Hendricks is Still Shifting Time

Long before digital video recorders such as TiVo Inc.'s product shook up the TV industry, Discovery Communications Inc. CEO John Hendricks attempted time-shifted television with the defunct Your Choice TV. Hendricks is now quietly shopping some of the int
ellectual property he developed for Your Choice TV to MSOs as they prepare to market menus of on-demand content to subscribers — including free-on-demand, possibly from the likes of Discovery.
Multichannel News national editor Steve Donohue talked to Hendricks last week about the big picture for DCI and the cable industry. An edited transcript follows.

MCN: You pioneered the concept of time-shifted programming in the early '90s with Your Choice TV, but it never took off. Is it frustrating at all when you see a similar concept succeed with TiVo and other DVRs?

No. What initially caught our attention was the demand by consumers for control of individual videos. We saw the videocassette sales as quite enormous, especially for some of our original productions. That first wave of digital could offer semi video-on-demand or a near video-on-demand. So if you missed Saturday Night Live, it would be playing on its own channel for two or three days. We created Your Choice TV as kind of an experiment to test it. It tested well.

The challenge was that the big hits of the time, like Seinfeld, had very complicated rights. So most of us said, 'We'll wait until the technology would allow us to deliver file-serve television,' which all of us saw as the second wave of digital.

MCN: What do think of the free on-demand idea from Time Warner Cable and some other MSOs? Are you OK giving it out for free?

Yeah. We feel the priority of the cable industry right now is the stabilization and growth of digital. It's a pretty good idea for the cable operators, as they introduce file-serve television, to come out with an entry-level offering that has value. We're finding ways that Discovery can provide content for that entry-level free on-demand.

We've created a product that we call 'Choice 10 Discovery,' which is designed for the free on-demand platform, and it will carry commercials. That's the important thing. What we've explained to the operators is that we can't have the heavy users of Discovery migrating over to file-serve television and watching our content without commercials, because we would lose the viewership to some of our big-budget specials.

MCN: Where does Choice 10 come from?

What we wanted to do was provide a menu that was flexible, where the consumer would always know there are 10 great menus from Discovery [including kids, science, history and how-to fare]. They mirror a lot of our offerings. The consumers will readily use this product, because it's free. They'll get used to it, and then we can use that platform to promote additional premium offerings. If you like Choice 10 Discovery, you'll love access to the 300-title Discovery on-demand product that you might pay anywhere $6 to $8 dollars a month [for].

MCN: Where and when will we see Choice 10 Discovery?

I think you'll see it offered within six months. We've been a company that's always been responsive to the marketplace. You can't stand in the way of these technologies. You can't wish they would go away. Our approach is, it's going to happen. Let's work with the distributors and provide content early on, and seize the early shelf space. That's what we did when we launched our digital products when everybody thought we were crazy.

MCN: The menu-driven concept reminds me of one of the patents you received during the Your Choice years.

In 1991, we pioneered a lot of the thought around menu-driven television, so we have a lot of intellectual property patents that have been issued through the years that we can provide to all of our users as a license. If they work with us in providing our file-serve television content, they can benefit from our intellectual-property rights.

MCN: Are you having any luck in licensing that intellectual property?

Yeah. We're just using it in a friendly fashion. There are some people — I'm not going to name names — but they're trying to make a business of suing people, and trying to extract license rights. So we can provide a lot of distributors with some immunity because some of our patent rights predate some of the other players.

MCN: What will television look like five or 10 years from now?

From the plans that I've seen, operators are going to roll out file servers in their headends pretty dramatically, and so you may see almost the entire digital universe within 24 months being able to access programs on-demand.

I think that the [DVR] capacity of TiVo will be resident in the next generation of cable boxes. All of us programmers know what our great content is. In some ways, we may be able to push content down to a portion of a local file server that's sitting on the set-top of the home.

A lot of the weaker television product will fall victim to file-serve television, because people won't compromise their viewing — they'll just quickly go to a menu, and they'll check out what's available from free on-demand.

MCN: Is it inevitable that ad revenue will drop?

