Business 2.0

August, 1998 Surrounded by his rock 'n' roll past, Jonathan Taplin has positioned himself in the center of Hollywood's future. This is, after all, the man who was the tour manager for Bob Dylan in the 1960s and weathered the outrage from audiences when the singer plugged in his guitar. He's the guy who produced a dark, strange film by a promising young director in 1974 Martin Scorcese's Mean Streets. The same guy who spearheaded media mergers and monster corporate buyouts during the "greed is good" heyday of the 1980s.

Now, Taplin, music producer Richard Baskin, and film director Jeremiah Chechik have created an ambitious company called Intertainer. They want you to skip the trip to the octoplex and, with fast Web access (see infographic below), zap the $6 billion movie industry direct to your PC/TV. The Santa Monica, Calif.-based company has plans to provide video-on-demand, electronic shopping, music, and other services to the home over high-speed telephone lines or cable television devices. "We are the future of digital entertainment and electronic commerce," says Baskin, 48, who shares his chairman and chief executive duties with Taplin. "We'll be a basic service for anyone with a cable modem or ADSL service."

Sound familiar? It should. Interactive television has been touted as the "next big thing" for nearly 20 years, but always proved too costly or too technologically awkward. Taplin insists that the economics and the technology have changed and the time is now right. The marriage between the PC and cable worlds, as well as an industry-wide push to develop a system based on open architecture, will allow the startup to create "a full-service interactive programming network." Intertainer is one of a new breed of company: central aggregators of entertainment. Businesses like Intertainer don't care whether the machine used to consume such broadband material is a PC or a TV or a combination of the two. Nor do they care if people get information from a cable modem or a set-top box. The only thing that matters is content who's got it, how it's packaged, and how to make it easy to sell.

Content is where Intertainer shines. The founders have an enviably fat Rolodex, assembled from their combined 50 years of experience in California's most fickle town. People return their calls, a simple fact that can mean a huge advantage to a digital startup. "If there's one thing Richard and I understand, it's how to work in this industry," Taplin says.

Billed as the HBO of broadband technology, Intertainer has been noticed and financially supported by many of new media's biggest players. Electronics giant Sony, telecom heavyweight USWest Communications, Intel, cable company Comcast, and the venture capitalists at Sterling Ventures have invested a total of $15 million in the 2-year-old company.

"It's the promise of what they're trying to achieve that has us excited," says Claude Leglise, vice president of Intel's content group. "Is the idea new? No. But we noticed Intertainer because they're actually doing it."

Baskin says another "incredibly large" outside investment will be made this fall. Officials with the five companies declined to say how much of the privately held Intertainer they own, but Baskin says that the company is still controlled by its original founders.

Despite its problems in the past, the buzz over interactive television still lives, thanks to a flurry of alliances between the cable world and high tech. The question now nagging these companies is simple: Will people pay for video-on-demand? "If Intertainer's service is not as simple to use as a VCR, people simply won't use it," Taplin says. "We've figured out a way to do that, and that keeps video rental executives awake at night."

It should. After all, Americans spend nearly $7.4 billion each year renting movies from corner video shops and monster movie hubs like Blockbuster. And they drop another $7.6 billion annually buying video tapes. Intertainer believes video-on-demand will feed consumers' voracious rental habits. The company has licensed new hits such as As Good As It Gets and classics including Singing in the Rain from several major Hollywood studios, such as Sony, MGM, Warner Bros., Universal, and Twentieth Century Fox. It has also signed agreements to distribute television programming from PBS and National Geographic and access several independent cartoon, fashion, and travel-oriented shows.

Intertainer has held two limited technical trials in California, one in Palo Alto with Pacific Bell and the other in Fullerton with Comcast. Each trial included a sample set of 100 homes. Intertainer won't divulge financial details about how the tests went, but Baskin says the company discovered that the average household ordered three programs per month.

Those trial launches will continue this fall, when Comcast and USWest roll out Intertainer in the Philadelphia and Boise, Idaho, areas. The launch, limited to "a few hundred homes at first," will expand into other markets by late 1998. Both service companies will include Intertainer as part of their basic lineup of channels for customers who pay for cable modem service or a digital subscriber line. The service will be available both on televisions and PCs, Taplin says.

