By Jon Fortt
May 1, 2007

Tech titan Hewlett-Packard (HPQ) has an ambitious plan to get a piece of the $35 billion U.S. consumers spend each year on TV and movies. The company wants to help studios automate the process of digitally archiving video and then help retailers sell more of that digital video onto iPods, phones, PCs, TVs, and any other platform that comes along.

I spent several weeks talking to HP executives and their partners about the plan, and I’ve got a more in-depth story about the company’s Hollywood strategy in the issue of Business 2.0 that’s hitting newsstands now. My conclusion: There’s no way it’ll be an overnight success (and HP doesn’t expect it to be). But HP’s overall vision of a digital media future makes a lot of sense.

At the center of that strategy is a secret facility outside Sacramento where HP has placed its first big bet on the future of video distribution. (I call it secret because I was the first reporter HP let in, and some of the company’s own employees haven’t been allowed to see it yet. HP has requested that I not spill the beans on exactly what city the facility is in.) At the facility, set to go live this summer, HP can crank out DVDs on demand. Order Karate Kid 2 on a website, and rather than send the order to a warehouse where the movie’s being stored on a shelf, the system will place an order in HP’s on-demand facility where a professional-quality DVD will be burned especially for you.

The most obvious benefit under this system would go to retailers, who would no longer need massive warehouses to store movies. But longer-term, the system could allow retailers to sell the “long tail” of video content that’s too obscure to give shelf space in your local Wal-Mart. (I’d love to mix and match old episodes of Quantum Leap, for instance.)

Wal-Mart (WMT), the world’s top seller of DVDs, happens to be the first customer for HP’s on-demand service. Customers ordering through the DVD site HP built for Wal-Mart will be able to access the on-demand facility near Sacramento. (The Wal-Mart site itself needs work, and both companies assured me they’re continuing to upgrade it.)

“We’re quite optimistic about it – the amount of untapped content that could be made available is pretty substantial,” said Kevin Swint, Wal-Mart’s divisional merchandise manager for digital media. “Long tail businesses are not easy to develop, but there’s plenty of opportunity there.”

But HP plans to expand the initiative beyond Wal-Mart. Using a model akin to its Snapfish digital photography service, which handles online services for Wal-Mart, Walgreen, Costco and other huge retailers, HP wants to be the force behind the scenes that’s powering online DVD stores for all sorts of big companies. Vyomesh Joshi, the HP executive vice president who leads the imaging and printing division, told me that Snapfish handles 50 percent of all online photo printing in the U.S. through the combination of its branded service and the white-label services it runs for Wal-Mart and others.

“I think what we saw was the same thing will happen to the video industry that happened to still images,” Joshi told me. But he expects it will take a while for the bet to pay off. “In all these new businesses you have to have patience.”

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