The Disc That Saved Hollywood

You'd think that, at 64, the decidedly dated Snow White would be headed for retirement. Disney has milked $1.1 billion out of the perky princess since "Snow White and the Seven Dwarfs" first arrived in 1937, rereleasing the movie eight times in theaters for each successive generation, and then selling millions of videotapes in two "limited" releases. Nonetheless, Disney is going to the wishing well again. On Oct. 9, "Snow White and the Seven Dwarfs" arrives on a next- generation DVD, and Disney CEO Michael Eisner is hoping that one bite of this apple will make shareholders forget all about "Pearl Harbor" and Disney's California Adventure. Two years in the making, "Snow White" the DVD is 15 hours of digitally compressed entertainment offered up in four different languages and jammed onto two silvery, CD-size discs.

There's a "making of" documentary, an interactive Dopey game and an original recording of "Some Day My Prince Will Come" by Barbra Streisand. You can take a virtual tour of the wicked queen's castle and read the original brothers Grimm fairy tale. Guiding you through this "Snow White" smorgasbord is the green-faced Magic Mirror, which admonishes "I don't have an eternity" if you dawdle while making a selection. (When in doubt, there's always the movie.) Bob Chapek, Disney's boss of home entertainment, calls the release "the first truly immersive experience." These days, that's Hollywoodspeak not for some treatment at a Beverly Hills day spa, but for the DVD version of movies.

Yet if ever there was a revitalizing treatment for Hollywood's sagging fortunes, this immersive experience is it. DVD players are populating U.S. households faster than any other piece of home-electronics gear in history. And last year alone consumers spent $4.2 billion assembling libraries of DVD movies and renting them. (Think of all those VHS copies of "The Lion King" and "Tarzan" that have to be replaced.) They are snapping up unprecedented numbers of such recent titles as "Gladiator" (5 million-plus) and "Crouching Tiger, Hidden Dragon" (2 million-plus), buying them at $18 to $25 a pop instead of just renting them as they would a video. Older titles on DVD go for as little as $10. Cheaper to manufacture than VHS tapes, DVDs are also more lucrative, netting the studios as much as $10 to $13 on each copy, says John Antioco, CEO of Blockbuster, one of Hollywood's biggest customers. Indeed, the public's powerful demand for DVDs is largely fueling Hollywood's current growth. Despite a drop in income from theatrical and home-video releases, worldwide revenues for Hollywood rose by $3.3 billion last year, to nearly $30 billion. DVDs accounted for 60 percent of that increase. "It is difficult to be profitable in the theaters around the world," says Eisner. "But DVDs are very profitable." Sales continue apace this year and could accelerate. Rebate checks from President Bush are arriving just as Panasonic, Sony and others are introducing recordable DVD players. And coming just in time for Christmas are such popular titles as "The Mummy Returns," "Shrek" and "Dr. Seuss' How the Grinch Stole Christmas." Beyond Hollywood, DVD is one of the few bright spots for major retailers like Best Buy and Wal-Mart, where consumers can fill out their collections with flicks that cost as little as $10 and pick up players for well under $200.

The DVD and the music CD share virtually the same DNA--something called optical storage technology. But while the plastic discs may look identical, the double-sided DVD has 14 times the storage capacity of its audio sibling. Spacious enough to hold a full-length film, multiple language tracks and bonus material, such as scripts and actors' bios, it delivers a markedly sharper picture and better sound than VHS. DVD movies can run in Sony's PlayStation 2 or on a plane in a laptop. The discs can store games, text, music and other multimedia material--all embedded as digital content on billions of microscopic pits in the plastic that are "read" for playback by a laser beam. DVD actually stands for "digital versatile disc," not "digital video disc."

The DVD format is so versatile, in fact, that it has managed to tip the balance of power in Hollywood, altering the very way in which movies are made. Temperamental filmmakers--no rare breed in Tinseltown--are negotiating clauses into their contracts that allow them to present the original "director's cut" when the movies go to DVD. Directors can show viewers "what the big bad studio made them cut out," says one top entertainment executive--and he's not just talking about the steamy scenes sacrificed for the greater good of a PG-13 rating. Likewise, directors are using the promise "I'll put that on the DVD" to soothe hurt feelings on the set. "It's the new lollipop that gets offered to actors for a scene that gets cut," says Cameron Crowe, director of "Almost Famous." With tons of room to play with, studios are creating entirely new products, not simply the same "repurposed" theatrical movies that VHS was stuck with. During the filming of Tim Burton's "Planet of the Apes," now in theaters, Fox had a separate crew on the set to capture material for the upcoming DVD. And for the DVD of Eddie Murphy's "Nutty Professor II: The Klumps," the director did a full recut of the film for Universal, creating an uncensored version.

