Question:
Why does Rupert Murdoch need 20 million digital
video recorders?
Answer:
Since modern Hollywood makes most of its money
not from the box office but home entertainment (SeeTable
1), Murdoch has set his sights on increasing
his share of that critical home-entertainment market,
and the digital video recorder (DVR) is his weapon of
choice.
Murdoch currently controls a major movie studio (Twentieth
Century Fox), a television network (Fox Television),
30 cable channels (including Fox News, FX, and Fox Sports),
and an armada of satellites that beam movies, sports,
and programs to television sets on five continents reaching
26 million subscribers overseas and 14 million subscribers
in the U.S.
The key to his new strategy lies in his recent acquisition
of a controlling interest in the satellite company DirecTV,
which has the potential to deliver entertainment into
homes in North America via so-called video-on-demand.
Murdoch has also given DirecTV CEO Chase Carey, a former
college rugby player with a Harvard Business School
MBA and a brilliant marketing strategist in his own
right, a mandate to, as an insider explained, "double
the DirecTV subscription base, making it the number-two
distributor of programming after Comcast, and then number
one. It's that simple." Even before Murdoch had
bought control of DirecTV, he promised, at Morgan Stanley's
Global Media Conference, that "every subscriber
will be getting either a free digital video recorder
(DVR) or one for nominal amounts of money, with no subscription
fee at the other end."
Why the DVR giveaway? To equip his satellites with a
video-on-demand capability. Since there are not enough
transponders on satellites to stream movies to individual
subscribers, Murdoch needs DVRs in every home to make
video-on-demand work. With DVRs, the satellites can
download movies in the middle of the night onto subscribers'
hard discs (without their having to do anything or even
be aware of it). Then, to "rent" the movies,
the subscribers need only click on their remote control
(which will charge their account via their telephone
line).
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 (one to get the movie and one to return
it) to the video store? Until now, video stores have
enjoyed one decisive advantage over the available pay-per-view
options: a 45-day head start. There is currently an
informal agreement among studios to delay the electronic
delivery of movies until 45 days after their release
in video stores, and Wal-Mart has pressured the studios
to maintain this buffer. But Murdoch, who famously crushed
the British newspaper unions, is not one to bend to
pressure from even a retailer as powerful as Wal-Mart.
By ignoring the 45-day window and releasing his Fox
movies on DirecTV the same day as their release on video
(and DVD), Murdoch’s empire would profit in two
ways. First, his Fox studio would get almost twice as
large a share of the rental revenue from each movie
(since studios get a 70-percent cut of video-on-demand
revenues vs. only 40 percent from store rentals).
The remaining 30 percent would go to DirecTV, which
would also happily carry films from other studios that
eventually joined Murdoch in breaking the 45-day embargo.
Making a sweet deal even sweeter, almost
all of Fox's share would be profit (since, unlike video-store
delivery, electronic delivery entails no manufacturing,
packaging, or return expenses). Second, and more important
to his strategy, his DirecTV satellite company would
gain a powerful advantage over rivals in recruiting
new subscribers. The view from the top is that the increase
in subscribers--a possible doubling--would more than
compensate for the temporary loss of video sales at
Wal-Mart.
Once Murdoch implements this strategy, his main rivals
in the delivery business--including Echo Star, Comcast,
and Time Warner Cable--will be faced with a Hobson's
choice: they can either match his electronic delivering
of movies on the same day they are released to video
stores or lose customers. Presumably, they will match
him, and since the other studios will not want to cede
this lucrative market to Fox, they will have to go along,
spelling the end of the 45-day advantage that video
rentals have historically had over Pay-Per-View release
and, with it, the end of the store-driven video-rental
business.
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