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Rolling in the Deep: Piracy might get the headlines, but industry problems—and solutions—run much deeper

Shortly after the rude arrival of Napster, the pioneering peer-to-peer file-sharing site, in 1999, this uninvited guest was eating the music industry’s lunch and eyeing its supper too.  Within a year, Napster could offer Madonna’s single, “Music,” even before its commercial release, and by 2001 it had more than 26 million users worldwide.  Adverse court rulings forced Napster’s bankruptcy that same year, but the sophisticated piracy it heralded would take a huge bite from the music industry, which now takes in less than half of its 1999 revenues and supports about half as many direct employees—currently less than 10,000. The U.S. movie industry is scrambling to avoid a similar fate.  While it lost the recent high-profile dustup over proposed legislation—the Stop Online Piracy Act (SOPA) and the Protect Intellectual Property Act (PIPA)—aimed at enlisting the U.S. government in cracking down on rogue foreign sites offering downloadable movies, that defeat also obscured the industry’s myriad forays into devising market-based solutions.  These are less about thwarting pirates than about meeting customers’ demand for convenience and affordability, the absence of which is the pirates’ real opening.

The industry’s new Holy Grail is the ability to offer premium digital content that can be purchased once and is viewable at any time on any screen, notes Paul Jahn, a partner in the Licensing and Technology Transactions practice in Morrison & Foerster’s San Francisco office.  Consumers would, in effect, be buying a digital license to stream content for viewing on a wide range of registered devices—similar to iTunes’ arrangement.  The library of digital content owned by the consumer would reside in the cloud, in a “digital locker” to which consumers could get near-immediate access.  For consumers, streaming gets around the problem of limited disk space and protects against digital obsolescence when devices change; providers like streaming content because it is significantly harder to pirate compared to downloads.

Numerous industry initiatives are aiming for this goal.  One of the most popular is UltraViolet, which is backed by the roughly 70 consumer electronics manufacturers, technology providers, and studios of the Digital Entertainment Content Ecosystem (or DECE).  “The idea is to enable the consumer to make a digital purchase with the same level of confidence as a physical purchase.  It will be there when they want, it will be there for many years, it will be available across myriad devices,” explains John Batter, CEO of M-GO, the consumer-facing brand of MediaNavi, the digital distribution joint venture formed by Technicolor and DreamWorks Animation.  As part of UltraViolet, M-GO has its own digital locker system—as do Disney, Amazon, and many others—and its own library of content that will not be offered via UltraViolet.  (Apple, naturally, has its own ecosystem.)

Delineating lines of cooperation and competition among a complex constellation of players—hardware, software, content, and cloud services providers—is far more about deal structuring than about copyright issues, explains Jahn, who helped DreamWorks structure the deal that created M-GO.  “There are a lot of questions about how you structure the economics of the distribution—how do you incentivize the studios to participate, to make it studio friendly, who gets what margins—so that it is a win-win for everyone to participate,” Jahn says.

“ The idea is to enable the consumer to make a digital purchase with the same confidence as a physical purchase.”
—John Batter, M-GO

The new platforms have triggered a complex dance within the industry, with players striving to forge crucial partnerships without ceding too much revenue potential.  The problem for studios is that the purchase models (both physical and electronic) garner far more revenue per view than do rentals or subscription services, but increasingly, consumers prefer the latter.  The UltraViolet platform, which is essentially a digital rights management authentication system, is something of a hybrid, giving users unlimited online access to movies once they’ve purchased a DVD.

Retailers also face compressed margins, and to date few retailers have signed on to UltraViolet.  Even the UK retailer Tesco, a DECE consortium member, has not yet supported the platform, instead throwing its lot in with a digital locker devised by its subsidiary Blinkbox.  Amazon, the largest retailer yet, joined in January, about the same time that Netflix pulled out.  At the annual Consumer Electronics Show, the DECE said it has 750,000 UltraViolet accounts in U.S. households since launching in October and anticipated “exponential” growth even though only 100 titles are expected to be released in this year, adding to the 19 that became available in 2011.

That low number illustrates the challenge in finding mutually felicitous business arrangements.  Digital distribution has disrupted traditional models in a number of ways, says Russell Weiss, chair of Morrison & Foerster’s Entertainment and Media Group.  “There are a lot of moving parts, and you have to be able to think through them and understand how one part is going to interact with the others.”  Technology has empowered consumers, who are ever more demanding (witness how quickly illegal streaming services sprang up to serve fans of basketball’s New York Knicks in the monthlong standoff between Time Warner Cable and Madison Square Garden).  And the proliferation of devices has blurred the lines of distribution.  Software companies are moving into manufacturing, and consumer electronics makers will also become content providers.  Both Apple and Google will soon offer smart TV sets that search the Web for content.  Then there is Verizon—primarily a phone company—which is teaming up with Redbox, the DVD rental kiosk operator (owned by Coinstar Inc.), to offer Web streaming.  Like cable companies with their triple plays, more companies will try to offer multiple and bundled services.

“Distributors must secure broad rights that permit the digital distribution of content across a wide array of devices,” says Weiss.  “The negotiations between distributors and content providers always involve a fight over defining the scope of the specific digital distribution rights being granted.”

The survival struggle comes amidst a markedly shrinking market.  From a peak of $14.1 billion in 2004, U.S. consumer purchasing of video content—both physical and digital—has dropped nearly 30 percent to less than $10 billion last year.  The IHS Screen Digest projects this could drop another $2 billion by 2015.  The entertainment industry has not always known how to play nice in the sandbox.  Now that box is shrinking, just as cooperation is more necessary than ever.

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