September 27, 2005

I have generally stopped mentioning Edward Jay Epstein's hopelessly parochial pieces on the business of Hollywood at Slate because they are best allowed to fade from memory without mention.

But every once in a while, I get the fever.

His latest opus, on how everything in home entertainment somehow comes down to Murdoch (as the king of satellite) vs Comcast (as the personification of cable), hit me in that very special way.

What Epstein seems to have completely missed is the evolution of DirecTV that had nothing to do with Rupert Murdoch and that Murdoch's fingers are just beginning to be felt by the consumers of a long-successful product.

For instance, DirecTV started the Tivo revolution long before Murdoch arrived. In fact, the biggest danger in recent years to Tivo was the loss of DirecTV as a partner, as Murdoch didn't decide to change the situation, but simply to bring it all in-house instead of continuing to pay Tivo for brand value. There is profit for News Corp in selling and supporting those DVRs themselves.

Additionally, the first show of a News Corp strategy with DirecTV that limits consumers only recently occurred. Murdoch & Co blocked Tivo from allowing subscribers to connect their combo DirecTV/Tivo boxes to home wireless networks, creating an easy DVD burning system to millions who don't have the hardware for it now.

The biggest mistake that both the cable business and Tivo made in recent years was not making the marriage of cable and Tivo more easily interactive. The DirecTV Tivo offers a much better experience than the cable Tivos, especially in the allowance for two feeds from the one satellite which makes watching one channel and Tivo-ing another or Tivo-ing two shows at the same time viable. Even the Comcast DVR offering continues to operate poorly in comparison to the satellite Tivo experience.

DirecTV before, and now with Murdoch, has always done all it could to expand the base, not only giving away equipment freely, but encouraging people who move to leave their satellite dish in place so that the next family can easily jump on board as they move in.

But the most important gem in the DirecTV business has been exclusive rights to offer NFL Sunday Ticket, which assures that you will be able to see every NFL game every week, except for local blackouts for non-sellouts. Just as Murdoch took Fox TV to the next level with sports, so goes the one come on that truly forces DirecTV demand, since price competition has now become negligible.

Murdoch's DirecTV also faces the obstacle of there not being the easy access infrastructure that cable spent so much to build in the last two decades. It is not true that everyone can get DirecTV. If you are in an apartment, it can be quite challenging. And if you want to leave cable for satellite, it requires an effort greater than just having a box show up in your house.

There is a discussion to be had about how satellite and cable will divvy up America in time, but Epstein misses the key issues… the must-have draw of football and what will soon be the quality and depth of the DVR experience. The 20 and 30 hour DVRs that Comcast is now giving away to customers are not going to change the consumer experience. They are gateway toys, but the real DVR revolution will come with the free distribution of the 100-hour and 250-hour DVR, which is not far off economically.

Remember how cool the 200mg Digital Walkman was? But they didn't make a dent. When iPod offered a system that could hold your entire 20g or 40g music library on a 4" x 2.5" box, that was the start of the revolution. And Apple is now successfully working its way backward to smaller niche versions.

It is the DVR that allows you to keep the entire season of Desperate Housewives without worrying about making space for other things that will change the world. But in that regard, both cable and satellite providers are up against the same problem in selling this killer app… the content providers. Anything that gets in the way of DVD sales is going to be resisted by the content providers (including News Corp).

It will be hard to take away the freedoms that DVR owners currently enjoy without creating more problems with consumers, giving the perceived moral high ground to pirates in a way that is deadly. But that is the next big challenge.

We who have DirecTV have already experienced some of the frustration of not having every option, as east coast and west coast network feeds are not available to subscribers with local stations available on the satellite. So when The Golden Globes (or any shows) are tape delayed, we can't see them live on the east coast feed while sitting in L.A. But each Sunday, we can watch the hot new HBO show when the east coast does and then again when the west coast does. I'd pay another $5 for that east coast network feed… and it would have no obvious negative for the network, except that the politics and station's rights have to be worked out. There are two solutions… either KABC in New York (for example) gets a national audience that causes major repercussions on local syndication, the power of their local news component, etc. or ABC builds a feed, that can be bought for a price, that stands alone from any one station, requiring content fill in what are now the local slots.

