Defense Contractors Have a New Ground Zero: Hollywood

Desperate for new markets, the industry thinks Tinseltown is the perfect target for its high-tech wizardry

Actors and directors film the gritty NBC cop drama Third Watch in Brooklyn, N.Y. But the show is edited in Hollywood on the Warner Bros.' lot -- 3,000 miles away. It seems like that ought to make reviewing and cutting film from the day's shoot a bit difficult. But actually, it's not a problem: NBC instantaneously ships a digital version of the film back to the West Coast lot on a secure broadband network, which can transfer hours of footage converted to data files in a matter of hours. That's a big improvement over the two-plus days it takes these film dailies to reach the West Coast via more traditional methods -- FedEx and mail courier.

Even better, the system allows editors and producers on both coasts to hold real-time editing sessions using videoconferencing. That saves time, money, and hassles. "You can't imagine how it has changed us," says Brooke Kelly, the show's executive producer. Who provides this wondrous system? It's no sexy new dot-com, but Picture PipeLine, a spin-off of old-school defense giant TRW (TRW ).

Yes, a defense contractor. It certainly isn't the first time that Pentagon suppliers have spun off new businesses based on their research and development for sophisticated defense technology. Most have failed (with one notable exception, though: Hughes Electronics, which has built a commercial satellite business valued at around $40 billion). But as pressures keep mounting on the federal defense budget, success outside the defense arena could prove essential to the industry's ability to improve profits.


  That has made Hollywood ground zero for companies like TRW and others. They're looking to sell studios the technology already developed for the Defense Dept. Tinseltown and the Pentagon have a lot in common: Both think of their intellectual property as top-secret. Indeed, the primary factor that has prevented the movie biz from embracing digital content is fear of piracy and uncontrolled distribution of their products. But control and security are two things that defense companies have plenty of experience delivering.

The old stalwarts can no longer afford to work only for the Defense Dept. For fiscal 2001, defense spending is set at 2.9% of gross domestic product, down from 5.9% at the end of the Reagan years. What's different this time around is that defense companies are finally learning what most high-tech companies figured out early on: Having the technology is important, but so are having the right price and the right connections.

Take Picture PipeLine. According to company President Tom Gritzmacher, its partnership with Warner Bros. has been critical to getting the company off the ground. Originally, Picture PipeLine pitched ultrafast transfer speeds of 150 megabytes per second, about 100 times faster than what was available on a T1 data line. The problem was, such systems can be very expensive -- close to $100,000 a month, compared to $3,500 a month for T1. So the company offered a lower price for a slower delivery rate but kept the guarantee of secure data delivery. That snagged Warner Bros. as a key customer and taught Picture PipeLine a lesson about the difference between negotiating a deal in the private sector, vs. bidding on a government contract.


  Boeing (BA ) also has several entertainment spin-offs on the move. On Mar. 18, Boeing's Digital Cinema successfully beamed -- via satellite -- the premiere of the Miramax film SpyKids to the new Universal Adventure theme park in Southern California. Later this year, the company will launch another product, Boeing Connexion, which will give commercial air passengers access to the Internet, e-mail, and real-time television news. Boeing says the potential market for Digital Cinema is $1 billion over the next five years. For Connexion, the company estimates that the market will be worth $70 billion over the next 10 years. That's a pretty penny, even for Boeing, which pulled in $14.7 billion in revenue in 2000.

Defense companies are also hiring executives outside the industry for expertise on getting these side businesses jump-started. In January, TRW brought in Charlie Mitchell, a sales and marketing point man. Mitchell was previously vice-president for sales at 3 Point Digital, a Burbank (Calif.) software and technology company serving the TV industry.

In a softening job market for high tech, the defense companies' timing couldn't be better. Although the evidence is still anecdotal, defense and aerospace companies say they're seeing software engineers returning in droves. Lockheed Martin (LMT ) says resume volume at its recruiting Web site has doubled since January.


  Attendance at job fairs has soared, especially in Northern California and in the technology corridor of Northern Virginia, outside Washington, D.C., according to Tracy Staley, a recruiting manager at Lockheed Martin. "We are seeing people who have left us come back, and we are seeing new folks from dot-coms and other high-tech companies come to see us," she says.

But some analysts remain skeptical that commercial applications will ever play a large part in traditional defense companies' bottom line. They point to numerous failed efforts to morph military expertise into commercial might. In the 1970s, Boeing made a big push into products such as shower compartments for modular homes. The venture was a notorious flop. Even as recently as the early '90s, when the Clinton Administration made dual uses of military technologies a "cornerstone" of its defense reinvestment and conversion initiative, commercial applications failed to take off.

By 1994, the Clintonites were forced to cut $265 million from that program because Republican lawmakers didn't believe the money was going to good use. Most experts still feel that way. "I've seen this movie three times before. The reality is that most contractors don't know how to price or market products in the commercial world," warns Jon Kutler, the president of defense-analysis company Quarterdeck Investment Partners.

Even the defense contractors acknowledge it won't be easy. After all, as Norm Augustine, the former chairman of Lockheed Martin, once noted: The industry's record of defense diversification is "unblemished by success." But this time around just might be different. In Hollywood, defense companies might have found the closest thing to their old cronies at the Pentagon: massive budgets and even bigger egos.

By Jane Black in New York

Edited by Alex Salkever

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