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Television feeling heat of illegal copying

Apr 9, 2001  •  Post A Comment

The illegal downloading of copyrighted content that has plagued the recorded music industry is about to become television’s problem and potential economic pitfall.
Efforts by television producers and distributors to secure economic content safeguards in a digital age are intensifying, even though they have become lost in a maze of legal, legislative, technical and regulatory skirmishes. The bottom line: How much money will copyright holders be allowed to make once their content is widely distributed over various digital broadband platforms?
“This isn’t just about music anymore. It is about television, film, books, magazines and every form of copyright content, the use of which should have a fee attached to it regardless of the distribution platform,” said Richard Parsons, co-chief operating officer of AOL Time Warner.
Copyright protection for intellectual property can’t come fast enough, given the rapid flow of interactive digital technology into the mass market.
Experts say the future belongs to content companies that can protect, exploit and collect royalties by licensing their intellectual properties for distribution on all platforms. But with trillions of dollars worth of content on the line and few if any enforceable safeguards in place, content players appear increasingly at odds over whether they can avoid an all-out siege by digital pirates who are faster on the technological draw in giving consumers the film, television and other content they want without heeding copyright approvals or fees. The result could be the loss of billions of dollars of potential revenues and profits that otherwise could be generated by various content licensing agreements.
Though experts say there is no way of measuring the huge financial risk of inadequately protected content, the Motion Picture Association of America estimates that its member studios lose $3.5 billion globally-and $250 million domestically-in videocassette film revenues annually to analog piracy.
Thieves in high gear
Viant, a Boston-based consulting firm, estimates some 400,000 movies are being illegally downloaded daily, and that number will rise to 1 million daily illegal content downloads in the United States by year’s end, according to the MPAA.
“No one knows what the economic risks will be,” said Mr. Parsons, whose AOL TW is the world’s largest content provider and owner. “The theoretical landscape could be as broad as the entire value of a movie studio’s library, to a record company’s catalog … because no one knows how pervasive these technologies will become and how broadly they will be used.”
AOL TW content, including print, film, television and Internet, is the second-largest income source for the company, or 38 percent of the total, generating more than $14 billion in 2001 and $17 billion by 2005. Of that, $8.5 billion comes from filmed entertainment content, compared with $4.6 billion from music and $1.2 billion from publishing, analysts say.
Studios realize profits from the distribution of their production after the initial exhibition and rely on the protected exclusivity of their content to generate revenues from home video, DVD, cable, premium pay and other ancillary outlets.
Warner Bros. expects its DVDs to generate $4.6 billion in revenues by 2002. Likewise, the potential profitability of Warner’s 32,000 television programs and 7,000 film titles lies in its ability to syndicate its exclusive product and protect it from being undercut by illegal downloads.
Because of its unique combined strengths, analysts say they expect AOL TW to post revenue and earnings growth that is 50 percent greater than that of other traditional media companies. But the 14 percent of incremental revenue and cash flow coming from Time Warner’s “classic” media businesses could be seriously jeopardized by an infringement of copyrights, analysts say.
“The risk to our business is large and substantial in terms of revenue flow. But there is something fundamentally more important here, in my judgment, than just the economics of it. It’s the whole basis of our productive economy,” Mr. Parsons said.
Seeking equal protection
The questions of copyright safeguards and economics are being complicated further by a growing rift between the major Hollywood studios and other entertainment conglomerates that create and distribute content for over-the-air broadcast, cable, premium pay, satellite, home video and theatrical film platforms.
The Walt Disney Co., Viacom, Fox Entertainment Group and MGM are finding themselves at a counterpoint to AOL TW and Sony, demanding that over-the-air broadcast content receive the same copyright protections afforded to cable and feature film content under a new agreement with major consumer electronics manufacturers. The “5 Cs,” as they are called-Matsushita, Intel, Toshiba, Sony and Hitachi-have agreed to provide technology in cable set-top boxes, television sets and other devices that electronically protect cable, pay-per-view and even satellite content from would-be pirates.
Disney, Viacom, Fox, Universal and MGM have asked the major consumer electronics manufacturers to add a watermark detection system that would protect over-the-air broadcast properties. The studios insist they won’t agree to an industry standard without it, and they have the backing of 12 key bipartisan members of Congress who, in a recent letter to the Federal Communications Commission, warned against jeopardizing “the long-term financial health of free over-the-air television.”
Failure to secure such provisions could mean the demise of free over-the-air broadcasting as content players prefer to shift their live sports, big events, film and other fare to more secure cable and satellite platforms, warn such proponents as the National Association of Broadcasters.
If the current 5 Cs plan becomes an industry standard, it could drive free over-the-air broadcasters out of business,” said Preston Padden, the chief Washington lobbyist for Disney and its ABC Television Network, which were leading opponents of the AOL TW merger. “It could become a premium world. The studios simply aren’t going to sign a digital copyright protection deal that doesn’t include the broadcast television networks.”
AOL TW insists that watermarking is an uncertain and expensive process that will just take more time, although it says it wants over-the-air broadcast content protected.
“We produce some of television’s most popular programming-`West Wing,’ `Friends’ and `ER’-that we would like to see protected from unauthorized transmission over the Internet,” said Chris Cookson, executive vice president and chief technology officer at Warner Bros., during a recent hearing conducted by the House subcommittee on telecommunications and the Internet. “But we realize today’s technology can do little that is meaningful to actually prevent signals received over the air from appearing on the Internet. We do not want to delay the rollout of other types of protectable digital TV. This has been more complicated than was anticipated.”
Both sides of the issue
The internal industry struggle is further complicated by the notion that AOL Time Warner not only could profit from shifting more business to its cable program platforms and systems (even though it owns The WB over-the-air broadcast network), but that as an Internet service provider, it needn’t be as concerned with copyright protection-only funneling content of all kinds to its members.
AOL TW says that isn’t the case. “We have always been against piracy and pilfering of intellectual property, and all we know is that the threat that digital technology presents appears to be even larger than traditional forms of piracy,” said Mr. Parsons.
News Corp. CEO Peter Chernin is calling on ISPs to block Web sites that infringe on copyright holders and that computer and other device manufacturers should install technology that protects copyrighted materials. “It is time for computer manufacturers and ISPs to face up to their responsibility … and join us in a concerted effort to protect Internet contact.”

