Digital Deal:
IBM gets credibility, Cameron gets $20 mil.

The scene is pure Hollywood. At one of Beverly Hills's toniest hotels, journalists mill around as pasta in cream sauce and spicy chicken legs bubble in catering trays. Perched in a director's chair in black leather pants and a chartreuse jacket is IBM's Lucie Fjeldstad; beside her is the more casually dressed James Cameron, director of several blockbuster movies.

It's not one of a hundred movie release parties. Instead, it's more of a coming-out party for this town's latest - and oddest - couple. Fjeldstad, IBM's general manager and vice president for multimedia, is now a partner with Cameron, who's best known as writer and director of the two Terminator mega-pics that catapulted Arnold Schwarzenegger into Hollywood's box office stratosphere.

Also adorning a specially constructed stage is Stan Winston, creator of Arnold's metallic prosthetics in Terminator 2: Judgement Day (T-2), and Scott Ross, former head of George Lucas's premier special-effects house, Industrial Light & Magic (ILM). Together, this formidable pool of talent has started a new computer-based effects company they call Digital Domain.

This schmooze-debut last February has everyone wondering what would draw IBM, the financially ailing computer behemoth, into such a seemingly out-of-the-way and risky business? For a corporation that's made its reputation serving other corporations, making movies is a surprising interest.

Fielding questions from her director's chair, Fjeldstad confidently assures everyone that her new venture makes sense. Reportedly at her say-so, Big Blue plunked down $20 million on Digital Domain, with the hope that she'll make back that and much more in the next five years.

Maybe so. Digital Domain, says a smiling Fjeldstad, is where Hollywood is really going to go digital. Already, the entire movie-making process, from scriptwriting to editing, is going though a gut-wrenching transformation as jarring as when the talkies appeared. What was once a paper and photo-chemical process is now being invaded by people wielding PowerBooks and Silicon Graphics Irises. While movies are still shot on film, increasing portions are now directly transferred to disk drives. There, eye-popping computer-generated effects are added. Then the entire thing is edited down on the computer screen. The finished film leaves the digital realm only for processing at the photo lab, where thousands of prints are made - untouched by human hands and damn near the same quality as the original.

What IBM wants is a piece of each step in this new process. Digital Domain's aim is to roll out a host of new software applications for the special-effects business and beyond. IBM will have first crack at the software, plus it will own half of any characters and stories Cameron and Winston develop with the company - from futuristic warriors to friendly aliens.

"We can start with a special-effects, digital-production studio and make money on characters and software," says Fjeldstad, who will remain at IBM and serve as a director of Digital Domain. "That will allow us to build the tools for Digital Domain in the future. We're going to lead the next generation of computer platforms and applications."

Cameron, who towers over everyone at six foot two, leans forward from his chair next to Fjeldstad, eager to explain why he's signed on. The man who just inked a twelve-picture deal with 20th Century Fox for $500 million is widely considered one of the most bankable talents in Hollywood. Each of his films is an effects-laden extravaganza that appeals to audiences worldwide. Cameron is so comfortable with what microchips can do that his last film starred one: the T-1000 chrome cop from the future. Terminator 2 ate up $17 million in effects alone, a third of that on computers.

Now Cameron isn't going to have to share that cash outlay with anyone else. Moreover, he's become something of a crusader, intent on dragging every other filmmaker into the digital world with his new company. And his clipped voice makes it very, very clear: Digital Domain plans to dominate the $100-million annual effects market.

"One, we have to get a very large share of the market today," he says, ticking each finger with an unfolding strategy. "Two, I believe we can influence the size of the market by getting techno-averse filmmakers involved, where it's no longer just digital post-production and live action. A larger percentage of films will be digital. If there's a boom [microphone] in the shot, take it out; or hang the actors from wires, and we'll remove those later in the computer. Three, we want to create a reliable revenue stream - there's the tools. A studio will come to us to create a character, or we can do it ourselves. We can do that during our down time."

Even if there isn't an entire shelf of Digital Domain tools right off the bat, Cameron and IBM could be rolling in cash from Cameron's first slate of pictures. T-2 has generated nearly $1 billion worth of business worldwide, from tickets to videogames to kid's action figures. Last Christmas alone, according to Larry Kasanoff, the street-wise president of Cameron's Lightstorm Entertainment, $25 million worth of videogames were sold. "It becomes an industry and extends beyond the life of the film," he says. Two years after the picture's release, there are seven videogames and "we're still approving T-2 toys."

