Rupert Murdoch gives away 20 million digital video recorders.

The joy of blockbusters.
June 14 2005 1:37 PM

Rupert Murdoch Strikes Back

His bold plan to give away 20 million digital video recorders.

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Murdoch: making life easier for couch potatoes. Click image to expand.
Murdoch: making life easier for couch potatoes

Never underestimate Rupert Murdoch as a true visionary of the New Hollywood—or his power to uproot and reshape it. Back in 1983, when it was considered little more than a sci-fi pipe dream for man-made satellites to send high-definition movies to homes around the world, Murdoch was positioning an armada 22,300 miles above the earth. His satellites were placed in the Clarke Ring, named after Arthur C. Clarke, who wrote the science-fiction classic 2001: A Space Odyssey. In this high orbit, they would serve as broadcasting platforms that could beam down movies—as well as sports events, news, and other programming—to tiny home antennas. It took another two decades for Murdoch to complete his bold master plan. In 2003, he bought control of DirecTV—the largest provider of satellite television in America—which, along with his Sky TV in Europe and Latin America, and Star TV in Asia and the Antipodes, gave him some 40 million subscribers. He then announced that by the end of 2005 his satellites would have the capacity to transmit 500 channels of high-definition programs.

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Girdling the earth with satellites was just the beginning. Even before Murdoch completed his acquisition of DirecTV, he told financiers at Morgan Stanley's Global Media Conference that he planned to marry the satellites above with TiVo-like home recorders below, explaining that "every subscriber will be getting either a free digital video recorder or one for nominal amounts of money." And, to this end, according to Business Week, he plans to order 20 million digital video recorders for his customers. *

Murdoch is attempting to revolutionize the world's video-rental market (both VHS and DVD). Since its inception in the late 1970s, video renting has been an inefficient business. Indeed, on first hearing the business model, Warner Bros. titan Steve Ross asked incredulously, "Can we really expect millions of busy people to get in their car, drive to a store, pick out a movie, stand in line, fill out a rental agreement, pay a deposit, drive home, play it on their VCR and then, the next day, repeat the procedure in reverse to return it?" Even with improvements in swiping credit cards and mail-in schemes such as Netflix, renting remains a cumbersome affair.

Murdoch plans to digitally deliver movies and other programming from his satellites to home digital video recorders that would be the same quality, or higher (HDTV), than a DVD. Since there are not enough transponders on satellites to stream movies to individual subscribers on demand, Murdoch needs DVRs in every home to make his digital-delivery system work. With DVRs, the satellites can upload movies in the middle of the night in encrypted form onto subscribers' hard discs without us having to do anything or even be aware of it. (One idea now under consideration at DirecTV is to provide these DVRs with an enormous 160-gigabyte recording capacity. The subscriber would only be told about 80 gigabytes, with the remaining 80 gigabytes reserved for encrypted movies.) Once the movies are placed on the DVRs, a customer "rents" them by clicking on his remote control.

Once it's possible to go no further than one's couch to rent a movie, why would any viewer choose to make two trips to the video store? Electronic delivery would also be much more profitable for the movie studios. Not only would it eliminate the manufacturing, warehousing, distribution, and return cost of DVDs, but it would cut out the video stores, which at present get about 40 percent of the rental money.

There's just one catch. To make digital video on demand work, Murdoch would have to overcome a formidable barrier—the 45-day head start that video stores have been given. This so-called "video window" is the result of a long-standing unwritten agreement among studios to delay the electronic delivery of movies for at least six weeks after video stores have had the opportunity to rent them. Because most people rent movies the week of their release—indeed, more than 80 percent of rental earnings comes in the first two weeks—most would-be renters have already seen a new release by the time the 45 days have elapsed. To get these renters, Murdoch would have do away with the delay and deliver his movies to his subscribers on DVR the same day that they are available in stores.

What has prevented the studios from closing the video window is, as a top Viacom executive explains, "In one word: Wal-Mart." Wal-Mart, the single biggest seller of DVDs, does not want to compete with home delivery. The company told Viacom's home-entertainment division, in no uncertain terms, that if any studio does away with the 45-day video window for a single title, they would risk losing access to Wal-Mart's incredibly valuable shelf space for all of its DVDs. In the face of Wal-Mart's retail power (the antitrust term for it is monopsony) the studios have kept the window wide open.

But Murdoch, who famously crushed the British newspaper unions, is not one to bend to pressure from a retailer even as powerful as Wal-Mart. After all, if he began delivering newly released movies to his satellite subscribers, his DirecTV would gain a powerful advantage over rivals in recruiting new subscribers, forcing his main rivals in the delivery business—including EchoStar, Comcast, and Time Warner Cable—to match his timely electronic delivery of movies. If they did follow suit, much of the rental business would move from actual, physical DVDs in the stores to electronically delivered video at home. My bet is that Murdoch will succeed, creating a vast new video-on-demand market, qualifying him (once again) as a master of the universe—or at least of New Hollywood's universe.

Correction, June 16, 2005: The article originally stated that Rupert Murdoch had placed an order for 20 million digital video recorders, when in fact he only announced that he intended to do this. (Return to the corrected sentence.)

Edward Jay Epstein is the author of The Big Picture: The New Logic of Money and Power in Hollywood. (To read the first chapter, click here.)

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