BSkyB aims to capture Europe's i-TV market with a Sun set-top strategy. But a growing Microsoft alliance has different plans.
Wired 8.03 ⎢ March 2000
SPORTS, NEWS, SOAP OPERAS, HOLLYWOOD MOVIES, MTV: Eleven years ago, Rupert Murdoch dynamited the cozy, four-channel world of British television with British Sky Broadcasting, a satellite service that beamed in more choices than the UK had ever seen. Now Sky has exploded another bombshell: interactive television. Using its new Open service, Sky's 1.8 million or so digital couch potatoes can turn on, tune in, and order pizza. Or buy groceries or books or CDs. Or check the weather or scan the movie listings or balance their bank accounts.
It works with a touch of the remote. Push the red button and the picture on your TV screen jumps to a vibrant image — an open tulip blossom, say, in extreme close-up. A list of options pops up on the right: Shopping, Entertainment, Money, Information, E-Mail. . . . Press Shopping and more options appear: Entertainment/Leisure, Fashion, Electrical, Gifts/Toys, Groceries/Pizza, Special Offers. The look is clean and fresh, in tune with the cool retro-pop aesthetic you see everywhere in London today. Want a CD from Woolworths, the High Street entertainment chain? Scan the offerings, push the yellow button on your remote to add one to your shopping list, then press the green button to look over your order. Press blue and the phone line snaking out from the back of the box on top of the TV set transmits the order to Woolworths — no keyboard commands, no download delays, no random screen freezes, no cryptic error messages, no sudden disconnects. The CD arrives the next day.
"We're not selling a tech product, we're selling an experience!" says James Ackerman, Open's chief executive. Ackerman grew up in LA, where his father helped produce shows like Dennis the Menace and Bewitched. He's in pitch mode. "Open is designed to be both liberating and fun. It's open 24 hours a day, it's open to you, it's open to everyone — that's the idea."
What it's not open to is the Web. Open offers Internet email, but shopping is limited to companies that have struck a deal to get on. "You have people who are going to use interactive television who have never been on the Web, who never will be on the Web — people who don't consider themselves technologically savvy or anything like that," says James Murdoch, Rupert's son, who oversees digital media for News Corp., the family's $13.5 billion-a-year global media conglomerate. Those people can use Open to buy books from the WHSmith chain, order groceries from Somerfield supermarkets, track stocks on E*Trade, get a mobile phone from Carphone Warehouse, send out for a pizza from Domino's. And Open isn't the only thing they can interact with on Sky. The sports channels let subscribers direct their own coverage of live football matches — summoning game highlights and statistics, choosing from four camera angles, switching to instant replay anytime they want. This spring, Sky News will go interactive as well, allowing viewers to get more detail on a story or go back to a report they missed.
None of this would have been possible without Sky's 1998 move to digital broadcasting. Because data can be readily compressed when it's stored digitally rather than in the continuous waveforms of analog, digital transmissions don't require as much bandwidth. That means broadcasters can pack more — more channels, better picture, better sound, interactivity — into the same capacity. In the US, where broadcasting is still mired in analog, television has been caught in the headlights of the Internet: Streaming-video Web sites multiply like bunnies, and people dream of the day when convergence will bring the Web to TV and TV to its knees. AOL's proposed takeover of Time Warner is the clearest indication yet of the Web's incredible momentum. But in Europe, playing to more than 8 million homes, digital broadcasters like BSkyB in the UK and Télévision par Satellite in France are ignoring the Web and reinventing themselves as providers of interactive services.
Which vision will win out? Even analysts at the same company disagree. "Don't bet against the Web," cautions David Card, who works in the New York office of new media research firm Jupiter Communications. "All the banking and shopping on the Web — it's crazy to try to re-create these in an interactive environment." Noah Yasskin, his London-based colleague, takes the opposite view: "Your TV set is not a big computer monitor. Interactivity on television is for simpler things — you're watching MTV and, click-click-click, the CD is in your house, and it's back to the show.
"I'm not a big believer in convergence," Yasskin adds. "The way we see it, there's going to be divergence. Digital television, PCs, mobile phones — there'll be Internet access on all of these devices, but what you're going to see will be radically different. European digital television could give the US a vision of how interactive services are going to look on TV — and yet everyone is blind to that."
