ONE MAN'S FLIGHT OF FANCY

This was it: the moment to celebrate. About 250 executives from Hollywood studios and home-electronics companies gathered at the Bellagio in Las Vegas earlier this year to toast their soaring fortunes, thanks to the phenomenal success of the digital video disc. Major studios sold a stunning $9.4 billion worth of DVDs to retailers last year, proof that DVDs now bring in a majority--52 percent in 2003--of Hollywood's revenue. Everyone noticed when the man most responsible for their good fortunes arrived: Warren Lieberfarb. The former chief of Warner Home Video deserved a round of cheers for doggedly pursuing his vision of the new format. Lieberfarb, more than any other person, merits credit for making the DVD a reality. He didn't invent the technology. More important, he saw its potential to transform the industry. So he cajoled, strong-armed and bargained with industry players around the world to set aside their parochial interests and sign on to a universal standard for the new format. No small feat, considering whom he needed onboard: studio chiefs, computer companies, retailers and heads of electronics companies. History was against him, too--the field was littered with failed formats (remember Beta?). "Never has one name been so associated with the launch of a major product," says Brad Anderson, CEO of BestBuy.

Surprisingly, Lieberfarb isn't Hollywood's most popular figure. And the cool feelings are mutual, since he's never felt fully appreciated. He had braced himself for seeing his former detractors raise a glass to their own smarts. "You will see the peacocks strutting," he had muttered. Within minutes he ran into a former colleague and started berating him for ignoring his calls. "I won't forget this," Lieberfarb barked, then abruptly left.

Few people in the entertainment business can ever really forget Lieberfarb, 60, either. Since it was introduced in the spring of 1997, the small silver platter he championed has transformed Hollywood and the way the world watches movies. Lieberfarb's dead-on hunch--that the masses would buy DVDs, not just rent them--helped ignite the greatest boom in Hollywood history, fundamentally altering the economics of filmmaking. Nowadays movie theaters merely begin the buzz for DVDs. We spent as much as $400 million on DVDs of "Finding Nemo," about $60 million more than at the box office. The prospect of issuing old films anew on DVD is behind Sony's current eagerness to sink perhaps $5 billion into buying MGM, with its trove of classics like "The Wizard of Oz." "None of us at senior levels on the studio side believed Warren's projections," recalls Bob Pisano, MGM's former vice chairman. "He was right. We were wrong." And now Lieberfarb is betting that he'll be right again. He is a consultant to Microsoft, Toshiba and others on the next-generation DVD, which promises to pack even clearer images and more features onto the discs. It could mean another windfall.

Lieberfarb's story is itself worthy of a Hollywood script, save for a thorny problem--the main character is both protagonist and antagonist. His maneuverings got electronics giants, media moguls, Hollywood and Silicon Valley to agree on the new format. But he often seemed to undermine himself with his brusque manner and boastfulness. His story has a bitter twist, too. For all the billions of dollars he's created for the industry, he has relatively little to show for his work. He is hardly impoverished. But his "DVD bonus"--Time Warner stock options once worth as much as $135 million--was wiped out by the disastrous AOL Time Warner merger. Then he was abruptly fired after what some Time Warner insiders describe as a power grab by him; Lieberfarb says he was fired only for hounding bosses to restore his bonus. A Time Warner insider said his dismissal letter labeled him "disruptive." An arbitrator is working on the dispute, and Time Warner is trying to block Lieberfarb from seeking testimony from top officers, including CEO Richard Parsons. Lieberfarb added billions of dollars to the company's value, says David Boise, his star lawyer, adding, "The question of how a company treats someone who has created that kind of value is interesting." Time Warner declined to comment.

Criticizing Lieberfarb as "disruptive" could also be considered a backhanded compliment to a man intent on shaking up an industry. Lieberfarb's first job in the business--as a senior financial planner with Paramount Pictures--wasn't the best match. He was a numbers guy in a world that frowned on fiscal discipline. But he stayed in the business, jumping to Fox and later to Warner Bros. Lieberfarb looked for new ways to reach film audiences, but often ran into a fear that any new distribution outlets would merely siphon away fans from theaters and television. Entertainment companies fear "disruptive technologies," not realizing that "we all win," he laments.

Lieberfarb's penchant for challenging the status quo and his pushiness got him fired at Warner Bros.--twice--early in his career. Yet top bosses always saw promise in him, repeatedly rehiring him and handing him control of home video in 1983. Video was then the hot new thing, and Lieberfarb not only mined Warner's library for gems to repackage, but engineered deals to put out MGM's videos. But by the early 1990s, videos were beginning to look like a sunset business. Digital television was on the horizon, providing another reason to bypass Blockbuster. "I always feared losing my job, that TV was going to put me out of business," he says. But how could home video be reinvented to compete with the new TV technology?