A Mouthful of Content

The night before the hotel bash, everyone's relaxing over dinner in the back room of Il Giardino, one of Beverly Hills's more elegant Italian eateries. The lengthy contracts were signed in the past week and it's time to mull this new venture over grilled salmon and warm salads.

With this much energy in the room, the conversation accelerates with each glass of Pinot Grigio. Fjeldstad dives into the odd tale that's brought her to this table. IBM gets more than a crack at adding a little Hollywood glitz to its software tools, she explains. It's now going to have a stake in the content. After studying the mouthful of content Sony bought when it ponied up $3.4 billion for Columbia Pictures, Fjeldstad and her lieutenant, Kathleen Earley, decided that's where IBM should be heading.

At first, the plan was for a digital production studio where customers would go to have movies or other projects converted onto Exabyte tape. Simultaneously, her group was designing a server-based network architecture for multimedia. Finally, she sold Corporate on software tools to interact with both ventures.

As could be expected, Fjeldstad and Earley's conclusion to link up with partners in Hollywood appears way out in front of the blue-suit mentality at IBM's Armonk, New York headquarters.

Fjeldstad waves a hand around the table. "You create a company from the lunatic fringe. I guess we're IBM's lunatics," she says. "The collaborative effort of all three here was essential. We're business people and we looked to the creative community."

Not all of Digital Domain is chummy. A culture clash between the engineering-bred IBM and the concept-is-worth-a-million-bucks Hollywood was predictable when it came time to draw up Digital Domain's corporate papers. Where everyone had been talking the same language, suddenly there were two very fundamentally different worlds. "When we said 'the creator,' we were talking about the person who came up with the idea," recalls Ross. "When IBM said 'the creator,' it was talking about the people executing the idea.'' Taking a slow breath, he adds, "It took a period of time for us to recognize the differences and we are now very sensitive about it. We're very sensitive about describing things.'' For its part, IBM declined to comment on the process.

Guessing there's some skepticism, Kathleen Earley tries putting a more business-like spin on the venture. "We wanted to push IBM into the next generation of applications - high-resolution moving images," she argues. "In the 1980s, it was data and text. The next generation of platforms depends on moving images, and it's going to fundamentally change processing."

For the others at the table - the artists - there's just the right mix of ego and vision to believe that the Fjeldstad-Earley take on the multimedia and digital revolution is real. There's also a touch of smarts, because none of them is putting up their own cash for Digital Domain. It's a marvelous marriage of intentions. Cameron and Winston had been talking about putting together their own special-effects studio last summer. And Winston even started a small computer-graphics shop just to handle Jurassic Park, which he then folded into Digital Domain.

Pointing to the IBM pair at either ends of the table, Cameron says, "They'd already looked at the digital studio and they needed an understanding of the content. I said I really didn't want to be in the effects business. But after T-2, I knew I already was." Now, he adds shrewdly, "IBM gets an R&D lab and revenues."

Winston, who's sitting next to Ross, worked with Cameron on and won an Oscar for Alien. He simply wants more control of his creatures. Typically, he creates something like the lumbering dinosaurs in this summer's Jurassic Park and then sees the computer-graphic versions of his designs animated by Industrial Light & Magic. "There's pride in ownership," he says.

His handiwork, though transparent on the screen, was integral to T-2's success. When the T-1000's head gets blown off by a shotgun blast from Arnold in a chase, that's Winston's lifelike puppet taking the pellets. The scene seamlessly blends into ILM's computer-graphic images, which make the head whole again. Even T-2's finale relies on Winston's craft. Similar stunts are going to make dinosaurs come to life in Jurassic Park.

Looking at his new partners, Ross lets out a yelp. "In my wildest dreams, I never thought I'd have this much expertise," he says. "I've died and gone to heaven. I have one of the largest technology companies in the world as a partner. It's like a candy shop."

Blue Blood?

Not much of what IBM is offering by way of hardware or software, though, appeals to Ross's sweet tooth. At Lightstorm's Santa Monica, California offices, Ross is kneeling before an Apple PowerBook 160, screwdriver in hand, loading a fax/modem, optical character reader software, and some RAM he had laying around. Over his head is a Japanese poster for Cameron's The Abyss.

