It may be no coincidence that so many recent motion pictures (Matrix, Terminator, etc.) depict a world in which a small band of humans battle machines that are intent on taking over the world. For the studios, this is not fiction but reality. Technology is transforming the industry. Among the invaders and shifts:

• Rise of the Machines: While TiVo may still have relatively low market share, it has a high share of mind among media executives. This is because it threatens to suck out the oxygen on which they live. While the television remote allowed viewers to wander, TiVo and other PVRs (personal video recorders) allow viewers to edit out the profit model at the heart of the media business, particularly for the networks. These devices also take programming out of the hands of programmers and put it into the hands of viewers who can watch what they want when they want. Fox Chairman and CEO Peter Chernin said it will disrupt the advertising model, but not destroy it. It may herald the end of several minute blocks of commercials and accelerate the move to product placement. He also points out that while network share has dropped from 70 percent to 40 percent in a more fragmented market, the networks are still the only place on the planet where millions of viewers can be brought together. Product placement is on the rise. Since the product-packed movie Minority Report, the artistic community is much more open to product placement. "It said to the producers that it is not such a terrible thing to play ball with the advertisers," said CBS President and CEO Les Moonves.
  
  
• Being There: There is plenty of room for promotion beyond traditional advertising spots as branding, advertising, and experience converge. In addition to product placement in films, television, and video games, there are many other ways to get messages out. At a panel on cultural convergence, CEOs of Starbucks and JetBlue said they put little or no resources into traditional media advertising, relying more upon word of mouth, PR, and effective branding. The green and white Starbucks logo succeeds without celebrity endorsements and flashy ads because it has become a cultural icon. "It is far more than a cup of coffee. It is a total experience," said Starbucks' Orin Smith. "We change the way people live their lives, what they do in the morning, how they reward themselves, where they congregate, where they meet for business, and how frequently they meet. We affect the way they feel about themselves and maybe the entire day." Companies also focus on building an employee and customer culture that supports the brand. "Our feeling was that our brand will be created with every single interaction with every one of our customers and every single phone call," said JetBlue's David Neeleman. "To grow, we have to create a culture where people enjoy the experience of getting on an airplane." JetBlue has added DirectTV to the airline seatback and diverse other customer benefits because different customers value different things. "Too much overkill is never enough," he said. Advertisers are also creating advertainment, such as a program on healthy living by a health care company.
  
  
• Pirates of the Cable Modem: The spread of broadband could take the battle over piracy from the music business into video. Studio executives said they are not as vulnerable as recording companies because they already offer their products in multiple formats (theaters, DVD and video rentals or sales, pay per view) at many different price points. In contrast, the music business defended the CD format which forced listeners to buy an $18 CD to obtain a single song. As Chernin pointed out, a DVD of an entire movie is often priced at less than the motion picture soundtrack on CD. "We have a much more flexible business model and tremendous availability," he said. The true test will be the widespread availability of broadband. "As broadband pipes get bigger, it will change," said Robert Kotick, CEO of video game maker Activision, Inc. "The music industry didn't react quickly enough, so they were not prepared for what happened. We have a generation that has grown up thinking content is free."
  
  
• Laura Croft, Audience Raider: When networks wonder where the 18-34 male audience is going, the answer is video games. Advertisers are just beginning to "Tony Hawk" their products through this new medium. While networks may not be able to show whether audiences are actually watching advertising, when a video game player has to drink a Pepsi or use a cell phone to get to the next level of a game, they clearly have to see the ads. Of course, studios are also using cross-overs to generate additional income, and games advertise heavily on television. While sponsors spent $10 million on gaming advertising compared with $10 billion on television, more dollars are beginning to flow into this medium.
  
  
• Mo' Money: When a studio puts $250 million into creating and promoting a film such as Van Helsing, years of work come down to a few hours on a Friday night. While most executives seemed to agree that spending levels have reached dangerous levels, if you are in this poker game, you have almost no choice but to ante up. Viacom CEO Sumner Redstone noted that he had to take the spending constraints off Paramount to attract top artists to the studio. "The cost of these movies is the dirty secret of Hollywood," Chernin said. "We have seen $100 million writedowns, and now you are going to see $150 to $200 million writedowns, and it will rock the industry." While there are surprises such as Mel Gibson's The Passion of Christ, Chernin noted that "there are not a lot of $400 million religious movies out there." Over longer periods of time, many studios undergo a boom and bust cycle.
  
  
• Play It Again, Sam: The voracious appetite for cash to fund these huge film projects has made the steady and more predictable cash thrown off by film libraries a coveted prize (as indicated by Sony's recent $5 billion bid for the 4,000-title MGM film library). In fact, building libraries may even be a big part of why studios keep making new motion pictures.
  
  
• Lost in Translation: International revenues are growing, and studios are still aggressively thinking about international markets. While pay television has grown by 46 percent in the U.S., it grew by 86 percent internationally. Redstone's MTV and Chernin's Fox have succeeded by adapting their products to local markets. MTV made little progress in India and China until it adopted local programming. Fox's Star Plus movie channel initially showed English language films with Hindi subtitles. The channel took off when it switched to Hindi language programming, and it now boasts 47 of the top 50 shows. "Even if we want to be cultural imperialists, which we don't, the consumers in these countries will set you straight very quickly," Chernin said. "For the most part, we are successful with local products."
  
  
• The Enforcer: Redstone said the Janet Jackson scandal that struck his CBS network may be more of an issue with politicians than the public. Chernin said that after the controversy, Fox did training for employees across the organization, including live focus groups with teenagers and parents. They found that viewers were not bothered by Janet Jackson or the mature-rated video game Grand Theft Auto, apparently able to separate fantasy from reality. A scene of domestic violence from The Sopranos was the one thing that bothered viewers because it was too close to reality. Networks have to answer most directly to the morals of society, which puts them at a disadvantage to cable and satellite television. "That can have a chilling effect on the kind of stuff we give the public," Redstone said, but ultimately "The consumer decides Fox is doing well, and the consumer is watching MTV. The politicians are not the king. The consumer is king, and as long as we appeal to consumer tastes, we'll be successful."

• Wharton Fellows

• Wharton Executive Education
  
  
• The Wharton School

This month's articles:

• Advanced Management Program
  Successful leadership may be less about a set of characteristics than a capacity for relationship.
  
  
• Custom Programs
  Leaders of Wharton's NASD Institute examine the complexities of insider trading regulations.
  
  
• Wharton Fellows
  Top media executives examine shifts in technology and other innovations.
  
  
• Wharton Career Advisor
  Expert advisors offer insights on dealing with politics and bureaucracy.
  
  
• Education à la Carte
  To lead effectively, you have to see the big picture. Upcoming programs can offer fresh perspectives.