For the moment, the confusion and lack of industry consensus have left the critical copyright protection issue and the future of copyright content economics in the hands of recorded-music companies and the courts, where a sure and swift resolution is no more assured.
Blind investments
Content producers continue to plow billions of dollars into new production and millions of dollars more into the digital conversion of existing content, not knowing when or what will be their return on investment.
Interactive technology is likely to alter the traditional exhibition and revenue-generating windows for films and television shows-which includes theater, cable, satellite, home video, DVD, premium television and other outlets. However, content piracy and illegal downloading will wreak even more havoc with those critical income outlets and patterns, industry experts say.
Little wonder then that content kings such as AOL Time Warner and Sony, MGM and Disney aren’t waiting for Congress or the courts to provide shelter and are forging ahead with plans for new services that allow for the controlled downloading of their encrypted films.
The studios involved declined to discuss the particulars. However, sources say the initial business models could include the use of subscription fees or pay-per-view as they move within the next four to six months to test who wants to watch movies on their computers.
The best defense is a combination of “being vigilant and enforcing the rights of creators and owners of copyrights. And we have to be out in the marketplace with alternatives, and that’s where we have been a little slow to the mark,” Mr. Parsons said.
Last week, AOL TW, Bertelsmann and EMI announced the formation of MusicNet, a new digital music distribution platform that will be 40 percent owned by RealNetworks. It will provide any third party with the technology and music to resell packaged streamed or downloadable content. MusicNet will not inculde content from a rival service, code named Duet, being developed by Sony and Universal with similar safeguards.
Time Warner says it is involved in such planned summertime services as Duet, a venture involving Universal and Sony that represents more than half the world’s licensed music, and Music Man, a venture with RealNetworks, that will provide secure, fee-based downloading and streaming.
MPAA members have sued cyber pirates who on their Web sites post the programs (anti-encryption DeCSS codes) needed to break the anti-copy-encryption codes being folded into DVDs, which allows the creation of flawless, multiple digital copies of the original film or television show. The economic threat to film and television content cannot be overstated. The MPAA is even targeting companies that manufacture and sell T-shirts sporting the DeCSS code.
The MPAA has been openly criticized for not making the development of encryption codes a public process during which flaws could have been identified and addressed by the hackers and programmers it is battling.
In Congress and the courts
MPAA President Jack Valenti says the economic impetus is too great for Congress and the courts to ignore the intensifying protection needs of companies that produce and distribute all forms of content.
“The copyright industries … are America’s greatest trade export,” Mr. Valenti said.
“These copyright industries are creating jobs at three times the rate of the remainder of the economy. They take in more international revenues today than does agriculture, aircraft, automobiles, auto parts-$80 [billion] to $85 billion. So I do not believe the Congress or the courts will allow copyright to be exiled or shrunk,” he said.
Several pieces of key legislation are pending in Congress. But the most dramatic action has been in the courts, with content providers winning battles against the likes of Napster, MP3 and Scour.
“Napster was able to attract venture capitalists so they could build a business,” AOL TW’s Mr. Parsons said. “But, the people who invested in Napster are not idealists. They didn’t do it because they thought music should be free. They were doing it because they thought they were going to make a return on their investment. When Napster ends up in bankruptcy, you’re not going to see venture capitalists funding these kinds of companies in the future. Anybody who thinks they are going to make money and build a business by stealing other people’s intellectual property-and deprive us of our rightful revenues and profits-is going to get hammered.”