The digital revolution in home entertainment may never have happened had it not been for Warren Lieberfarb, whose vision of movies on disc ultimately led to the creation of the DVD. As president of Warner Home Video, he forged an alliance of film studios, consumer electronics companies and computer manufacturers to bring his vision to fruition. This, in turn, set the stage for a digital revolution in which consumers are easily able to watch or buy the latest movies and shows over the internet or through their cable provider — or subscribe to Netflix or any of the other subscription streaming services that also owe their existence to this iconic visionary. Now 78, the “father of DVD” — and recipient of the prestigious Wharton Infosys Business Transformation Award — sat down at his Brentwood, Calif., office for a lengthy conversation with Media Play News about the development and launch of DVD.
MPN: Warren, what was your initial vision for DVD?
Lieberfarb: The goal was to have a new form of packaged media based on digital and optical technologies that had both material and manufacturing cost advantages relative to videocassettes. A corollary to cost superiority would be the ability to offer discs at attractive consumer price points and that would equate to transactional profitability greater than that of the royalties expected to be derived from pay-per-view and inherently greater profit potential than videocassettes. Pay-per-view was seen as the competing threat to the VHS rental ecosystem. Moreover, the vision I had was to have a product that could be manufactured in seconds rather than in
the real time of the movie, as high-speed tape duplication had failed to gain traction. This would optimize the efficiency of the supply chain. Finally, a five-inch video-disc was seen as having the size and appearance — and, thus the popularity and familiarity — of the audio compact disc. Lastly, I believed that we had to offer superior picture quality to videocassettes, broadcast and cable TV (comparable to the laserdisc in video resolution) — and superior sound to stereo, i.e. 5.1 channel sound comparable to that required by the Advanced TV Standard. It was also apparent that if this could be perfected, it would enable playback not only on hardware connected to TVs, but also on compliant PCs — and even offer the possibility to replace the CD-ROM due to this new disc’s capacious data capacity that was inherently a necessity to meet the audio and video feature set. Therefore, interoperability between the TV and PC was another aspect of the initial vision.
MPN: When did you first envision movies on disc?
Lieberfarb: It was in the late 1960s, when I was exposed to Philips’ efforts to develop a laserdisc, which preceded the compact disc.
MPN: Your efforts intensified when we saw the VHS market, which had been booming throughout the 1980s, began to slow down a little bit.
Lieberfarb: The signals of that which was impacting the VHS rental market came from the fact that rental incidence was declining among DirecTV subscribers. DirecTV had a significant increase in the number of channels that it offered consumers versus that which cable offered, including the compelling NFL Sunday Ticket. And in those households that became DirecTV or Dish subscribers, the incidence of renting videocassettes precipitously declined. It was my view that cable, to compete with digital satellite, would have to increase its channel capacity. It would accomplish this by upgrading its plant to a hybrid fiber-optic and coaxial cable architecture. The number of channels on cable, therefore, would increase. More channels, more choice, equated to households being less apt to rent from the local video store.
The writing was on the wall that home video’s long-term future was at risk due to the next generation of digital cable and digital satellite. The solution, in my mind, if the goal was to keep packaged media viable, was to offer superior quality, both audio and video, on a format that people were familiar with and that they associated with quality — namely, the compact disc. I had to find a way to deliver higher-quality video, at lower product costs than VHS, so that the notion of buying and owning would provide convenience, especially to families with children, enabling every household member to program what they want, when they want, where they want … at a price point ultimately in the neighborhood of $10 to $12.
MPN: When did you first present this concept, this vision, to the Warner brass, to your superiors at Warner Bros.?
Lieberfarb: In 1986 or thereabouts, when Philips approached me to support the CD Video, which was 20 minutes of audio and five minutes of video clips on a five-inch CD. Philips had the notion that this would enable a second format for the music industry akin to the environment when they had both LPs/cassettes and 45s. … This never succeeded. … But the CD Video player would also be able to play a laserdisc. And I looked into the economics of laserdisc manufacturing, and ultimately discovered that in high volumes, the laserdisc had the potential to be half the product cost of a VHS tape. So in ’86, I became intrigued by this notion of whether we could use this effort to launch CD Video as, in fact, a Trojan Horse to get laserdisc off the ground.