But it isn't just geography that determines how people envision the future of TV. It's what company they work for, and what engineering choices that company made years ago, and what it stands to gain from the outcome. On one side are the proponents of interactive television — Sky and other satellite companies across Europe, many of them using software from a Silicon Valley outfit partly owned by Sun Microsystems. Arrayed against them are the proponents of PC convergence — including UK cable companies that compete with Sky and are partly owned by Microsoft. Sun's vision of interactivity treats TV as a unique entertainment medium; Microsoft views it as a big-screen computer that lacks only a browser to make it a portal to the Web.
But this isn't about a bunch of starry-eyed pioneers deliberating the best route to interactivity. It's about money and market share and a desperate struggle for control of the little black box on top of your TV set. "When you look forward, that set-top box is going to do everything in the home," says Rupert Murdoch. "That's why Bill Gates has been investing in every cable company that he can lay his hands on in the world. If he can get a set-top box with some software in it, it'll be running the air-conditioning and providing extra services to the homeowner and sharing the revenue, I presume, with the cable operator. We're not using Microsoft in our system. We think we can develop these things ourselves."
An Evolutionary Fork
In the white-hot cauldrons of innovation that spangle these Web-happy States, the idea that the technochallenged little UK, wallowing in the lee of the Internet, could chart an alternative route to interactivity sounds ludicrous in the extreme. What prompted the Brits — and most of Europe as well — to go off on such a tangent? In part it was their phone system, which charges users by the minute, even for local calls. If this policy was intended to keep people off the Net, it worked: With only 18 percent of its households connected last year, compared with 44 percent in the US, the UK lags a good two years behind (though it's ahead of most other European countries outside Scandinavia).
There are other factors as well. One is the DVB (digital video broadcasting) project, an international consortium of broadcasters, manufacturers, and regulatory agencies that began working in 1993 to establish a European standard for digital transmissions. While the US standards committee got bogged down in political squabbles and technical arcana, the DVB group developed a standard so technologically reliable that some US station owners have petitioned the FCC to let them use it instead of the standard they agreed to.
Then, too, British viewers were primed for interactive TV by teletext: Broadcast for years through an otherwise unused portion of the analog signal, it lets you press buttons on the remote to call up text messages on your television screen — ads for holiday getaway packages, things like that. Viewers think of it as interactive television (even though they have to pick up the phone to buy anything), so it's gotten them used to the idea of shopping on TV. A Gallup poll conducted last fall found that 42 percent of British consumers favor television for home shopping and only 26 percent prefer a PC. But among people ages 16 to 24, two-thirds preferred TV.
All this is good news for Rupert Murdoch, whose News Corp. holds 40 percent of Sky. Murdoch saw digital as a chance to win new subscribers for all his satellite platforms — BSkyB, Sky Latin America, and Star TV, which operates out of Hong Kong and reaches 82 million homes across Asia. "I just knew it had infinitely greater capacity — not just channels, but the interactive possibilities," he says. "And I wanted to get it done as fast as possible." But even Murdoch has doubts about the route to interactivity Sky followed. "I would have liked to do a pure Internet thing," he says. "But we all look at the Internet differently today than we did three years ago, when we went down this path."
The man who headed Sky during the transition to digital is Mark Booth, an American who now runs epartners, Murdoch's London-based new media investment arm. Like most Sky execs, Booth has a television background: He came to the UK to launch MTV Europe in 1986 and later oversaw Murdoch's TV operations in Australia and Japan before returning to London to run Sky. "There's nothing that keeps Sky from ultimately doing Web-based applications if it wants to," he says. "But I don't think people are going to want to watch Amazon.com the way it is currently formatted. One thing we understood at MTV is that people expect television production values to be television production values. When you use that set, there's an expectation. You and I are very forgiving of our computers crashing, of being disconnected online. We have a high threshold of pain in the PC environment. In the television environment you have zero tolerance. It's a different medium."
When Sky execs decided to go digital, the only choice they liked was OpenTV, a software package that wasn't Web-compatible. At a time when streaming video on the Web was still in the herky-jerky peep-show stage, OpenTV (not to be confused with Open, Sky's interactive shopping-and-information service) could process full-screen digital video and audio in real time. "A lot of people had smoke and mirrors," says Sky CTO Geoff Walters, "but nobody else had anything that would run in a digital set-top box."