Day-to-day running of Digital Domain is up to Ross, and he's under no obligation to buy any IBM hardware. In fact, he's already taken a guided tour of Silicon Graphics's latest gear with its president, Ed McCracken. Whatever technical help he gets from IBM is going to be pretty narrow at first.

This is the third go-round for Ross. In the early 1980s, he turned San Francisco's One Pass Video into a successful production company. After moving to San Rafael's ILM in 1988, he tripled the size of the staff to 300 and turned it from a break-even operation to "extremely profitable."

His friendship with Cameron goes back to 1988 and The Abyss - Cameron used ILM for the digitally generated water creature that befriends the divers. But Ross's ties with IBM are even more strange. Two years ago, he ran into Fjeldstad and Earley at an IBM-sponsored focus group in Los Angeles. Sitting next to horror-meister director Wes Craven in a roomful of TV writers, Ross listened as Earley outlined IBM's ability to deliver interactive TV. Intrigued, and frustrated with his work at ILM, he called her a year later to get an update. He'd be in New York, why not, they suggested, visit White Plains?

Ross almost didn't make it. First, he didn't like the idea of working for the company. The son of war protesters from the 1960s and an itinerant sax player, Ross had second thoughts. He purposely missed a car IBM sent to whisk him off to its campus 40 minutes away. He called Earley, apologizing, feigning an oncoming cold. Earley wouldn't listen and simply sent another car. Upon his arrival, Ross couldn't face the meeting and started back to the car, only to see it pull away.

"IBM meant the bastion of Corporate America, white shirts, blue suits, black ties," he says, seated in a half-lotus position in his office chair. "The most powerful American corporation. There were lots of reasons I didn't want to go into the building." But after four hours with Fjeldstad and Earley in a non-descript meeting room, hearing their vision for digital production tools, he changed his mind. "They were wonderful," says Ross, genuinely astonished. "I left feeling this wasn't so bad."

Two weeks later, he resigned from ILM. His success there was also his frustration. After gaining 75 percent of the special-effects market, Ross wanted to create products. He still slaps his forehead talking about the morph phenomenon. ILM created morphing software for Ron Howard's medieval fantasy, Willow, to transform a goat into a woman. But it missed the market opportunity, and now someone else's morphing program sells off-the-shelf for $95. Digital Domain will not make those kind of mistakes. (Fjeldstad later said ruefully, "If I could have a dime for every time I see morphing on TV, I'd be a millionaire.")

But before the first non-IBM dime comes into Digital Domain, Ross has to start cranking out effects for TV commercials, films, and theme-park rides. What Ross calls the digital asset - high-end clip art, animation, and modeling, paint, and rendering tools - will follow. An even bigger component of future revenues, however, is dependent on Cameron's and Winston's fertile imaginations for characters. Those will be marketed on their own. Ross has his eyes set on digital characters for multimedia titles, TV programming, and films.

If there are any worries, Ross just has to recall his fumbling visit to IBM. "I'd be n up in the morning. [But] I'm convinced that IBM will let Stan, Jim, and me run the company," he says. "It's in writing. It's in perpetuity. That's why we spent so much money on lawyers."

IBM's arrival in the effects biz is just about as welcome by the Hollywood townsfolk as a Martian spaceship landing in Grovers Mill, New Jersey. "They're going to be an immediate player with that talent at the top," grumbles John Hughes, president of Rhythm & Hues Studio, a top effects company. "It's another major competitor." Indeed, every movie studio is getting into the act with its own Silicon Graphics-packed facilities. Meanwhile, computers are getting cheaper, so someone can do passable tricks on a low-end workstation in the living room.

As it is, "the effects business is pretty shitty," adds Jim Morris, general manager of ILM. "A two-to-three-percent net after taxes means a very good year." And there are doubts as to whether Cameron can make the pie big enough for everyone by spreading the gospel of digital production to the rest of the Directors Guild. Even with Cameron's own films, Morris figures Digital Domain will have to scramble to keep busy. Another worry may simply be that both Cameron and Winston will be stretched too thin doing their own projects to bother counseling newcomers to digital filmmaking.

Pausing for a moment, Morris sees a parallel with his own boss, George Lucas, who pioneered computer use in films and created ILM in the process. Digital Domain "is riding on Jim's shoulders," he remarks. "It's not too different from how ILM started."