MORE than 39m Americans watched the film industry's Academy Awards on television last Sunday night. Nostalgia ruled as the judges awarded Oscars to a raft of films that paid tribute to a golden age when people flocked to cinemas and filled the seats. Tinseltown's yearnings for the good old days have been all too evident of late. Americans bought 40m fewer movie tickets last year compared with the year before. Cinema attendance in the United States is now at its lowest point since 1996. Movie executives blame everything from the weak economy to video games for the downward trend in attendance. They cling to the hope that each coming slew of sequels, franchise offerings and book adaptations will bring bigger audiences than the last. They are, of course, deluding themselves. The reality is that a fundamental change in consumer habits is undermining their industry. As has happened elsewhere, technology is allowing people to be choosier than ever about how, when and where they consume the film industry's output—and increasingly they are shunning the cinema. Consider the metric known as the “multiple” that the studios use to measure a film's success. This is a production's final box-office gross divided by ticket sales during its opening weekend. A decade ago, the industry had an average multiple of over four. Today, the average is below three. Some recent films which were expected to be blockbusters finished up with multiples of little more than two. There are good reasons why more and more films are starting out with strong ticket sales, only to see their attendance figures swiftly fizzle. Over the years, average ticket sales for opening weekends (adjusted for inflation) have barely changed. Hard-core movie fans—primed by trailers, trade magazines, word-of-mouth and the industry's marketing muscle—are mainly the ones who go to see films as soon as they open. They always have, and always will. But they are a minority.

The difference nowadays is that mainstream cinemagoers—those who wait to hear what friends and critics have to say—have many more choices at their disposal. And if the buzz about a film is not compelling enough, rather than head to the multiplex, many are likely to wait until it comes out on DVD or Blu-ray Disc—or, more likely still, to stream it from a video-on-demand website such as Netflix, Amazon and VUDU. This is particularly true of people in their twenties and thirties.

Here, then, is Hollywood's predicament. Over the past decade, television sets have morphed from being bulky boxes with poor resolution to become large flat-panel displays offering pristine pictures—plus connections to the internet with software widgets and browsers for downloading movies, television shows, games and other video fare. In the comfort of a living room, a 50-inch flat-panel television set hooked up to a digital video recorder (DVR) and a Blu-ray player can be every bit as immersive as the cinema. Two out of three American homes have at least one large high-definition television set. Almost half also have a DVR. And three out of four have fast broadband connections to the internet.

With such numbers working against them, multiplexes in the mall are being disintermediated by internet-connected televisions in the home. Meanwhile, connected TVs are doing much the same to cable and satellite television providers. More accurately, both are being disaggregated, rather than disintermediated, by connected TVs. In other words, television sets that are connected to the internet provide consumers with a handy way of buying just the shows they want to see, rather than the hundreds of channels they have to pay for but mostly do not want.

This trend was especially evident at the recent Consumer Electronics Show in Las Vegas. While not exactly a new development (connected TVs are now into their fourth iteration), the surge in investment and hype suggests the consumer-electronics firms have finally twigged that they have to do more than merely add internet connectivity to their products. Their future depends on turning dumb televisions into smart, interactive platforms—alongside computers, tablets, game consoles and smartphones—complete with their own ecosystem of apps and services.

The distinguishing feature of smart television will be the ability to personalise the content—so people get only what they want, when they want it, and wherever they may be. Using details mined from people's social graphs on Facebook, Twitter and the like, smart television will know who those people are individually and how they spend their time. They will then make useful recommendations about the kind of content each person might enjoy. Apart from personalising the content, media companies will be able to tailor the advertising to an individual's needs and tastes.

Turning dumb television into a social platform also means giving viewers the tools to interact with other viewers. In a sense, this is already happening. Instead of using a mobile app like Foursquare for people to share their geographical location with friends, television apps such as yap.TV, Yahoo's IntoNow or Bazaar Labs' Miso let users “check in” with a show or film, and engage with others watching it.

Viewers say they find sharing comments in real time about content being watched, voting for the best performances, and simply having fun with others who have similar interests enhances the viewing experience no end. In short, social TV is all about building a better water-cooler—a place to gather around and have brief conversations that brighten up the day. Do not underestimate its significance. It is the secret sauce that has made social networks like Facebook, Twitter and Pinterest such phenomenal successes.

Inevitably, turning television into a platform for social networking will affect the way the medium is consumed. Instead of surfing channels on television for something interesting, viewers will use an app to discover the URL of a specific movie, show or episode that they want to watch (or the app has recommended to them), whether it be on YouTube, Hulu, VUDU or some other streaming website.

In the process, the traditional world of network television, with its channels of competing fare—each with its own blend of shows, news, sports and old flicks—will be competing headlong against the online world's vast supply of disaggregated content. Time Warner may boast of offering 900 television channels, but YouTube has literally tens of millions of individual “channels” catering for every conceivable taste.

And unlike the broadcast approach of television, a narrowcast channel on YouTube can turn a profit with very little programming. One of the most lucrative (a comedy show hosted and produced by Ray William Johnson) adds just 12 minutes of new content each week, but gets over 4m views for each of its twice-weekly productions. Network television would kill for such numbers.

So, if an online channel costs next to nothing to produce, and can be built around a single six-minute show, how will traditional television—with its huge production costs and overheads—continue to exist? Perhaps television companies will likewise have to create “channels” around single shows, bulking up their offerings with out-takes, quizzes, polls and interactive comment.

Back in Hollywood, studio bosses view all this upheaval in videoland with a mixture of apprehension and distaste. Their worst fear is that, with social TV looming on the horizon, their 60-year nightmare about television stealing their audience may be finally coming true. With less to lose, a few independent studios and producers have reached out to the internet, even going so far as to offer films for on-demand viewing while they are still showing on the big screen. The major studios will eventually have to do much the same.

It is not as though film is about to fade away. The cinemas may decline and eventually crumble. But there will always be an audience for films that offer great story-telling and fine acting (as well as spectacular car chases or flashy explosions). It is just that they will be consumed in an entirely different manner. The film industry's job is to figure out how to make a living when practically all forms of video entertainment—film as well as television—are watched exclusively online.