So teams from Sky and Thomson Sun Interactive — the joint venture between Sun Microsystems and Thomson Consumer Electronics that developed OpenTV — spent two years writing dozens of programs and linking them to help form a digital broadcast platform. Subsequent upgrades — software to run the interactive sports channels, for example — were designed to be beamed down via satellite with instructions to install themselves automatically. Crashes were not an option. By the time Sky Digital was launched in October 1998, Microsoft was pushing Windows CE, the consumer-electronics version of its Windows operating system, but Walters wasn't interested. "We're about creating an environment which is very, very stable and very, very reliable," he says pointedly. "Computers are a very different environment."
The move to digital seems to be paying off. Two years ago, Sky was netting close to £5 million a week, but it was cursed with a high churn rate and a stagnant percentage of households. Now it's a hot proposition. To make it work, Sky has had to give away the set-top box its digital service requires — a move that's plunged it deeply in the red. But by the fall of 1999, analysts were estimating that Sky Digital was getting some 50,000 new subscribers a week. And those boxes are opening up nifty revenue streams: Open, which is almost one-third owned by Sky, collects a commission of about 8 percent on all sales — considerably more than most Web portals command. Multiply that by the 6 million subscribers Sky is expected to have in a few years, add in advertising revenues, and it's easy to see why analysts who estimated the value of Open at £1.4 billion last spring were valuing it at £2 billion or more by fall.
Open had a knockout Christmas: 45 percent of Sky Digital customers used it at least weekly, and Gameplay, a UK-based gaming company, actually pulled in more revenues from Open than it did from its own Web site. Even so, among Sky's competitors, the joke about Open is that it's closed. "I don't really understand their thinking," says Peter Hall, managing director of product development at Telewest, the UK's second-largest cable operator. "We can't assume that the PC and the television are different devices. In three years' time, in my view, they will be the same. So why would you ever try to resist the power of the Web?"
The PC Vision
Peter Hall has a special incentive for embracing the Web: Last May, Microsoft announced a deal to buy 30 percent of Telewest. A few months earlier, Redmond had bought nearly 5 percent of the UK's leading cable operator, NTL — which, like Telewest, was preparing to go digital. London newspapers saw the move as Bill Gates taking on Rupert Murdoch globally — but would Microsoft ever want to control a cable company the way News Corp. controls BSkyB?
"Never," says Georges Nahon, who heads Microsoft's Internet and television operations in Europe, Africa, and the Middle East. "The reason we invested in cable in Europe is because we want to make sure that our financial partner becomes a business partner and uses our technology. The way it is today, you get boxes that are only capable of providing access to TV. For an incremental cost, you can get Web connectivity — and we, Microsoft, believe that we can help you."
Years before he joined Microsoft, Nahon helped develop Minitel, the national videotext service introduced by France Telecom in the early '80s — a marvel of Gallic technology at the time, a pre-Internet relic today. Now he works out of La Défense, the futuristic office complex built around a monumental, arch-shaped office building that's in a straight line with the Arc de Triomphe, the Champs-Elysées, and the Louvre: la gloire de la France projected into the 21st century. Still, his message is straight out of Redmond.
"We are saying that unless you become compatible with the Web, you are cutting yourself out of this huge collection of content and services," he declares. "Now, if a television broadcaster says, 'I don't care about additional services' — meaning 'I don't care about additional revenues' — fine. But he will have to explain to the shareholders why he made the decision not to work with Microsoft or the PC vision."
From a business standpoint, Redmond has any number of reasons to push that vision. In a fully converged world, Microsoft content sites like Expedia and MSNBC could become Webcast channels, fighting CBS and CNN for their share of the infinite-channel universe. MSN — the onetime Microsoft Network, now recast as a portal to the Web — could easily become the channel that pops up every time you click the On button of your remote. WebTV, the Internet-on-television startup Microsoft bought nearly three years ago, could be synchronized with broadcasters and used not just to render Web sites on TV but to bring interactivity to existing television shows. Windows CE, the company's scaled-down operating system, could allow Redmond to control interactive television the way it controls desktop computing — even more profitably, if it were to get a cut of commercial transactions made on TV.