At any given time, Intertainer will have about 500 hours of programming cached on a Unix server and available for playback. The company plans to rotate about a quarter of the lineup each month.

Like the Web, Intertainer relies on the ease of point-and-click to maneuver through its various menus. Two concentric circles on the splash screen offer users a choice of entertainment and film genre, ranging from Lawrence of Arabia to concert footage of Alanis Morissette. Consumers will pay $3.95 for first-run movies and from $.35 to $1 for an hour of television programming. Pricing for downloading music and playing video games has not yet been determined.

Prime pedigree The Taplin-Baskin friendship goes back more than a decade to the '80s, when they ran into each other at social functions in Hollywood. At the time, Baskin was composing movie scores and was politically active with the Democratic Party. Taplin, having set up the business meeting in which the Bass brothers bought a controlling stake in Disney, was handling other large-scale media mergers at Merrill Lynch. The third founder, Chechik, was directing such films as National Lampoon's Vacation. (Chechik, a member of the company's board of directors, is not involved with day-to-day decisionmaking.)

Framed memorabilia hanging on Intertainer's office walls reinforce the trio's credibility. Platinum records by Barbra Streisand and Willie Nelson in the lobby are witness to Baskin's success as a composer and recording producer. In the back are pictures of stars chatting with Taplin, a Princeton graduate with mutton chops and a shaggy 'do who ducked out of English lit class to hang out with Janis Joplin. His personal favorite is the Richard Avedon portrait of Taplin and The Band, an autographed candid shot of musicians and their tour manager munching on sandwiches.

About four years ago, Taplin looked at efforts to screen films on the Web. Inconsistent quality of the video images muddy tones, blurry focus as well as transmission delays, convinced the 50-year-old entertainment veteran that the Net was a poor movie house. "It was like watching television in 1948: terrible pictures, terrible sound," Taplin says. "We had spent our lives working to make pictures look and sound rich and wonderful. There had to be a better way to do this than the Internet."

They are not alone in that belief. Intertainer's biggest competition comes from another startup, DIVA Systems in Menlo Park, Calif. DIVA evolved as the brainchild of founder and CEO Paul Cook, based on technology developed at RCA Labs during the early '80s. Launched in 1995, the company initially rested its future on a proprietary, scalable video server and a line of set-top-box technology. DIVA has drawn more than $298 million in private financing rounds.

So far, DIVA has rolled out its service in four markets: Delaware County, Penn.; the northern areas of Philadelphia; Monmouth County, N.J.; and the northern suburbs of Atlanta. Plans for expansion were unveiled in April, when DIVA and General Instrument announced their intent to work together. By fall, General Instrument and Scientific-Atlanta will port DIVA's video-on-demand service on their digital cable set-top boxes.

ntertainer's vision is far greater than that of the typical video-on-demand startup. One of the company's more intriguing efforts is its attempt to blur the line between television programming and ecommerce. Take the fashion industry, where designer Donna Karan, among others, is allowing Intertainer to broadcast video footage from her fashion shows. While you're watching the models at the latest DKNY show slink down the runway in the season's hottest evening styles, a little black dress catches your eye, and a tiny shopping icon suddenly flashes in the corner of the screen. Point the cursor on the model, click, and the screen jumps to a description of the gown, its price tag, and an electronic order form.

Your credit card number is already on file with whatever company is bringing the Intertainer service into your home. Order the garment c'mon, you're worth it and Bloomingdale's will ship the dress to you the next day.

Though Donna Karan may be a little highbrow for the average consumer, Taplin says he envisions working The Gap and The Limited to grab a broader audience. Eventually, he adds, Intertainer will embed such ecommerce hot-links throughout all the television shows and feature films it broadcasts. A shopping icon appears onscreen to alert viewers to purchasing possibilities. Do you like Jennifer Aniston's earrings in a Friends episode? Want to buy a trench coat just like the one David Duchovny wears on The X-Files? Taplin sees a day "very soon" when audiences will be able to just point, click, and buy anything featured on a TV program.

