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March 21, 2007

 

Warren Lieberfarb Chairman, Warren N. Lieberfarb & Associates, former president of Warner Home Video and Founding Father of DVD Related Links: Lieberfarb's Forbes profile Lieberfarb as a Variety home entertainment leader Wikipedia's Moore's Law definition (see Q 4) More 10x9 Q&As

Q 1: The home entertainment industry is undergoing a transition from standard definition to high definition, similar to the transition from analog to digital reflected in the introduction of the DVD. What can that previous experience tell us about the current transition?

Following the incredible success of DVD, the major film studios would probably be very happy to simply replicate the same process for high-def. They would love to settle on a standard high-def disc format and then stuff the existing distribution channels with new and old films on high-def discs. Whether those discs were distributed by Blockbuster or Netflix or Wal-Mart would not matter as long as consumers replaced their present video libraries with high-def video libraries.

But it is not that simple, because there are now alternate ways to distribute the same content. Over time, video-on-demand will move to high-def too.

Q 2: So what will be the dominant platform for distributing high-def content?

In the long run, the answer is simple: Internet video distribution will dominate. Yet, in the short term, Internet distribution is mainly a distraction -- more trouble to some people than it is worth.

Q 3: How do you figure that?

  When Shrek 2 was released to DVD in 2004, it sold 11 million units in the U.S. during the first three days. At 6GB per DVD, that’s 66 petabytes, or 66 million GB, of video data transported from retailers to homes over three days in the U.S. alone.

To put those 66 petabytes of data in perspective, the Internet Archive, which claims to hold a searchable picture of the entire World Wide Web back to the mid-’90s, holds about 2 petabytes of data. That means Shrek 2, in its first three days of DVD release, was 33 times larger than the entire Internet -- ever.

If Shrek 2 had been carried over the Internet, rather than in shopping carts and minivans, it would have required an Internet pipe that could carry slightly more than 2 trillion bits per second. That’s bigger than all current Internet backbone pipes put together.

'The Internet is not yet ready to distribute major video releases.'

My point is simple: The Internet is not yet ready to distribute major video releases. Yes, you could make the files smaller by using a more efficient compression program like H.264. You could distribute the files using a peer-to-peer system like BitTorrent. But whatever technical tricks we play to reduce the burden of releasing Shrek 2 over the Internet, there still won’t be enough bandwidth, especially if we start talking about Shrek 2 in high-definition.

Q 4: Why then are Amazon and Apple, and Microsoft, and even Wal-Mart launching Internet movie distribution services now?

Their reasons vary, but the one reason these companies all have in common is to remain in the game, because eventually Internet video distribution will dominate.

The Apples and Microsofts are gaining toeholds in an emerging market. Apple’s iTunes, for now is all about selling hardware, not movies. Apple will book more revenue in the first month from selling its $299 Apple TV video extender than it will book from selling or renting videos over iTunes for the next two years.

Microsoft, too, sees home video as part of its Xbox 360 strategy, with the main point being selling more game machines and ultimately more games.

When the Internet was first turned-on 40 years ago, the backbone connections carried 50 kilobits-per-second. Today, the average Internet backbone connection is 10 gigabits-per-second, and between some cities, there are multiple backbones in parallel. This is an increase over 40 years of at least 200,000 times.

For now, the Internet is far too small to handle the bulk of retail video traffic, as we saw with the Shrek 2 example. But Moore’s Law tells us 10 years from now, the Internet will be at least 1,000 times bigger than it is today.

Q 5: What should the major studios be doing about video-on-demand?

The VOD market in the U.S. is currently worth about $1 billion. It’s projected to grow to $5 billion by 2011. That sounds like a lot of money, but it works out to around 500 million viewer-hours per year—roughly equivalent to a single day’s worth of TV viewing in this country.

Disney just announced that it expects $25 million in revenue this fiscal year from video downloads, mainly of hit shows on its ABC TV network. That’s the equivalent of less than one day of revenue from Disney’s theme parks and only 10% of the revenue the network gets from Good Morning America.

'For larger content companies like film studios and TV networks, this is a time to experiment, find what works, and to position themselves for the Internet era to come.'

For major media companies, these revenue numbers are almost inconsequential, except that we know they’ll grow by a thousand times a decade from now. For smaller content companies, this is a time to establish profitable distribution on the Web. For larger content companies like film studios and TV networks, this is a time to experiment, find what works, and to position themselves for the Internet era to come.

Q 6: It sounds like some form of optical-disc storage will remain essential, though. Which one?

DVDs will be a factor in the market for another decade. In the short-run, the high-def format war will resolve itself, probably through co-existence of both formats following the videogame model, rather than the consumer electronics model. It’s ironic that it was Sony’s PlayStation 3 ramp-up that compelled certain studios to support Blu-ray, when in fact it was precisely that occurrence that led to Microsoft’s determination to support HD DVD in the Xbox 360.

Q 7: What does that mean for the rest of the home entertainment industry?

The potential high-def market is huge -- much bigger than the simple replacement of a $40 billion DVD industry. For the first time in half a century, TV standards are changing in ways that are no longer backward-compatible, so everyone will be buying a new TV. Or several. Video recorders, video players, video receivers, set-top boxes, cable boxes, satellite receivers, video projectors and home theater audio systems will all have to be replaced with new digital and high-definition products.

Alternate delivery paths like the Internet will require their own consumer electronic devices like Apple TV. So on top of a $40 billion replacement video content market, there is probably a $200 billion replacement video hardware market for quite a few years hence.

Q 8: What effect will changes in the way films and TV programming are distributed have on the content itself?

The huge change we are seeing isn’t so much in how we are viewing or going to view content -- that’s fairly predictable given a long enough time frame. The big change is in new content types that are emerging. User-generated video as seen on services like YouTube is not only occupying a lot of viewer time, it is creating a whole new career path for professional videographers. This will have major impact over time.

'In 10 years, most films will be released in theaters, on video and pay-per-view at the same time.'

It would be easy to claim that user-generated video is like CB radio and will eventually disappear. But the difference is the Internet’s global range. For enthusiasts, being able to reach a small but global population of cohorts will never get old. For those who want to use video for news, to carry the truth about places where truth is scorned, will never get old. These two factors against a continually dropping cost structure promises an exciting future for user-generated video serving niche market. This goes equally for independent feature films, with more and more being released on the Web rather than in theaters.

Q 9: Does that mean the major studios will be less relevant?

There will still be big movie studios because there will still be the need for big-budget productions. But TV networks will probably be less strong 10 years from now than they are today as producers are able to directly reach home viewers. The radical call would be to say that the networks will die, but that probably isn’t so. We’ll still need them until a viable alternate path comes available for watching American Idol.

Q 10: What about movie theaters?

Digital projectors and digital distribution of movies to exhibitors will become the dominant -- and perhaps the only -- technique. But movie theaters are not going away as either an industry or a social experience.

In 10 years, most films will be released in theaters, on video and pay-per-view at the same time, as the three industries realize that their markets don’t really overlap that much.

The dominant home viewing platform will still be TVs, but the dominant computing platform may well be mobile. As such, anything we can do at home, we’ll also be able to do away from home.

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