The numbers behind the industry.
Rupert Murdoch Strikes Back
His bold plan to give away 20 million digital video recorders
By Edward Jay Epstein
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
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.
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
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.
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
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.