And Intertainer wants a cut of each transaction. Just what percentage that will be, though, is something on which neither Taplin or Baskin will comment. Intertainer says it plans to launch a "major" (no dollar amount released) marketing campaign by early next year. (Right now, Intertainer is mostly interested in nailing down distributors, rather than doing any direct marketing to the public.) "We need about 700,000 subscribers to meet our break-even point," Baskin says. "We expect to have 1 million subscribers by 2000." According to Taplin and Baskin, Intertainer will make a profit in one of three ways: through interactive advertisements, electronic commerce, or video-on-demand.

Those estimates are incredibly ambitious, considering that most previous video-on-demand projects have struggled to reach the 100,000 mark. DIVA, which has 1,300 subscribers, installs and finances all of the computer equipment at the cable company's end. The cable company handles all customer solicitations and service. DIVA charges the cable operator $5.95 per month for each interactive customer. "The cable operator decides whether or not to add that fee to the customer directly," says Alan Bushell, DIVA's president and chief operating officer. "Like HBO, it could be folded into the operator's super cable package." Consumers then pay for individual programs, ranging from $.99 to $3.95 per show.

DIVA's and Intertainer's business models both rely on shared revenues from video-on-demand sales, advertising, and online shopping transactions. Video revenues will be divided with the network provider and the company that owns the content. Advertising and transaction fees will be shared with the local access provider.

Money pit?
Despite new plans, the specter of the past haunts any video-on-demand initiative. As recently as 1995, the telecom world was promising an imminent revolution in video delivery. But the dream was nearly impossible to realize. GTE tried and failed in Cerritos, Calif. So did Time Warner, with its 500-channel cable service in Orlando, Fla. Hoping to create the perfect product for consumers' insatiable appetite for electronic entertainment, Time Warner spent hundreds of missions of dollars. Set-top boxes costing thousands of dollars were handed out to homeowners for free, according to company sources. These devices were then connected to enormous and very expensive file servers. Though promising in concept, the experiment is now widely regarded as an extremely costly flop.

One of the most promising efforts was TELE-TV. Vowing to become cable television's worst nightmare, executives from Bell Atlantic, Nynex, and Pacific Telesis began recruiting television programming from Hollywood's creative community. The high-power venture promised it would revolutionize the channel-surfing experience by putting viewers in control of what they watched and when they watched it.

But hopes were quickly dashed by complaints of high installation costs and technological incompatibility. Today, TELE-TV and a number of other interactive-video forays have been cut back or scuttled.

"At least all these trials accomplished one thing: We know what does and doesn't work," says Richard Green, president and CEO of Cable Television Laboratories in Louisville, Colo. "They were expensive lessons for the industry to learn."

Taplin and Baskin insist that the times they are a-changin'. Key tech components are now falling into place. Earlier this year, several high-profile deals were made that call on such high-tech giants as Sun Microsystems and Microsoft to incorporate PC components into a new generation of digital set-top boxes. Carrying a price tag of $400 of less, these boxes are easier to produce and will roll into retail outlets by the end of the year. File servers, which companies like Intertainer use to route digital programs from a central office to the customer's home, are also cheaper to build now and much more powerful than before. All that may still sound expensive for consumers, but think about it this way: Cable operators routinely point to $1,000-per-stream as the break-even cost for bringing such broadband services into the home.

In the move to provide faster Internet service, cable companies are announcing plans to offer high-speed modem service to the nearly 65 percent of homes in America homes that subscribe to cable TV service. And thanks to prodding by Intel and Microsoft, the telephone companies have pushed forward the deployment of digital subscriber lines, which allow users to access data and video up to 25 times faster than existing telephone modems can. "Right now, everyone's trying to establish a leading position in this [video-on-demand] field," says Geoffrey Roman, executive vice president of General Instrument. "Who's going to be the leader? Who knows? Either way, the industry is giving customers more entertainment options. It's up to the public to say what finally succeeds."

P.J. HUFFSTUTTER (P.J. is a technology reporter with the Los Angeles Times, where she covers Orange County companies and the blurring line between youth and online culture.

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