Does this seem like a familiar discussion? Here's a hint: The last time, it birthed TBS and CNN (for starters) in The Cable Revolution.

The advantage that Rupert Murdoch does have ahead of all the cable businesses is that he owns one of the four top television networks and one of the six major content providers. He can use DirecTV to push the envelope and to experiment without the support of the other studios… not that he won't want it.

Real VOD is likely more than a decade away. But the paid Fox Programming Network on DirecTV could happen next year. The one obstacle is the creative talent on shows who want to get paid. But $5 a month to get 24 hours a day of Fox programming without ads is a viable and expansive market idea. But again, the argument against is not about how to deliver this, but how much it cannibalizes DVD sales.

So be creative. As I found out this weekend when trying to Tivo a local-to-Miami football pre-game show that comes free along with NFL Sunday Ticket… I could watch, but I couldn't Tivo. So what if for my $5 a month, I could see but not keep ad-free or sponsored-by-the-half-hour episodes of current Fox and FX shows. A year after they have played out on DVD retail shelves, I can Tivo the first season of The Simpsons, The Shield, 24, and others, but last season of each is not yet Tivo-able, though it does show up as programming now and again.

Again, how does this effect syndication and DVD sales, the other exploiters of this material?

You can only imagine how long the list of economic variables would be on every single TV show and film for which the studios are seeking new distribution modes to increase revenue. The hour-longs that ended up on studio-owned cable networks a few years ago stirred a series of lawsuits by producers. Now those deals are made up front. The same is true here. How much is saved by eliminating the retail middleman, hard discs, etc? What is the cannibalization?

This brings us back to the power of the theatrical business in the movie world. After all the ways to exploit materials are explored and as some stick and mature, novelty wears off and the thick top of cream will inevitably stop flowing.

We all only live 168 hours a week. People spend as much as 50 hours of that time with a TV on right now. My satellite offers me about 50,000 hours of content in that week. So there is a 1000-to-1 availability just on satellite now. Add DVD, video games, music, the internet, etc and for less than $200 a month and a family has literally hundreds of thousands of hours of entertainment in their home each month that they are already paying for but which they can never enjoy for lack of hours in a day.

Yet ten to twenty-five million people each week are willing to spend even more to go to a movie theater to watch a film that will be a part of that incomprehensibly dense mélange within a year, at a price greater than the cost of three or four days of all that content they leave behind at home (and that is the most conservative estimate of the expense of going to the movies).

Give that up? Are they nuts?

Do drug dealers stop stocking cocaine because it's too addictive?

The future of all entertainment is being defined as you read this by the internet. Not by bloggers or ad sales shifts or even me (tee hee), but by the mode of access. We now live in a niche world with incomprehensibly more forms of entertainment available to us at any hour of any day than ever before in human imagination.

The future superstars of this industry will be those who find the balance. I would argue that the most heroic figure will be the person who best defines the windows of opportunity.

But back to satellite vs. cable. That battle has barely begun. Will one of the delivery systems find other exclusives with the power of NFL Sunday Ticket? Will cable get more aggressive and way overpay to break DirecTV's exclusivity in the next pact? And in the great irony, will the experience of cable delivery come to match the experience of the satellite… not surpass, just match? Because if it does, DirecTV could easily be marginalized once again. Simple intuition will tell you, cables in the ground are easier for the customer. If cable can achieve Experience Parity, then it is a fair fight, at which point that battle will become about content exclusivity and non-entertainment alliances like combination deals for internet access or long distance or whatever. The simple reality is, no one cares how they get entertainment into their living room. They just want it easy and they want every option.

Simple.

E-ME.