Putting movies on a disc wasn't Lieberfarb's idea. The glitch-prone DiscoVision from MCA and Selectavision from RCA came and went in the early 1980s. The pricey album-size laser discs appealed mostly to videophiles. At Warner, Lieberfarb collaborated on disc projects with Philips in the late 1980s. Little came of it, though. By the early 1990s, his gut was telling him that if movie discs were the size of CDs, were priced right and offered a better picture and sound than video, people would collect movies like books. The key was to make the discs cheaply, based on a universal standard.

Time Warner agreed early on to team up with Toshiba to develop the DVD. Toshiba had a crucial stake in new technology to compress a two-hour movie onto a single side of a disc. The partners launched a DVD project code named "Taz" (for Warner's Tasmanian Devil character). Later at a secret meeting in London's swank Dorchester Hotel, says Lieberfarb, they recruited Philips to the team. But in a stunning move, Philips soon left to jointly develop a DVD with Sony. Philips and Sony were natural allies, since they each owned and licensed aspects of the compact disc's technology. Their DVD would share much of the CD's DNA, so they assumed they could reap new royalty rewards together.

The divided camps were heading toward a format war, like Sony's Beta debacle versus VHS. Neither wanted that for DVD, especially Lieberfarb. He traveled the world to broker compromises. He got his trump card by wooing the computer industry, which was looking for a medium that stored more data. If computers could use the same disc that stored movies, it could stoke demand and drive down manufacturing costs. Dan Sullivan, a former IBM executive, says Lieberfarb's role was crucial in closing the deal. "He's very convincing," says Sullivan. Lieberfarb now had the leverage he needed to win agreement on a single standard.

The technical solution was only half the battle, though. Not all the studios embraced the idea. Three majors--Disney, Paramount and Fox--balked, expressing concerns about piracy. But rival studios winced at the prospect of paying royal-ties to Time Warner, which owned DVD patents. Paramount appeared to be worried that its corporate sibling Blockbuster would face competition from major retailers selling DVDs. It was time for Lieberfarb to broker more deals. He eventually helped persuade Time Warner to end a bitter dispute with Rupert Murdoch by agreeing to put his upstart Fox News on Time Warner cable systems. Murdoch began releasing DVDs from his Fox studio.

Even Lieberfarb was somewhat startled by how swiftly DVDs became a success. By the end of 2000, just four years after DVDs were introduced, consumers had snapped up 14 million DVD players, making them the fastest-selling home-electronics device ever. At the same time, "Gladiator" became the first DVD to earn $100 million in sales.

With the world's largest film library (think "Superman" and "The Fugitive") at his disposal, Lieberfarb aggressively released DVDs. None of the studios en-joyed the bonanza like Warner Bros., which also earned millions in royalties, thanks to patents it held owing in part to Lieberfarb.

By now, everyone in the business knew him. The honors poured in for "the father of the DVD," as the trade press dubbed him. In 1999 he and his Toshiba cohort received an Emmy for their DVD efforts. And last year the French government bestowed its highest cultural honor on him. With the honors came resentment. His critics accused him of lobbying for credit, which he disputes.

Lieberfarb was in line for a payday, but would it be cash or stock options? Gerald Levin, then the CEO of Time Warner, suggested he forgo a payment of $25 million and take options, according to Lieberfarb. "I'm going to make you very rich," he recalls Levin saying. But when AOL Time Warner cratered, the options did, too. Levin quit in 2002, and his successor, Parsons, wasn't hearing any special pleas from employees to be made whole. In mid-December, Lieberfarb was fired with $10 million severance. A friend at Time Warner describes him as "a tragic figure," adding, "It's very sad."

When he's not fighting his arbitration battle with a Time Warner over compensation, Lieberfarb is searching for another big reward, with the next-generation DVD and other future technologies. Microsoft has signed him up as an adviser for its digital-media strategy; it's particularly interested in high-definition DVD. Among other things, Microsoft controls technology for compressing video onto high-definition discs. Again, two consortiums--one headed by Sony, the other by Toshiba and NEC--are backing rival formats. The new technology promises video images and sound two or three times better than DVD, and will enable interactive bonus material akin to videogames. Lieberfarb is careful to avoid discussing his current work.

In the future, will there be a place for a "hard" medium that you can touch and store on your shelves? Lieberfarb believes that answer is no. "The future will see video on demand delivered over the Internet, and movies will be just one of the offerings,'' he says. Already, services like RealNetworks can offer "Finding Nemo" online, and TiVo offers connections to Internet movie sites. Digital video "will transform what, where, when and how we get our entertainment,'' he says. Lieberfarb probably won't play such a key role in shaping that future as he did with the DVD. That, if nothing else, may at least ease the tension a bit at future industry parties.

CORRECTION

In "One Man's Flight of Fancy" (July 5), we wrote that MGM's film library includes such classics as "The Wizard of Oz." In fact, Time Warner has owned the movie since its 1996 purchase of Turner Broadcasting, which itself had obtained the movie in an earlier acquisition of all of MGM's films made before 1986. NEWSWEEK regrets the error.

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