At the moment, most European cable and satellite operators rely on either OpenTV or MediaHighway, a similar software package developed by Canal+, the French pay-television giant. Microsoft's hope is that its proprietary Windows software can be combined with the open standards of the Web to form a springboard into interactive TV. Thanks to its deep pockets, it now has a shot: After Redmond invested in Dutch and Portuguese cable companies last year, both agreed to test a new software package that uses elements of Windows CE and WebTV; Microsoft's UK cable partners are evaluating the package as well. And since Windows for television isn't that different from Windows for computers, Microsoft can boast a ready-made community of software developers all set to port themselves over to TV. "There are very few developers for OpenTV," says Nahon. "We want to make sure that the market is not locked so that only a limited number of companies have access to it."
A Global War for the Home
So a software company partly owned by Sun is pushing a proprietary system for interactive television — one called OpenTV, no less — at the same time Microsoft and its proxies are promoting the open horizons of the Web. But isn't Sun supposed to champion open systems, while its rival pushes Windows to the max? Isn't this some kind of role reversal?
Actually, it's not — the issues go beyond whether television should bring people to the Web. As Murdoch suggested, this is a global war to control not just digital television but everything in the electronic home — the systems that will light rooms and pipe in music and keep out intruders and control the temperature and manage your life. For both Sun and Microsoft it started nine years ago, when they first ventured beyond the computer and into the far different realm of consumer electronics.
At Sun, a small team of researchers set out to develop software for things that had a chipset inside and weren't perceived as computers. The group came up with an experimental programming language called Oak that was intended to work in anything from a TV set to a doorknob. In 1993, when Time Warner issued the specs for an elaborate interactive television system in Orlando, Florida, Sun eagerly pursued the set-top-box contract — only to lose out to Silicon Graphics, whose founder, Jim Clark, envisioned interactive TV as a "telecomputer." When the Orlando trial debuted a year and a half later, the project's leader compared it to the software required to put a man on the moon — but it turned out the moon was closer. The system required 300 employees for only 4,000 subscribers and set-top boxes that cost $8,000 apiece to produce. Then America discovered the Internet, and interactive television became a bad joke.
When Jim Clark quit Silicon Graphics and launched Netscape, the company that would open the Web to the masses, Sun took note. In 1995, Oak was renamed Java and licensed to Netscape for its Web browser, where it transformed the Web from a repository of static pages to a cornucopia of animation. Sun's interactive-TV team was spun off into a joint venture with Thomson to develop software for DirecTV, the American satellite broadcaster — without Java. Eventually, Thomson sold its share to a South Africa-based pay-television company, and the venture was renamed OpenTV, after its product.
For the past two years, OpenTV has been working on a next-generation set-top box, based on Java, that will be capable of displaying pages from the Web. Not that anyone involved thinks the TV and the PC will merge. "Television is an entertainment medium," says Jan Steenkamp, OpenTV's CEO. "You go to television like you go to a movie house. You go to the Web like you go to a library. One smells of popcorn, and the other is quiet. To cable operators who would like to offer that type of feature, we have to provide the opportunity. But we see it as a niche product."
Like Sun, Microsoft got into consumer electronics in 1991, when chief techie Nathan Myhrvold urged the company to look to consumer devices — particularly to a form of interactive TV he dubbed the video PC. A consumer-technology group was formed, press demonstrations were staged, trials were scheduled, and then the whole thing fizzled. Gates, under fire for letting Netscape get a head start with its Web browser, announced at the end of 1995 that Microsoft was "hardcore about the Internet." A year later, when the consumer-technology group shipped its first product, Windows CE, it wasn't for television but for the handheld PC. Not until January 1998 did Microsoft land a TV deal, when TCI's John Malone agreed to use Windows CE in millions of digital set-top boxes — one day after he panicked the Redmond camp by announcing a deal with Sun to put Java in those same boxes.
On the face of it, you'd think Java and Windows could live in peace. Java is a programming language; Windows is an operating system. But what sets Java apart from other programming languages is that software written in it will run anywhere — on any microprocessor, on any operating system, in any device. This "write once, run anywhere" capability was intended from the start to prevent the consumer-electronics world from becoming dominated by any one software company. The licensing fees Sun collects for Java barely cover its costs: It's all but given Java away trying to make it an industry standard. The idea is to get Java in the set-top box — and stop Windows CE from giving Microsoft a lock on the living rooms of the 21st century.