Well, the chicken and eggs to make that happen, the Catch-22 to make that happen, never came together. And before you knew it, the question of how do you put video on a CD-like substrate became my mission. We’re now up to about 1988. I entered into an agreement with Philips to together determine whether there had been advances in MPEG compression that would enable 120 minutes of at least VHS quality to be encoded on a CD. We were never able to achieve that with MPEG-1 video. It was only when MPEG-2 video compression had been standardized that we were able to not only get VHS quality, but to in essence approximate laserdisc quality as well as 5.1-channel audio. At this point in time I was willing to compromise laserdisc quality for the cost superiority of a CD vis-à-vis VHS.
MPN: After the 1989 acquisition of Time Inc. by Warner Communications, you suddenly had a new CE partner, Toshiba, that had been brought in through the newly formed Time Warner Entertainment venture. Philips at first was going to work with you to co-develop the DVD, but then wound up teaming with Sony to develop an alternative format called MMCD.
Lieberfarb: MMCD stood for Multimedia Compact Disc. Its maximum data capacity was 3GB, and its principal objective was to preserve the patent position that Sony and Philips had in the compact disc by extending it to video. They designed it to use the physical structure of the compact disc and the existing optical pickup of the compact disc. The data capacity was far below that which Toshiba and Warner were developing because we were designing a product to have the video resolution comparable to the FCC’s Advanced Television Standard, 5.1 digital sound, interoperability with a personal computer, and data capacity for the bonus material that people would see as added value, in addition to the movie itself.
MPN: So now we have two opposing camps. How did we get to a unified format? How did we avoid another VHS versus Betamax battle, where both formats came to market and slugged it out?
Lieberfarb: Sony and Philips … tried to convey the notion that our product was theoretical, could never actually be made in quantity, and was, in essence, vaporware. … So we had to find a way to stop these hostile actions of Sony and Philips, and how did we do it? In 1992, the head of the antitrust division of the Justice Department had issued a set of new guidelines for the enforcement of antitrust law in high-technology industries. Well, there was a provision in these policy guidelines that stipulated the misuse and abuse of a dominant patent portfolio to stifle innovation and limit competition in an emerging technology would be a violation of the Clayton Act and/or the Sherman Act. What is the misuse and abuse of a dominant patent portfolio to stifle innovation and limit competition? Fictitious product announcements, vaporware, premature product announcements were all seen, from an antitrust standpoint, as in violation of the Sherman Act or Clayton Act. Well, I had all of this evidence of Philips and Sony’s behavior. We went to the Justice Department and its antitrust division examined the evidence we had accumulated. They already had Sony and Philips under investigation for anti-competitive practices on the licensing of CD patents to CD manufacturers. They expanded their investigation to include the anti-competitive behavior they were engaged in against what we at the time had code-named TAZ, as in the Tasmanian Devil, and the threat of an antitrust action caused Sony and Philips to capitulate and agree to support DVD.
MPN: That led to other CE companies lining up behind DVD as well, and the computer industry was not far behind. Where did that leave Hollywood?
Lieberfarb: Each studio had a different story that I had to engage them on in order to win support.
Let’s take Paramount. At the time, Viacom owned Blockbuster as well as Paramount. We’re in the period 1997, 1998, and Blockbuster had finally come to realize that its inventory model — namely, of buying videos at $65 wholesale and renting them, and having limited copy depth of the new hit movies — resulted in inadequate inventory to meet demand for new releases. Thus, consumers became increasingly frustrated and dissatisfied by the video rental experience. People had gone past the stage of being satisfied with renting older movies; they wanted to see the current releases. And this phenomenon evolved the longer they owned their VCRs. We had concluded a test with the management of Blockbuster in which we provided, at a wholesale price of $2 per unit, high levels of inventory of Eraser, an Arnold Schwarzenegger movie, and Tin Cup, a Kevin Costner movie with Rene Russo about golf, so as to validate that a higher level of inventory, minimal wholesale prices, and a revenue-sharing arrangement would result in higher rental transactions and would be margin-accretive to both Blockbuster and the studios. In other words, in a quid pro quo for the lower wholesale price, Blockbuster would agree to a revenue-sharing arrangement with us. This was initiated when the president of Blockbuster was the ex-Walmart executive Bill Fields, and he and his management team wanted to experiment with a copy-depth/revenue-sharing arrangement.
