Til Death Do Us Part - Getting Past The 7 Year Digital Itch

December 6th, 2006 Davis Posted in Movies, Technology, Media, HDTV DVDs, DVDs, Kiosks |

During the throes of the tech bubble, Time Warner became enthralled with a little ole internet company known as AOL. At the time, technology was hot, the markets were robust and the media company was eager to take a stab at digital distribution. While Time Warner didn’t know about the blood bath the tech market was about to face, in 2000, they started a romance with AOL and by the end of the year, their lovefest would ultimately consumate in a merger that has proved to be one of the most costly marriages in the history of the financial markets.

At the time, the merger seemed to make a lot of sense. AOL had a growing internet business. Time Warner had a dusty library of archived content that they were eager to release. By combining both companies, they could create synergies that other media companies couldn’t match. The result however, turned out to be nothing more then disasterous and when AOL officially changed their name back to Time Warner, they all but admited that their tech experiment had gone terribly terribly wrong.

Fast forward to 2006. Time Warner has managed to completely transform their company. They’ve ended their walled garden approach and albeit kicking and screaming, they’ve led the other studios in embracing various digital strategies. With 2006 having brought about a profound revolution in online video, Time Warner has given notice that 2007 will usher in big changes for the company’s film strategies.

On Tueday, Time Warner CEO Dick Parsons, sat down with investors at the Credit Suisse Media and Telecom conference and gave a remarkably candid assesment of his company and their plans for the next year. In his conversation, he discussed the format wars, the competitive landscape of the telecom markets and perhaps most importantly, Time Warner’s digital plans in 2007.

In regards to the format wars, Parsons offered very little hope for consumers who would love to see this silly little battle end. When asked about the potential for the PS3 to be a leader in the HDTV market, Parsons downplayed it’s importance and told the audience that the HDTV flat panel displays would be the real driver for HDTV content growth.

“The format war is unfortunate almost by definition. Because it creates confusion in the minds of consumers, it doesn’t allow a big group to line up behind either one of the formats and begin to drive the costs down so these platforms are going to be out of the reach of the mass market. I mean what is the PS3? Like $600 bucks or something like that? However, even there, I think we’re positioned to take advantage of what uptake there is on the new devices because we’re one of the few studios, if not the only one that is putting out stuff out in both Blu-Ray and HD-DVD.”

While I admire Time Warner for being one of the only studios to be format agnostic and leave it to consumers to decide which is the superior format for the future, I nonetheless disagree that this war was inevitable. The only reason why we haven’t seen broad support for both formats is because of greed. Rather then trusting the markets to decide, both Blu-Ray and the HD-DVD camps have attempted to gain a monopoly on the format and it has clearly backfired as a result.

In discussing Time Warner’s cable assets, Parsons shrugged off concerns about competition from the telecoms. He pointed out that even where FIOS has been deployed, the telephone companies have been acting rationally and are already raising rates in an attempt to profit even after a very limited deployment. While he confessed to not knowing how far the telephone companies would take this video war, he was less then optimistic on satellite’s long term chances in the mix of things.

“If you talk to the guys who really sort of understand, at a profound level, the sort of technological space we’re moving into, a Gates or a guy like Eric Schmidt, and they are the guys who have told me that ‘Geez Dick, you guys with Time Warner Cable’ or I’ll say the same thing with Brian [Roberts] and his cable platform, ‘you don’t understand how far ahead of the rest of the market you are with your platform, it is just that much more robust, it’s going to take these other guys 5 - 6 years to catch up, if they make the investment.’ It turns out they’re right. The cable platform is, in terms of delivering bytes into the home and giving functionality to all of the things you can now do in a digital world, it is just four, five, six years ahead, in terms of it’s robustness and it’s capacity to deliver the telco platform and unless somebody invents something that doesn’t exist today, it will be permanently ahead of the satellite.”

Over the years, we’ve heard an awful lot of noise about FIOS, yet here we are today and there still is less then 1 million households subscribing to fiber in the US. While this is clearly important to the telephone companies, it won’t easily replace the cable systems that have developed over the years. In the long run consumers will benefit from being able to choose between one or the other, just like they benefit from choosing from DSL or cable internet access today, but Parsons may be right that the future of everything on demand may be much further out then anyone expects. While this would undoubtably help Time Warner as a company, I can’t help but feel just a tad disappointed, that the technology is still so far behind where I wish it could be.

After Parsons’ presentation was over, he opened up the conference to a question and answer period. This has always been my favorite part of financial events because often times, this is where the biggest bombshells are released and this event was no exception. When asked about the narrowing of digital release windows between downloads and DVDs, Parsons offered up far more information then I was expecting and mentioned that 2007 will likely be the year that we see burn on demand technology make it’s way into retail stores.

“I think that you’ll see next year, our studios and possible others, going to a download to burn format. The reason we haven’t done it yet is because this has to be worked out and done in cooperation with our existing channel of distribution, I mean you don’t wanna go around the people you’ve been working with in terms of builiding this business at this point in time, so we’ve just seen Walmart for example, go with these little kiosks, it’s all experimental now, these little kiosks in the store where you can actually go and have a download to burn experience instead of having the physical disc and if we do this right, it’s a win win win for everybody. It’s a win for the distribution channel because they avoid a lot of inventory costs and shelf space. It’s a win for the studios, because you avoid a lot of manufactuering costs and you get your product out there more quickly, and it’s a win for consumers because they can get it when they want, how they want and in the format they want it.”

I’ve been fascinated with the DVD kiosk ever since I first had an opportunity to inteview DVD Station and they showed me a DVD kiosk that already had burn on demand technology built into it. While I walked away impressed at the technology, I knew that it would still take years for the studios to embrace a solution this radical.

With the DVD rental stores having been slaughtered in the financial markets and with retailers clearly upset over Apple’s digital download plans of their own, it was only a matter of time before we saw the studios warm to the idea of bringing burn on demand to the retail store level.

By incorporating burning technology into kiosks and retail spaces, video stores and retailers could potentially stock 70,000 films and never have to worry about running out or about it taking up too much floor space. The idea is powerful, the economics could save the DVD industry for another decade and if Parsons’ statement that Redbox is already testing this functionality at Walmart is correct, it may be coming sooner then even I expected.

While it’s taken years for the studios to come up with a sound digital strategy and while I expect that it will likely take even more years to work out an HDTV digital strategy, nontheless I find it very exciting to see these developments. With 2007 marking the 7th anniversary of the AOL and Time Warner meger it is nice to know that consumers will finally be able to take advantage of the synergies that were promised when AOL and Time Warner first said that fateful I do.