Much of the sparring has taken place in Geneva, where Sun and Microsoft are among the 254 broadcasters, manufacturers, and regulatory bodies debating interactive television on the DVB consortium. Having already set digital broadcasting standards, the DVB group is about to issue a standard for interactivity for the next generation of set-top boxes. It's called MHP (Multimedia Home Platform), meaning it's intended not just for interactive television but for every electronic device in the home.
The MHP standard addresses various types of interactivity, including access to the Web. Microsoft, in alliance with Intel and other companies, has been fighting to put HTML, a basic building block of the Web, in the standard for every type of interactive TV. If television is a PC and interactivity is something PCs do on the Web, why not make all interactive TV compatible with the Web — and, by the way, let MSN come onscreen every time you boot up the TV? Unless you happen to think a TV set isn't a PC; then there's no reason it needs the extra memory and processing power required to run HTML. "If Microsoft can lock people into the technology we have today, it can win," says Mike Clary, Sun's business development chief. "What we're trying to do is give them a richer experience."
Along with pushing HTML in Geneva, Microsoft and Intel led the opposition to Java — a fight they gave up in November, when the DVB board voted unanimously to include it in the new MHP standard. Unfortunately for Microsoft, Java captured the imagination of Europe's digital-TV crowd. Yet at the moment, though set-top boxes share the DVB broadcasting standard, the boxes for one country won't work across the border. With a Java-based standard, that could change. "The great vision," explains Barry Flynn, editor of the London-based newsletter Inside Digital TV, "is to transform the vertical markets of Europe into a horizontal market."
So Java became a rallying point, and what sounded like straightforward technology questions — Should interactive television be a gateway to the Web? Should the PC and the TV converge? — became fraught with geopolitical implications. "You have technical arguments mixing with political arguments mixing with sociocultural arguments," says Flynn. "The fear in Europe is that Internet content is dominated by Americans. And Microsoft fits into those arguments. It's the imperialistic American monolith."
A World of Many Webs
For BSkyB, the immediate issue isn't HTML versus Java or even Microsoft versus Sun; it's how to compete with cable. When Sky was launched, cable was shorthand in the UK for lousy customer service. What put cable on the map — and set it up to threaten Sky in the digital world — was the government's 1992 deregulation, which allowed cable operators to carry phone calls as well as television programming. In order to do so, they had to install two-way pipe — which gives them an advantage over Sky, whose satellite transponders can beam down vast quantities of data but whose current-generation digital set-top boxes rely on a phone line and a puny 28.8 modem to send information back.
But Sky is not without options. "We're running trials on DSL technology," says Tony Ball, the new CEO, a native Londoner who took over last June after several years as head of Murdoch's Fox Liberty Ventures in Los Angeles. Ball was an engineer before he became a sports programmer, and he's made DSL — which enables ordinary copper phone wires to carry high-speed data and voice simultaneously — a priority from the day he walked through the door. One advantage of DSL is that, unlike cable, it doesn't slow down as more users sign on. "If everybody in a system is on the cable modem, it isn't that fast," Ball says, "whereas if you buy a couple of megahertz on a DSL line, you're not going to get crammed down as more and more people come on."
With his nasal Cockney speech, his monogrammed shirt and silver cufflinks, and the stiff white hair that bristles Beckett-like from his angular head, Ball encompasses several degrees of improbability. On weekends he likes to race around London on his BMW motorbike, yet his office is as nondescript as the rest of Sky's brick-and-glass headquarters in the industrial suburb of Isleworth. Only one item leaps out from the sea of beige and white: a bright red 1960s digital clock that hums impatiently and marks each minute with the loud flip of its cardlike display. "I love that clock," Ball says, a smirk flickering across his face. "It's a digital joke."
Ball's real digital joke, of course, is that he's reinventing the company as an interactive information and entertainment service. He wants to get the Sky brand — Sky News, Sky Sports, Sky Digital — onto every electronic device people own. Last summer Sky started offering computer users a free Internet service through British Telecom's phone lines. Shortly afterward it morphed its Web sites into a portal called Skynow, with search capabilities and content from Sky's news and sports channels. Now Sky is providing football scores wirelessly to mobile-phone customers. Soon it may offer a DSL connection for PCs along with a broadband portal to the Web. "We have a bunch of ideas for the next generation of boxes, which have devices built in so you can suggest movies to people and they can download them overnight, you can send them games," says Ball. "But that's for tomorrow."