Then [Viacom chairman] Sumner Redstone fired Bill Fields for failing to meet his first-quarter forecast — which was based on the prior year’s first quarter, which had the Titanic phenomenon — and was now taking charge of Blockbuster himself until he finds John Antioco. Blockbuster built a new warehouse in Texas. Blockbuster was entering into revenue-sharing deals with every studio based on data that was coming from the Warner experiment. The then-chairman of Paramount became an adversary of DVD. He thought it would cannibalize the VHS business and he didn’t believe the financial models that DVD would become a high-volume, mass product that would exceed the profitability of VHS rental. Sumner Redstone created an investor day in Texas where he was going to show the new warehouse and how they were repackaging the product from the studios so that they were suitable for being inventory in this new revenue-sharing model. There was some kind of new packaging that he developed and he wanted a common distribution center for the whole country. And he had an entourage of Wall Street analysts on their way to Texas. But the one studio he didn’t have to revenue-share its product was Warner Bros. And he had promised Wall Street that he’d have 100% studio support for this new model. So Sumner calls me from his plane and claims that I had driven his stock price down by telling certain analysts on Wall Street that we were not going to support his revenue-sharing initiative. I said I would never meddle with providing confidential information to analysts, and that I viewed all of that as proprietary between us. “But I will tell you, Sumner,” I said, “until Paramount supports DVD with day-and-date releases at sellthrough prices, we won’t be revenue-sharing our product in Blockbuster stores.” A day later, the chairman of Paramount called me and said we had Paramount’s commitment for supporting DVD.
Which brings me to Fox. [Studio chief] Bill Mechanic believed that DVD was dead on arrival because it did not provide record capability. The CD didn’t provide record capability, and the use of the VCR had evolved in most countries to being essentially used for playback of pre-recorded material instead of time-shifting. So I tried to make the claim to Mechanic that record capability was irrelevant. If we had quality that was superior to VHS, and we had a price that was fair, the offtake of DVD and related content sales would be an accretive business and it would be addressing the threats we’ve faced from the expansion of channels and video-on-demand on cable.
Well, Fox was launching The Fox Family Channel with Haim Saban as its partner. Haim had a global success with “Mighty Morphin Power Rangers.” But The Fox Family Channel found itself, in the Time Warner Cable system, at a very high position on the dial. The Fox Family Channel wanted to have a much lower dial position. And I conveyed to the leadership of The Fox Family Channel that there might be a way to get a lower dial position. I was hopeful that News Corp. and Fox Family Channel senior management would convince Bill Mechanic and Peter Chernin that the DVD was an accretive new business that they should support with day-and date-availability at sellthrough prices. I’m not privy to what transpired, but in the end they got a lower dial position, and we got DVD.
MPN: There were other battles as well, most notably Divx, the pay-per-play variant championed by the CEO of Circuit City, one of the big consumer electronics retail chains. That one generated a lot of press at the time. But Divx didn’t last long, with CE manufacturers reluctant to support the format because they didn’t want to confuse the consumer. And then, of course, there was digital VHS, the cassette’s last stand, which likewise went nowhere. When did you first know DVD was going to be a massive success?
Lieberfarb: When Divx failed and we had unanimous support from the studios, unanimous support for a de facto standard, unanimous support from the consumer electronics industry, unanimous support from the PC industry, an agreement on obligatory content protection technology incorporated in both the content and on the hardware, and the support of Best Buy, Target, Walmart and even video rentailers, as well as Columbia House. The tracking studies we were doing on awareness and satisfaction, week in and week out, kept showing that people loved the product. So we not only gave consumers something they really wanted, but we also created a completely new ecosystem of authoring, encoding and replication that enabled a dramatic transformation in the distribution model for home video on a global basis.