Ironically, DVD was almost stillborn when it arrived in 1997. Widely opposed by Hollywood because of piracy concerns, the technology found an unlikely advocate in a man who made his mark in the unglamorous studio backwater known as home video. Even as he was peddling "Lethal Weapon" tapes at home-video conventions in the '80s to mom-and-pop retailers from Pocatello, Warner Bros. home-entertainment boss Warren Lieberfarb would tell anyone who'd listen about the coming technology he believed would do to videotape what CDs did to vinyl. At 57, Lieberfarb is no techie. But he is, as AOL Time Warner CEO Gerald Levin puts it, "a free thinker." (In 23 years at Warner Bros., he has been fired twice, basically for being too pushy with his ideas.)

Alternately loathed and admired for his messianic zeal, Lieberfarb emerged as "the Godfather of DVD." Godfather is an apt title: in contrast to the early pioneers of home video, who bickered for years over competing Betamax and VHS formats, Lieberfarb helped get industries in line behind a single DVD format and set the stage for huge success. The efforts involved back-scratching deals between Time Warner (now AOL Time Warner) and its powerful media-industry rivals that, NEWSWEEK has learned, resulted in crucial support for DVD. In one quid pro quo, Time Warner backed down in a bitter showdown with mogul Rupert Murdoch over the airing of his Fox News channel on Time Warner's cable systems; only then did Murdoch agree to release Fox movies on DVD. In another instance, Time Warner acceded to demands by Blockbuster for increased supplies of Warner Bros. videos under a novel and favorable pricing plan; Blockbuster's parent, Viacom, then allowed its Paramount studio to begin releasing movies on DVD. Warner Bros. also is widely believed to have agreed to use in its DVDs audio technology partly owned by Steven Spielberg, in a successful bid to get Hollywood's top filmmaker to embrace the new format.

Through the late '80s, Warner Bros. worked on early versions of the technology with Philips, the Anglo-Dutch electronics giant that, along with Sony, controlled the technology for audio CDs. But the two came up empty. In the early 1990s Lieberfarb chanced upon a new collaborator, Kohji Hase, a Toshiba Corp. executive who was overseeing research on recordable optical discs. The two men discovered each other after Toshiba and Time Warner had formed a broad partnership in 1992. "Everyone thought the partnership was bull----," recalls Levin, the AOL Time Warner boss. Engineering teams launched a project code-named Taz, for the Warner Bros. cartoon character Tazmanian Devil, and in 1994 they came up with a workable prototype.

That's when world war broke out in the electronics industry. Sony and Philips emerged with a rival disc. At the root of the conflict were royalties. Sony and Philips control the technology behind the CD, which was an essential component of the DVD. Among other things, they pushed to call it a CD, in order to keep the considerable royalties flowing. Annually, CD royalties add up to a fortune, in some years $700 million for Sony alone. The battle raged until the middle of 1995, when IBM weighed in. The computer giant immediately saw that the disc could be critical to its plans to introduce notebook computers. A dual-use DVD that could store both movies and computer data would produce greater consumer demand and drive down manufacturing costs. With its deep business ties to all of the Japanese giants and to Philips, IBM forced a compromise, and in late 1995 the two camps joined forces.

But then something funny happened: the rest of Hollywood balked. Disney, Fox and Paramount all refused to put their movies on DVD. Without them, DVD seemed DOA. The studios' big concern was piracy: without proper safeguards, DVDs would provide counterfeiters with perfect digital copies of movies--the pirate's holy grail. Lieberfarb was "willing to sacrifice the movie industry and turn it into what happened to the music business with Napster," says Bill Mechanic, the former Disney executive who built the studio's lucrative home-video business. In addition, some studios didn't see the need for DVD, believing that consumers were satisfied with VHS, which was doing a brisk business at the time. There were other, unstated factors at play: suspicion and envy among the studios. "It was a technology invented by others with patents held by others," says a former executive at Disney, a latecomer to DVD. Warner Bros. had, in fact, received several patents for DVD technology, and rival studios were loath to pay it the four cents or so it now receives on every disc that's pressed. Eventually the DVD promoters established a copy-protection scheme, albeit one that isn't totally secure. Finally, by early 1998, the rest of the studios had signed on to DVD.

Today the resistance is long forgotten. Instead, studios are busy dreaming up new ways to cash in on their favorite products, making them more sophisticated, interactive and fun. New Line is offering what it calls "beyond the movie experiences," with far more goodies than the traditional deleted scenes, directors' commentaries and movie trailers that round out most DVDs. "13 Days," for instance, contains archival footage of the Cuban missile crisis and pop-up menus that explain the cold war to the un-initiated. Meanwhile, DreamWorks plans to make a huge splash with its Nov. 9 DVD release of "Shrek," already the year's most profitable movie. In addition to a newly created 15-minute ending, the DVD will feature the first use of "Revoice Studio," a karaoke-like program that allows viewers to be Mike Myers or Cameron Diaz for a day, substituting their own voices for the actors'. "The viewer becomes the actor," DreamWorks marketers say. And you can bet that next time Disney will think of that for "Snow White."

Photo: Five million units shipped and still fighting on

Correction In "The Disc That Saved Hollywood" (Business, Aug. 20), we should have said that the DVD of "Shrek" will be released Nov. 2 and will include 15 minutes of new animation material, including a new three-minute ending. And an accompanying graphic should have noted that "Gladiator" is a DreamWorks/Universal production.