Tomorrow is the province of John Swingewood, the exec Ball put in charge of Sky's recently formed new media division. In his previous job as head of British Telecom's Internet division, Swingewood ran a trial using DSL for personal computers. He knows that hooking up a DSL line to the set-top box would make possible real-time interactivity — for games or for conferencing, say. After that, who knows? Financial data to mobiles, information kiosks on the street, datacasting via satellite to PCs, even return-path technology that will turn the home satellite dish into an uplink facility, allowing people to stream information back to the bird that's been feeding them TV all these years. Sky's aim is to be ubiquitous — on the telly, on the computer, on the mobile, in the street, via satellite, through the phone lines. If Ball and Swingewood can pull that off, few people will remember that the company's set-top box failed to put their TV sets on the Web back in 1999. In effect, Sky will have realized the vision of interactivity that Sun has been pushing for years.
"An entertainment device is not a personal computer in any sense," says Bill Joy, Sun's cofounder and chief scientist. "The purpose is different — one has an entertainment purpose, and one has an education/information-gathering/bill-processing/email-reading purpose. It's also about the posture that you have. We recognized this back in the old Oak days — we called it near versus far. Far computing means you're leaning back. It's something you can operate with your thumb. And given that you have a large screen and you're in that position, you don't get the news the same way. It's newscast versus newspaper."
Java-enhanced television can let you surf the Web, but it can also do much more. If you're watching an auto race, you could sit in any driver's seat and view the instrument readings across the bottom of the screen. It could insert a local dealer into a BMW commercial and let you press a button to get more information or schedule a test drive. It could show you the quickest traffic route, or analyze your golf swing, or run your portfolio on an onscreen ticker. It could even accept a datastream that could be displayed on any number of devices — personal computer, pager, mobile phone — and customize it for TV.
In a sense, Java will make possible not just one Web but many webs. "I think we'll have a web of content for computers," Joy says. "And we'll have a web for handheld and a web for entertainment. We may also have a web that is voice activated, like when you're driving. If you go to Yahoo! on the web of entertainment, it's produced differently because it assumes you're sitting back. The web that comes to your pocket assumes that currency of information is important, because it knows it can get it to you instantly. But you're not going to bring a page of The Wall Street Journal online down to a 100 x 100-pixel display. I think the web to handsets, the web to personal-computer-like devices, the web to TV could easily be as different as television, radio, and newspapers. Why are we imagining they're the same?"
So, uh, does this mean there's not going to be convergence?
"We never believed there would be," he says quietly. ■
Rupert Discovers the Internet
IT WAS A LITTLE OVER A YEAR AGO that Rupert Murdoch, speaking in Singapore at a forum on 21st-century media, dismissed Internet stocks as overvalued and cautioned that the Net will "destroy more businesses than it creates." That was then. Today, Murdoch — a man many see as the avatar of traditional broadcasting, master of a satellite armada that blankets half the planet with programming uplinked from his studios in London and Hong Kong and Los Angeles — has got the Internet religion. In recent months, he's launched a $300 million new media venture fund, partnered with the Japanese investment company Softbank to port US-based Web companies overseas, and bought stakes in more than a dozen dot-coms — most dramatically in December, when he agreed to trade $1 billion in cash and promotional tie-ins for 10.8 percent of Healtheon/WebMD, the health care transaction-and-information firm. Even so, he's shown no eagerness to follow Time Warner CEO Jerry Levin to the online altar.
"I was thought to be anti-Internet, which I never was at all," says Murdoch, awash in the glow from a half-dozen TV monitors embedded in the wall of his vast corner office in News Corp.'s mid-Manhattan tower. "I did say I don't know how you justify the price of some of these stocks — which I still say, but I've been wrong."
Does he regret not getting into it years earlier — say, when he turned down the opportunity to buy a chunk of America Online?
"Sure. In hindsight, it would have been lovely to have a big slice of Yahoo! when it was worth only $500 million, or of AOL or whatever. For a long time I was wrong about AOL. But a lot of people put too much money into this too early — like Pathfinder. Time Warner learned a lot from it, but it was a very expensive lesson."