Our approach is to work with our advertisers and to bring them along into this universe. I think most of them feel there was a lost opportunity with some of the premium services. Imagine if there was an automotive firm that could've presented [HBO's] Band of Brothers
with limited or no commercial interruptions.

We've created something we call Discovery Sponsors Cinema. As Discovery negotiates file-server space with cable operators, we're also negotiating a portion of that space — up to two hours — that would be for our commercial partners. So you might have a five-minute little infomercial that's a test drive of a new automotive vehicle. Realistically, if consumers are paying for premium product, they will expect that the content will be delivered perhaps commercial-free, or with only one commercial interruption. But I think that even in a premium offering, we can have presenting sponsors.

MCN: Does consolidation make it more difficult to continue operating as a pure programming company?

We're facing consolidation on a number of fronts. In a way, it's difficult, because when you're dealing with consolidated distributors or consolidated advertisers, they have more leverage. But we found that once you can do a deal with them and work with them in partnership, you can get dramatic distribution quicker. You can get larger-volume advertising deals.

So far, I think we're OK with the environment, and that's why we see ourselves remaining a strong independent for a long time to come.

MCN: Is Discovery for sale?

No, and it's never been for sale. Over the years, there have been people who contacted us and talked to us, and we're always polite. We explore ways that we might work together.

MCN: Those talks with NBC last summer were never about selling the entire company?

No. We had exploratory conversations that looked across a lot of our divisions to see what the possibilities were, and what came to fruition was the Saturday-morning block. Our shareholders are very comfortable with our growth trajectory over the next decade, and see no reason to consolidate or acquire.

What tends to be frustrating is that generally, as we look at things, we look to be an acquirer. Because we don't comment on the rumors, a lot of times people just assume that we would be the entity that would be acquired, and that's just incorrect.

MCN: So if anything, we should look for Discovery to do deals similar to the Discovery Civilization joint venture you just did with The New York Times Co.?

Very, very selectively. This is something that you're not going to see even on an annual basis.

MCN: What did you learn from the work that McKinsey & Co. did for you last year?

They helped us discover the revenue potential of online, and we saw early on that a lot of the projected revenue that most people were thinking about wasn't going to materialize as quickly. So we quickly shut down or reduced our staff effort in that area, and reduced our investment losses. They've been an ally in looking throughout the organization for efficiency, and making sure that we're just utilizing our assets to the maximum extent.

MCN: Are you concerned about a leadership drain with the exit of [Discovery U.S. president] Johnathan Rodgers and Mike and Kathy Quattrone [the GMs of Discovery Channel and Discovery Health Channel, respectively]?

No, not at all. Discovery now has 4,000 employees, and if you look at the top executives, I think we have a lot of bench strength. Johnathan was a terrific asset for us. Given Johnathan's interests, we knew that he wasn't going to be here for decades.

We're very confident in our leadership. We do have a vacancy that Judith McHale is looking to fill, and we think, again, we'll attract someone that's going to make a tremendous contribution over the next five to 10 years.

MCN: You have a lot going on outside of Discovery, including the [new pro women's soccer league] WUSA.

My wife and I enjoy that, so we have a weekend activity, our investment in the WUSA. It's been an investment, too, that I think has worked to the advantage of the cable investors [Cox Communications Inc., Time Warner Cable and Comcast Corp.]. That's just been an enjoyable asset. It's fun to be part of a professional league without the expense of going out and buying the Washington Redskins.

MCN: But do you spend less time on day-to-day Discovery operations than you did a couple of years ago?

Not really. I'm here practically every day, and I meet regularly with my direct reports — Judith McHale for operations and Greg Durig for finance. And then I chair our content board for Discovery, which looks principally for content development for all of the networks worldwide.

MCN: How do you think the cable upfront will do this year, and how do you think Discovery will do, in particular?

I think we'll do fine. We've seen some of the people who try to forecast and say that cable may be up 4 to 6 percent, and I think that's something we're comfortable with. We may be pleasantly surprised that it's more than that. And I think Discovery will have a fair share of an increase over last year.