Excellent points Ramsey. How will Apple secure the premium content? I know for a fact Disney wanted an answer before they signed on with Apple ITV. The following article was from 2004. Wonder what the $ total is now almost three years later? Jeff
Time Warner, Disney, Viacom Lose $3.5 Billion to Film Pirates
June 30 (Bloomberg) -- Sitting at a table for eight in his personal dining room, beneath a vintage poster for ``The Treasure of the Sierra Madre,'' Warner Bros. Entertainment Inc. Chief Executive Officer Barry Meyer rails against people who download his studio's movies for free from the Internet.
During a three-course lunch with President Alan Horn, he even takes issue with the term piracy for fear of ennobling the pests who have devoured much of the music business and are moving to films. ``It's not swashbuckling,'' Meyer says. ``It's theft.''
Meyer, 60, and the heads of other big movie studios are eager to define the terms in this fight. Otherwise, they may end up like the record labels -- with a generation of kids who think copyrighted music is free if can you find it on the Web.
U.S. movie companies lose $3.5 billion a year to piracy, not including the burgeoning trade on the Internet, according to the Motion Picture Association of America. The Encino, California- based group represents the seven biggest U.S. moviemakers, including Time Warner Inc.'s Warner Bros., Viacom Inc.'s Paramount Pictures and Walt Disney Co.
DreamWorks SKG's ``Shrek 2'' opened in theaters on May 19. A copy of the animated motion picture -- about an ogre and his bride -- which had been shot in a theater with a digital camcorder hit the Web a day later. Viewed on a laptop computer, the pirated version looked as good as a DVD.
`Harry Potter' on the Web
``Harry Potter and the Prisoner of Azkaban,'' a film from Warner Bros. about a teenage wizard in training, turned up on the Internet three days after it premiered in England on May 31. Some theaters there used night-vision goggles to watch for pirates.
Paul Kocher, a cryptographer from San Francisco who spends half his time in Los Angeles working with the studios, describes a dire ending for his clients. As Internet access gets faster and video compression improves, downloaders may steal a third of the studios' annual revenue -- that would be $3.7 billion for Time Warner alone -- making many of them unprofitable.
``Then you would get massive consolidation,'' says Kocher, 31. ``The movie industry knows this storm is coming.''
Encryption specialists like Kocher are just one weapon the studios are marshalling to fend off pirates. They're pushing consumer electronics companies to add security features to DVD recorders and personal computers. They're lobbying in Washington for stricter copyright laws, and they're suing companies that violate a 1998 federal law making it a crime to circumvent anti- piracy systems.
`Stealing a Hotel'
Suits against individuals who download movies may be next, says Jim Gianopulos, co-chairman of News Corp.'s Fox Filmed Entertainment. The Recording Industry Association of America, the record companies' lobbying group, took that step against music downloaders last year.
``When someone steals a movie that cost you $120 million, that's theft on a scale that's unimaginable,'' Gianopulos, 52, says. ``It's like stealing a hotel.''
Free-speech advocates, consumer electronics makers, small businesses, entrepreneurs and some members of the U.S. Congress are lining up against the studios. They charge Hollywood is trying to deny them an inalienable right: fair use. In simple terms, that's the ability to duplicate copyrighted material for one's own consumption, like taping ``The Apprentice'' TV show to watch later.
The Supreme Court guaranteed that right in 1984 when it ruled that Sony Corp. could not be held liable for copyright infringement by selling its Betamax video recorder.
The digital age has upended the fair-use concept. With file- sharing software like Kazaa, distributing a song to the world is as easy as loading it onto your computer to enjoy it yourself. Stopping the first act often means stopping the second.
`Gray Area'
``It's a major gray area, and it's getting grayer every day,'' says Christopher Chaudoir, a lawyer at Pillsbury Winthrop LLP in Los Angeles who specializes in copyright law.
Jason Schultz, a lawyer at the Electronic Frontier Foundation, a San Francisco Internet privacy organization, says viewers will lose if Hollywood has its way. He predicts the studios, in concert with Microsoft Corp. and other computer- related companies, will curtail the ability of a personal computer to copy and share music and movies. ``They're going to take away the record button,'' Schultz says.
The studios' struggle with piracy goes back to the 1980s, when criminals started manufacturing and selling knockoff videocassettes of movies. The threat exploded with digital technology. Each digital copy is as good as the original, making the duplicates attractive to viewers. Factories in Russia pump out 20 million illegal DVDs a year, according to the Russian Anti- Piracy Organization in Moscow.
`Follow the Bread Crumbs'
DVD piracy threatens the studios' biggest source of revenue. Sales and rentals of DVDs totaled $16.1 billion in the U.S. last year, according to Los Angeles-based Digital Entertainment Group. That topped North American box office revenue for all movies of $9.27 billion.
Online piracy is worse than counterfeit DVDs because it's harder to trace, says Gianopulos, sipping a Red Bull energy drink in his Los Angeles office. ``You can follow the bread crumbs to a warehouse of pirated cassettes,'' he says. ``When it's virtual, it's more anonymous.''