Time Warner spent years trying to build its cumbersome Pathfinder site into a viable Web brand, only to throw in the towel and make a deal with AOL. But Murdoch had an expensive lesson of his own: In 1993, well before Web browsers opened the Net to the masses, he bought Delphi, a drab, text-based Internet service, only to dump it three years later when it was down to 50,000 customers (compared with AOL's 5 million). After that, News Corp. confined itself to promotional sites for television properties like Fox News and Fox Sports, even as other media giants were trying to bottle the entrepreneurial zing powering the dot-com startups.
Yet of all the global media conglomerates that have come out of the megamergers of the past dozen years, News Corp. is by far the most entrepreneurial. Starting with a pair of Australian newspapers he inherited from his father in 1954, Murdoch cobbled together a print, film, and television empire that on an average day reaches 450 million people around the world. He based it on the revolutionary potential of satellites: Fascinated by Arthur C. Clarke's 1945 vision of geosynchronous spacecraft orbiting the planet and beaming data to a stationary footprint below, Murdoch embraced Clarke's prediction that the free flow of information would threaten the concept of national sovereignty. From there it was a short leap to the idea of a transnational media corporation beaming news and entertainment from satellites circling the globe.
But Murdoch has come to realize that the Net has a lot more potential for revolution. "Governments can regulate satellites," he says. "You have licensing of the satellite spectrum, and you can identify people with dishes. But once the Internet starts to pass through you, it's pretty hard to do much about it. You can't afford to say, 'We won't develop a telephone system so people can't have the Internet.' You'll just rot as a country, you'll be left so far behind."
Yet this is hardly the reason for Murdoch's infatuation with dot-com billionaires like Jerry Yang of Yahoo! (which has less than 3 percent of News Corp.'s revenues and twice the market cap) and Masayoshi Son of Softbank, which owns 30 percent of Yahoo! and chunks of more than 100 other US-based Internet companies. To capture their spark he's turned to younger people, putting Mark Booth, the former chief of British Sky Broadcasting, in charge of epartners, his new media investment arm, and making his son, James, who headed News Corp.'s US Internet operations for the past two years, an executive vice president responsible for new media worldwide. Does he ever wish he was 27 again like his son and back to two newspapers? "With all this happening?" he asks, face brightening. "Yeah, I might understand it better or react faster to it." Almost immediately, though, he reconsiders. "No, all the experiences in publishing and public taste and reacting to it — it's been a long lifetime of professional experience, which is, I think, relevant to what's going on. We're still talking about mass tastes."
Although Murdoch Junior denies any responsibility for focusing his father on the Internet — "It wasn't me! It wasn't me!" he cries in mock horror — insiders say he's been very influential. Whether he can harness the Net as effectively as a Jerry Yang is another question. Suit and tie aside, he has the right accoutrements: Clark Kent eyeglasses, Silicon Alley headquarters outfitted with a '50s fiberglass rocker and Frank Gehry cardboard chairs, a staff of twentysomethings in T-shirts and jeans. But at times the younger Murdoch has seemed almost as leery of the Web as his father: In 1998, for example, he sat out the portal spree that saw Disney buy up Infoseek and NBC mate with Snap!
"We very purposefully stayed out of the fray," James maintains. "There's not going to be an infinite number of players in that category." Jon Richmond, the new president of News Digital Media, concurs. "It doesn't make much sense to aggregate a lot of eyeballs and pass them on immediately to somebody else. Our idea is to aggregate a lot of eyeballs and keep 'em," he says. "That being said, I wish I'd founded Yahoo!"
But while Yang and his partners were starting their search engine, News Corp. was foundering with Delphi. Murdoch's strategy ever since has been to wait for high-bandwidth cable-modem connections to open the Internet to assets like TV Guide and Fox's vast library of movies and TV shows. As a print medium, TV Guide has been losing ground, but an electronic version in broadband could morph into something Murdoch describes as "the mother of all portals." Web sites like Fox News and Fox Sports could offer immense troves of videos that would otherwise sit on the shelf.
This strategy has its fans: "Given their brand names and given their content, I think they have amazing advantages over the early movers," says Jessica Reif Cohen, broadcasting analyst at Merrill Lynch. "And they didn't have to spend the money to see how the market would develop." But Murdoch's new focus on dot-coms is an admission that the future won't wait: In order to be a player in broadband later, News Corp. needs to bulk up its Web presence now. And the AOL-Time Warner news is a reminder that Murdoch has to rely on others for distribution in the emerging world of broadband, just as he does in television.
