kicking and screaming. You might have something like a $300 or $500 movie, with a Texas Instruments projector on your large-screen television, where the rights owners just assume, like a pay-per-view fight, that you are going to have 15 neighbors over, or what have you. But I don't think you are going to be shipping a DVD on Day One or downloading a visual file except on a unique pay basis.

PD: I think the answer to that is in the hands of the studios. It could turn out to be an enormous saving grace, if you price your product right and have effective distribution. One of the things that has always troubled me conceptually about the studios is that they don't really have a great belief in pricing. The general feeling is that if I have a music superstar, regardless of whether I charge $25, $25.60, $11, or $5 a CD, there's just -- demand. That's it. It fills up no matter what the price point is. I don't believe that's true.

What does Wall Street think?PD: Wall Street is going to start putting more and more pressure on the entertainment structure to be more economically efficient. We are going to have to find better ways of doing things. We are going to have to find cheaper movies, and movies are going to end up being driven by things other than stars. There will be spectacles that everybody has to see. In marketing we are going to have to learn; nobody in the studio world knows how to use the Web yet to market. They create Web sites that don't mean anything. They don't know how to reach consumers, they haven't created databases, they haven't profiled the people who go to movies, they haven't figured out how to market to them.

FB: I think what Peter is describing in terms of the technology pressure on studios' economic structure has always been there. I used to say that on current production, a good studio was one that, in a five-year period, made a lot of money one year, broke even plus or minus a couple of million in the next three years, and had a small loss in year five. That's fabulous performance! But they do have an advantage. They have these great pay-TV deals, they have these great video relationships, and they have these great overseas outlet deals. So for a producer, even if you think you can distribute a film yourself, and, say, you can get European financing for it, you can't get the same bang for your buck in the ancillary markets yet. What you have to understand is that this is a business where everybody involved in the process makes money on the motion picture business except the studio. They are investors. They take other people's money. I think their greatest fear is that if they don't continue to finance movies, then their role as a distributor is easily diminished.

So does Hollywood need to be fired? Need there be an executive transfusion?PD: Well I think the harsh reality is that in this world there needs to be a new awareness. It doesn't mean that the people on top of these companies can't continue to run them on some basis. It means that they need to move people into more senior positions -- and listen to them -- who are different than the people who were there before, but the truth is, and I found this out, there are not a lot of those people. The number of people on the planet who have crossover skills is probably under 15.

ADDITIONAL RESOURCES

InteractiveTV Today.Pfeiffer Consulting press information.Veronis Suhler media merchant bank article talking about how "a robust economy and the positive impact of the Internet have driven solid growth in the entertainment industry."

Write to robert.lafranco@redherring.com.