ONE TO WATCH? VIDEO-ON-DEMAND INTERTAINER INC.

Bloomberg News October 7, 1998
By Kathryn Harris
(Kathryn Harris is a columnist for Bloomberg News. The opinions expressed are her own and don't represent the judgment of Bloomberg LP or Bloomberg News.)

For nearly 30 years, Jonathan Taplin has been at the cutting edge: a road manager for Bob Dylan in the early 70s; a film producer, then investment banker in the 1980s. By 1995, he was a movie producer again and also a consultant to Microsoft Corp.

Taplin's encounter with the techies convinced him that there was money to be made by old hands in Hollywood using new technology. No one had yet delivered a palatable, interactive video service for the personal computer screen.

In 1996, Taplin and two Hollywood friends started a pay-per-view company called Intertainer Inc., preparing for the day when high-speed, broadband systems make it possible to deliver top-quality video programming to either the personal computer or the television screen on demand.

The entrepreneurs hope to parlay their experience and contacts in rock 'n roll, movies and high finance to build a service that becomes as ubiquitous as Home Box Office or MTV. They've devised a service that allows consumers to browse for movies, music, books or fashion. If a movie is rented, the consumer can stop and start the viewing for 24 hours, just as a rental video can be controlled on a VCR.

Name Backers
Intertainer has won financial backing from Intel Corp., Comcast Corp., U.S. West Inc., Sony Corp. and General Electric Co.'s NBC. Equally important: the entrepreneurs have persuaded six of the seven major motion picture companies to make programming available. (Paramount is the only holdout; its parent Viacom Inc. also owns the Blockbuster video stores, which presumably will suffer if pay-per-view takes off.) Although any manufacturer or studio could begin offering its own pay-per-view service, some executives are impressed by the way Intertainer has developed its programming from a variety of sources, and developed an easy-to-use system for consumers.

"Everybody else is so invested in the technology; they're focused on what people will accept, use and enjoy," says Brian Roberts, chief executive of Comcast, which is testing Intertainer in dozens of cable TV homes near Philadelphia.

Certainly others have tried to sell interactive television. Remember Warner's QUBE, which offered yes-or-no choices in programming to some cable TV households in Ohio in the late 1970s? QUBE was so expensive that Warner kept the true cost secret even within its executive ranks. But it was a marketing tool that Warner used to distinguish its service from other cable operators bidding for big-city franchises.

QUBE also whetted the interest of American Express Co., which bought 50 percent of the Warner cable business in 1979. American Express was eager to tap the potential of electronic commerce, like banking and shopping, from the home.

Primitive Stuff
But QUBE's special programming looked primitive compared with slick network productions, and the system couldn't readily differentiate members of the viewing household. In 1984, the system was scaled back; American Express sold its stake back to Warner in 1986.

Another decade would pass before interactive television was marketed again. In late 1994, Time Warner Inc. launched its "Full Service Network," in front of 450 journalists in Orlando, Florida. That costly experiment collapsed under the weight of missed deadlines and unfavorable comparisons to the Internet, where electronic mail, chat-rooms and transactions with banks or other commerce could be performed with greater ease.

A more recent effort: DIVA Systems Corp., formed in mid-1995, has introduced video-on-demand to four cable TV systems in the last year, but it won't disclose the number of users. The Menlo Park, California-based company uses its own proprietary hardware from end-to-end, which is costing a bundle. DIVA has raised $348 million in four rounds of financing. Revenues for the year ended June 30 were $82,000, while total operating expenses amounted to $65 million.

Getting to Market
Intertainer's challenge is to persuade both telephone companies and cable TV operators to add its service, and ultimately, to persuade American consumers that they really want video-on-demand on their personal computers or television sets.

The company's founders certainly have experience catering to America's appetite for entertainment and fashion. While they concede that not everyone wants to watch a movie on a personal-computer screen, they think that consumers will readily eye-ball fashion videos or free music videos, which will lead to electronic commerce transactions via Intertainer.

Richard Baskin, who serves as co-chief executive with Taplin, is a music composer and movie producer ("Nashville") who has also produced music videos and television specials for Barbra Streisand, Elton John and Rod Stewart.

In Fashion
The third co-founder, Jeremiah Chechik, is a one-time fashion photographer who moved successfully to commercials ("The Night Belongs to Michelob") and feature films ("Benny and Joon"; "The Avengers"). Chechik is not involved in the day-to-day operation but is a member of the board.

Among other board members: music producer Quincy Jones and Jeff Sagansky, president and chief executive of Paxson Communications Corp. Sagansky was one of Intertainer's earliest supporters, when he learned of the project in his former job as co-president of Sony Pictures Entertainment.

"I heard a million different pitches," Sagansky says, of the days when he also oversaw new business development for Sony Corp. of America. "This was by far the best technological application."

Sony, of course, expects to be one of the manufacturers of set-top boxes once the cable television industry adopts open standards for such devices. Likewise, Intel is looking for ways to encourage consumer use of its increasingly powerful microprocessors. Service providers like Comcast and US West help with start-up capital because they hope a new service like Intertainer will draw more subscribers, or even distinguish their service from a competitor in the same local market.

Economics
Intertainer has avoided use of proprietary equipment, unlike DIVA, which is having a hard time persuading some cable operators to adopt its own custom-made set-top box.

Cable operators and telephone companies will look closely at the economics of Intertainer, however, since they must bear the cost of supplying a server to send the programming along the broadband to consumer homes.

US West will look at the efficiencies of the system when it begins testing Intertainer next week in Boulder, Colo., over high-speed telephone lines.

"The greatest hurdle is getting the technology to support high volumes of users economically," says Joe Zell, president of !NTERPRISE Networking Services of US West Communications. Zell, who is on the Intertainer board, says the service might be introduced commercially in the second half of next year if field and market trials are successful.

Intertainer's backers have only invested a total of $18 million to date spare change for this crowd. Intertainer's mettle will be tested when it needs the next round of financing.

Baskin, the co-CEO, says the company will try to raise another $20 million in the next 90 days, which he says should be sufficient to get the product to market.