News Corp. has made deals with Time Warner's Road Runner cable-modem service and with Excite@Home to carry Fox News and Fox Sports in broadband. But Time Warner and News Corp. have clashed in the past — most memorably in 1996, when Time Warner set off a feud by declining to carry Murdoch's new Fox News channel on its New York City cable systems. It was settled, but not before Time Warner's Ted Turner said he was looking forward to "squishing Rupert like a bug," News Corp. filed a $2 billion antitrust suit, Turner compared Murdoch to "the late Führer," and Murdoch's New York Post ran the page-one headline "Is Ted Turner Nuts?"
Murdoch's bid to extend his satellite armada to America came to a bad end three years ago. "We were too late in this country," Rupert admits. "We were so consumed with Sky." But elsewhere in the world — like Asia, with its huge potential for growth and its limited number of cable systems — satellites give him a fat pipe in the sky, and all the leverage that goes with it. With their enormous capacity, digital satellites can deliver interactive television, Internet services, movies on demand, anything broadband can offer. And Murdoch doesn't lack content, or the ability to get more.
Take the Healtheon/WebMD deal, which allows News Corp. to get around sky-high Internet valuations by trading ad space in its newspapers and broadcasting operations for a stake in the company. News Corp. will run WebMD columns in its newspapers, "health minutes" on its TV news shows, sports-medicine reports on its sports channels, nutrition and fitness shows on its family channels — an arrangement that beefs up its health coverage while building WebMD as a brand. Similar efforts are under way in other content areas Murdoch considers key, like business, travel, and education. "There are more than 60 million people today in higher education," he says. "There's going to be demand within 20 years for that to go to 180 or 200 million as three-quarters of the world lifts itself out of poverty. There's no way governments or private institutions can supply that in the traditional manner — it's going to have to go electronic. And we're looking at it very closely."
In the meantime, News Corp. is struggling to adapt its existing properties to the Web. In the UK, where the downmarket Sun features topless models on page three, the company recently launched page3.com, "Home of the Great British Babe." As Murdoch tells it, the site was started "almost as a joke," but the snickering stopped as soon as the response came in: "We had something like 12 million hits in three or four weeks. People sign up for it and want the chance to vote on the prettiest girl of the month. We're getting their names and so on and we'll get back to them." In Australia, where News Corp. publishes dozens of papers, the company is spinning out its highly lucrative classifieds in the form of job-recruitment and auction sites on the Web. "Recruitment advertising online is so powerful it's a real opportunity to move into career-management services, a whole end-to-end human-capital business," says James Murdoch. "The problem is that when you put it online, it doesn't necessarily stay attached to the newspaper. It's very interesting."
While he grapples with this stuff, epartners' Mark Booth serves as News Corp.'s antenna to the future. A longtime company operative, Booth was still running Sky last spring when Microsoft offered him a reported $25 million to head its global Net operations. Rupert Murdoch countered by giving Booth $300 million in venture capital and promising him a piece of the upside. As part of the deal, Murdoch and Softbank's Masayoshi Son — who once worked shoulder-to-shoulder with Booth on the launch of a News Corp./Softbank satellite venture in Japan — created a joint fund called eventures. Softbank has long been exporting the US-based Web firms in its portfolio to Japan; eventures was set up to incubate them in the UK, Australia, New Zealand, and India — in effect, to dot-com half the world.
Theoretically, Booth's job is not to further News Corp.'s strategic interests but simply to make investments that pay. But it's no accident that his deals have partnered the company with some of the hottest players on the Net, from Softbank to Equinix, an infrastructure outfit backed by Cisco Systems and Microsoft, to W.R. Hambrecht, the Web-savvy San Francisco investment bank. "What will a media company look like in 10 years?" asks Booth. "No one knows. But if we're successful, epartners will create both an institutional understanding of what's going on and also some really interesting new relationships."
"I think this is the most complicated, the most fundamental thing we've faced," Rupert Murdoch admits. "We've had lots of problems, but not like this. There is some fundamental change going on, and it raises difficult questions. How do we adapt to new media? We're searching, we're experimenting, and we have some fairly strong ideas — but no certainties." ■
Contributing editor Frank Rose wrote about Microsoft's adventures in televisionspace in Wired 6.04.