Nov. 20, 2002 - By Paul Bond, The Hollywood Reporter

Investors a few years back were a bit overenthusiastic about digital entertainment companies that overpromised while they under-delivered, leading to what media consultant Michael J. Wolf terms a "digital demolition."

Even so, entertainment companies burnt in the tech meltdown would be wise to pay close attention to digital technologies, regardless of the ever-changing prevailing wisdom on Wall Street.

"The business is coming back," Wolf told 150 top media and technology executives at a Tuesday breakfast sponsored by the Digital Coast Roundtable.

What happened during the bubble period that ended in March 2000 was nothing more than an extreme example of the cycle all new technologies go through: exuberance, then bust and now a comeback.

After recapping some dire news in the tech space — "some telecom companies are dead and don't even know about it" — Wolf enthused about impending digital distribution of music, film and television.

"The debate is over; it's going to happen," said Wolf, who leads McKinsey & Co's. Global Media & Entertainment Practice.

Digital video recording, video-on-demand and interactive TV will eventually represent "meaningful subscription revenue," he predicted. And Sony's online game "EverQuest" "has a bigger population than Cincinnati."

Consumers, in fact, were quick to embrace digital entertainment, at least in the form of DVDs. Already in 30% of America's homes, DVD players will be in 70% of homes within two years, Wolf said.

Wolf compared the adoption rate of DVD to other popular technologies. It took just four years for DVD players to penetrate 20% of domestic households — quicker than VCRs and PCs (eight years), cell phones (10 years) and color TV sets (14 years).

And beyond the technology, Wolf noted, consumers have proven their willingness to pay for quality entertainment. Spending on entertainment rose from $950.09 annually in 1990 to $1,695.16 a decade later, representing an increase that's 2.47 times the rate of inflation, Wolf said.

He is even bullish on music, an industry that's been hampered by digital file-sharing technologies.

Trading songs and burning CD compilations — technological capabilities often viewed with disdain by industry executives — at least spur interest in music, Wolf said.

Entertainment needs to stop worrying so much about how revenue might be split up in digital distribution and focus on giving consumers what they want. And it needs to stop obsessing over piracy, a real problem though not one that should hamper innovation.

Consumers buy "The Sopranos" on DVD, even though they might easily tape episodes freely with their VCRs, he noted. And "somehow the book industry survives even though there are libraries."

Textbooks are hugely profitable, even though it was once feared that Kinko's would put the industry out of business.

Wireless also affords great opportunities. Those who doubt consumers' interest in experiencing entertainment on handheld devices have never seen a 10-year-old working a Nintendo GameBoy.

Wolf was introduced by Robert J. Dowling, editor-in-chief and publisher of The Hollywood Reporter and chairman of the Digital Coast Roundtable, the 4-year-old nonprofit group that promotes economic opportunity for technology companies in the California region stretching from Santa Barbara to San Diego.

Digital technologies have put music "in a state of shock," Dowling said, "and the film industry fears it's next."

But such disruptive technologies also afford opportunity, Dowling stressed, echoing a theme throughout Wolf's presentation.

"Media and entertainment executives will ignore the transition to digital at their peril," Wolf said.

Copyright 2002 The Hollywood Reporter