TorrentBits.org typifies the stealth, ingenuity and speed of Web sites that traffic in feature films. According to the site, it's run by ``Redbeard'' on a computer server in the Netherlands. According to the Public Interest Registry, the domain name is owned by Ben Dover in Bencity, New York, which doesn't exist.
The site connects people who want a film with those who have it, dodging copyright issues that would come up if TorrentBits had its own copy.
Downloading `Troy'
Four days after Warner Bros.' ``Troy'' -- a $175 million adaptation of Homer's Iliad starring Brad Pitt -- reached theaters, it was the most popular download on TorrentBits, according to rankings on the Web site.
A pirate who identified himself with an avatar -- in this case, a cartoon image of a 1970s hipster with a feathered hat and a gold tooth -- posted the copy. His notations on the Web site show the film came from a camcorder pointed at a screen in a movie theater. The audio was better than usual because the camera operator had plugged into the audio jack at his seat, which some theaters make available for the hearing impaired.
Simon92922
After viewing ``Troy,'' TorrentBits customers weighed in. Simon92922 said the download was decent for a first release on the Internet. ``I could probably re-encode the video and stop the glare slightly,'' Simon92922 wrote on the Web site.
The MPAA says camcording is on the rise. Trumpeting one of the rare arrests, the association said security officers at an AMC theater in Burbank, California, caught Orlando Castro, 22, recording ``The Day After Tomorrow'' on May 31, three days after it opened in theaters. Castro was charged with one felony count of commercial burglary and will be arraigned on July 13, according to the Los Angeles County District Attorney's office.
Many times, pirates get the film before the release date -- often from a studio insider or an agency promoting it.
Universal Pictures' ``The Hulk'' hit the Web two weeks before its release on June 20, 2003. Universal had sent the film to a Manhattan ad agency, where a worker lent it to an acquaintance. In turn, that person gave it to Kerry Gonzalez, a Hamilton, New Jersey, man who made a copy and posted it on the Internet, according to the U.S. Justice Department.
Universal said it contacted the FBI after learning the film was on line. Last year, Gonzalez, then 24, pleaded guilty to copyright infringement in U.S. District Court in Manhattan. He was sentenced to three years of probation and fined $7,100.
Hollywood's Advantage
Hollywood has several advantages over the music industry when it comes to fighting Internet pirates. Its biggest may be that it got to watch the record industry deal with them first.
The RIAA, which represents EMI Group Plc, Warner Music Group, Madonna's Maverick Records and others, say sales started falling after college student Shawn Fanning figured out a way to help people find MP3 files on the Web. MP3 is an abbreviation for Moving Picture Experts Group, audio layer 3, a standard used to compress audio files into digital packets that can be shipped around the Internet.
Fanning started his file-sharing company, Napster Inc., in 1999. The RIAA sued Napster on behalf of 18 record companies that same year. It declared bankruptcy in June 2002. Software maker Roxio Inc. bought Napster for $5 million and set it up as a paid service in October, mimicking Apple Computer Inc.'s online music store. Apple charges 99 cents a song and has sold more than 70 million since April 2003.
Moving on to Kazaa
People looking for free music have moved on to networks such as Kazaa, owned by Sharman Networks Ltd., a closely held company based on the Pacific island of Vanuatu and operated from Australia. Unlike Napster, Kazaa doesn't use a central computer to help users find songs. Customers connect directly to one another and share whatever they like.
Peer-to-peer systems like Kazaa differ from Napster in another way: They've beaten the entertainment companies in court.
In April 2003, Judge Stephen Wilson of U.S. District Court in Los Angeles said that two file-sharing-service companies, Streamcast Networks Inc.'s Morpheus and Grokster Ltd., didn't contribute to copyright infringement by users. Although they make file-sharing software, the companies aren't liable for what people do with it, Wilson ruled.
The RIAA, Sony and Time Warner had argued that Streamcast and Grokster had a responsibility to prevent infringement. The MPAA and 20th Century Fox joined the suit because peer-to-peer file sharing is the preferred method for movie swapping, too. The entertainment companies appealed to the Ninth U.S. Circuit Court of Appeals, which heard oral arguments in Pasadena, California, in February. A decision is pending.
Changing Strategy
Four months after Wilson ruled, the RIAA changed strategy and started suing downloaders directly for copyright infringement. The association drew public ire when it accused 12- year-old Brianna LaHara of New York with infringement for offering a thousand songs on a family computer through Kazaa. Her mother, Sylvia Torres, paid $2,000 to settle the case, according to the RIAA.
Michael Shamos, an intellectual property lawyer and professor of computer science at Carnegie Mellon University in Pittsburgh, says the studios are crying wolf to protect the prices they charge for theater admissions and DVD sales. ``Any industry that has gotten fat on monopoly profits can't imagine fighting again,'' he says.
People will keep going to the movies because they like the communal feeling and the big screen, Shamos says. ``Troy'' grossed $45.6 million in its first weekend and another $23.8 million in the second although it was available on the Web.
