Hollywood stages piracy showdown

In an ironic twist worthy of a Hollywood screenplay, the source of their recent conflict is the precise reason for the success behind their original collaboration: digital technology.

"At least one high-tech executive has described illegal pirate content as a 'killer application' that will drive consumer demand for broadband," Eisner, chief executive of Walt Disney, said in testimony before a Senate hearing on copyright violations earlier this year. "Unfortunately, other high-tech companies have simply lectured us that they have no obligation to help solve what they describe as 'our problem.'"

Eisner didn't name Jobs or his companies--Apple Computer and Pixar Animation--but he didn't need to. Disney's recent actions to protect digital content, joined by other major studios on Capitol Hill and elsewhere, are tantamount to a broadside against much of the computing industry in general. The issue will begin a key test Thursday when the Federal Communications Commission meets to discuss digital broadcast copy protection.

Hollywood's love-hate relationship with technology illustrates the resolve of movie studios to avoid being "Napsterized," as some call it--shorthand for the impact that digital file-sharing has had on the music industry, which has attributed steep declines in sales to the phenomenon. As high-tech companies increasingly stake their futures on digital entertainment, the movie business is mustering all its strength to control the use and distribution of its work.

At the same time, the studios recognize the lucrative possibilities of interactive programming and other enhanced video services. They must be careful not to cut themselves out of any new business resulting from the next generation of TV set-top boxes, high-definition programming, digital cable systems and wireless networking systems being developed as television, computing and entertainment increasingly converge in the home.

Although piracy has existed for years, studio executives have viewed it with rising alarm as the development of such convergence products has gained momentum. As a result, they have embarked on a precarious balancing act that could define the future of all three industries, multibillion-dollar markets and anyone who owns a TV set or a computer.

"There are studio executives who would like to license to us but are not allowed to by their corporate parents," said Jonathan Taplin, CEO of Intertainer, an Internet video-on-demand service that has content-licensing agreements with some Hollywood studios. "It's a very dicey era we're in. The five studios plan to do their own business, and they don't necessarily treat me the same way they treat themselves."

Until recently, the entertainment industry has essentially favored a two-pronged approach to the digital revolution: backing technologies that prevent piracy and litigating against software and hardware developers it considers uncooperative in that effort. Today, Hollywood is putting more weight behind a third option--legislation--which is taking the issue to a new level.

The most controversial proposal is a bill authored by Sen. Ernest "Fritz" Hollings, D-S.C., and heavily endorsed by media companies such as Disney, which would require hardware makers to include technology that blocks the illegal copying of copyrighted works. The legislation puts the onus on all parties, from consumer groups to record labels, to create the solutions.

"It is a legitimate fear by content holders that what they're licensing either doesn't compensate them correctly or is a type of technology where they don't anticipate the ramifications," said Sean Ryan, chief executive of Listen.com, which is the first start-up to strike licensing deals with all five major record labels.

High-tech companies argue vociferously against the bill, maintaining that the government should not dictate product innovation. Many executives in the industry believe that once a program is recorded, consumers should be able to view it anywhere in his or her domain, whether on a DVD player, a PC or any other device.

"This is the same thinking I heard from the Warner Bros. Records folks about Napster and digital downloading in the '90s. Fighting future advances to preserve the past's business models is futile," said Jim Moloshok, senior vice president at Yahoo and himself a former Warner Bros. executive. "It's like folks in 1940s radio saying to the public, 'If TV catches on, some day the public will have to pay $250 a month to hear their dramas and comedies on the radio!'"

Andy Wolfe is already feeling Hollywood's wrath. He is chief technology officer of Sonicblue, the producer of Replay TV, which is being sued by major film studios and television networks alleging that the company's set-top recorders allow consumers to make illegal copies and share them on broadband connections.

"The appropriate step is not to take technology wholesale away from customers, but to create new businesses around content with digital rights management and to use legal measures against large-scale copyright violators," Wolfe said. "Hollywood has not chosen the tactic of trying to understand this technology but maybe delay it for a decade while they change the relationships to allow existing distributors of content to profit from digital distribution."

If that's true, the studios may be running out of time. As they convert their services to digital transmissions, cable and satellite companies are opening the door for TV networks to deliver video on demand and interactive programs through more powerful set-top boxes. Many companies are installing Replay-like features in these devices that allow viewers to skip commercials while getting more information through the Internet.

So far, the studios have managed to keep illegal use of these technologies largely under control, in no small part because of limitations in technologies now in use. But all that could change with widely anticipated high-definition television broadcasts, which the Federal Communications Commission is pushing all sides to adopt for the mass market.

Studios and other media companies worry that people will figure out a way to record digital programming on a wide scale and post popular shows on peer-to-peer networks where they can be shared for free. Their fears are warranted.

In May, bootlegged versions of "Star Wars: Attack of the Clones" began appearing on the Internet within hours of its premiere at theaters. Though the copies were of poor quality and required hours to download, high-definition technology offers pristine images and realistic sound that could take far less time to transfer on the Net if compressed in smaller files.

"If you want to make a library of movies on HBO and write them onto a DVD, the studios agreed that's a legitimate thing to do and technology should allow you to do that," said Chris Cookson, the chief technology officer at Warner Bros. "But that doesn't allow you to take it and re-transmit it outside the household."

Pixar, which co-produces all of the films it releases with Disney, might be expected to show concern over piracy as well. But the creator of such movies as "Toy Story" and "Monsters, Inc." considers digital technology its bedrock. While Jobs hasn't publicly denounced anti-piracy bills, he hasn't wholeheartedly joined Disney's fight, either.

On the contrary, earlier this year Apple ran a "Rip. Mix. Burn." campaign to help boost anemic computer sales, and its new iPod digital-audio players, which support any MP3 file, come with limited piracy protections and a 20GB hard drive, large enough to store a small library of movies.

"There are so many interests and so many competing rights," said Lawrence Blanford, CEO of Philips Consumer Electronics Company, which produces DVD players and recorders. "There's no perfect answer."

The studios have joined with some high-tech companies to form the Broadcast Protection Discussion Group, which has proposed guidelines that would force digital television manufacturers to include technology that encrypts their transmissions as soon as a "broadcast flag" signal is received by a DTV set. This encrypted signal would allow programs to be recorded but prevent them from being distributed on the Internet.

Influential members of the House and Senate have written letters urging FCC chairman Michael Powell to draft regulations requiring these broadcast flags. But the proposal has been angrily denounced by major computing and consumer electronics companies, which contend that the Broadcast Protection Discussion Group is controlled by the entertainment industry.

"It's not our job to convince Hollywood that it's not a threat," Sonicblue's Wolfe said of digital recording and distribution. "It's our job to convince them it's not illegal. What we've done is try to convince Hollywood it's a new channel for commerce and to profit from it rather than be afraid of it."

Even if encryption technologies are required by law, their endurance remains an open question. History has shown repeatedly that the more the industry tries to develop ways to thwart piracy, the faster people develop ways around the barriers. That has certainly been the experience of the music industry.

Nevertheless, the technology companies are fully aware that Hollywood has the upper hand in the debate, as they have with all others. Veterans of both the PC and the TV industries note that their products are only as valuable as the shows they can bring to the home.

"We have to start with the premise that consumer electronics is dependent on content," said Jeff Joseph, a spokesman for the Consumer Electronics Association, a lobbying group. "DVDs or CDs or HDTVs are far more compelling with quality content to view. That dynamic immediately creates an imbalance in its relationships.