Overnight Downloads
So far, the time it takes to download a movie works in the studios' favor. People often set up their computers to run overnight. ``It's not unusual to wait 16 hours to get a feature film,'' says Eric Garland, CEO of BigChampagne LLC, a Los Angeles- based company that tracks movie downloads. ``That's not really a consumer experience.''
As the Internet gets faster, download times will shorten. Last year, scientists at the California Institute of Technology in Pasadena said they had developed a way to retrieve a full- length DVD movie in less than five seconds.
For most movie pirates, the process of putting a movie onto the Web starts with a digital camcorder. A camera selling for as little as $500 is small enough to smuggle into the multiplex. The best ``theater rips'' come from the projection booth, where the pirate can plug into a sound jack and enjoy a straight shot at the screen. Getting into the booth requires an accomplice on the inside.
`Leeching' and `Seeding'
Next, the pirate loads the movie onto a computer and compresses it, so the file takes less time to upload and download. For distribution, many pirates use BitTorrent, a computer protocol for transferring files. Bram Cohen, a 1993 graduate of Stuyvesant High School in New York, invented BitTorrent as a faster way to send big files.
BitTorrent, which isn't affiliated with the TorrentBits movie site, encourages sharing because it takes less time to download a movie when you're simultaneously uploading one. Uploading a film is called ``seeding,'' and downloading is known as ``leeching.''
Cohen, 28, tailored BitTorrent for the etree community: followers of bands like the Grateful Dead that let fans tape concerts and swap the music on the Internet as long as they don't sell it. Cohen says he opposes trading copyrighted movies. ``You unleash a technology on the world, and you can't control it,'' he says.
Cohen says he supports himself with donations from BitTorrent users. He invites contributions on his Web site, www.bitconjurer.org, and says he has no plans to turn his software into a business.
Creating eDonkey
EDonkey, another popular movie-trading program, would like Hollywood to use its software. Sam Yagan, 27, president of New York-based MetaMachine Inc., the maker of eDonkey, says the studios would do better selling movies to downloaders than suing them.
A 1999 Harvard graduate, Yagan created SparkNotes in his dorm room as an online competitor to Cliffs Notes, the yellow-and- black summaries of classics. He got English majors to write outlines of ``Moby Dick'' and ``The Scarlet Letter'' to start his series. He sold SparkNotes to Barnes & Noble Inc. for an undisclosed price in 2001.
Better File Sharing
A year later, Yagan hooked up with Jed McCaleb, 29, a physics major who had dropped out of the University of California, Berkeley, in 1994 to devote himself to computer programming. Disappointed with the speed of Napster, he set out to build a better file-sharing system. In 2001, he came up with eDonkey, named for the program's ability to haul big files around the Web.
Like BitTorrent, eDonkey is software for sharing any file -- music, movies or software -- and Yagan says he doesn't condone piracy. ``There's nothing I want more than people paying copyright holders,'' he says.
Another technology that's rattling Hollywood is the personal video recorder, or PVR. TiVo Inc.'s system is the best known. It records shows onto a computer hard drive. Ron Wheeler, who became Fox's first chief of content protection in 2001, foresees a day when PVRs contain trillions of bytes of storage space. Cable and satellite customers will be tempted to fill up on movies and then cancel their service, he says.
Such concerns are creating a rift with consumer electronics makers, who argue that Hollywood's anti-piracy efforts discourage manufacturers from putting out new products.
Digital Millennium Copyright Act
The locus of their discontent is the Digital Millennium Copyright Act, signed by President Bill Clinton in October 1998 at the studios' urging. The DMCA makes it a crime to circumvent anti-piracy measures built into electronic equipment.
Wheeler says that without the DMCA, anti-piracy technologies wouldn't stand a chance against the legions of hackers eager to duplicate and distribute movies.
Before the studios started selling DVDs in 1997, they agreed to protect them with the Content Scramble System, or CSS. Two years later, a Norwegian teenager named Jon Johansen cracked the code. He wrote a program that decrypts the CSS and posted the software, called DeCSS, on his Web site.
Using Johansen's DeCSS program, a user can copy a DVD onto the hard drive of his computer and burn a new DVD or compress the movie and put it on a site like TorrentBits.
Wheeler says the only thing that keeps more people from decrypting DVDs is that it's against the law. Copying DVDs for commercial use may bring a punishment of five years in prison and a $500,000 fine.
`Ripper' Software
St. Charles, Missouri-based 321 Studios, a father-and-son operation that makes software for copying DVDs, has felt the studios' wrath. In February, Judge Susan Illston, in U.S. District Court for the Northern District of California, sided with Metro-Goldwyn-Mayer Inc., Sony and other studios.
She issued a permanent injunction stopping 321 Studios from selling its ``ripper'' -- software that breaks the content- scrambling system on a DVD, thus allowing a movie to be copied.
Julia Bishop-Cross, a 321 Studios spokeswoman, says most buyers are parents who want to copy DVDs like ``Finding Nemo'' in case the original is stolen from the minivan. ``We're blue in the face from telling people we're not pirates,'' she says.
U.S. Representative Rick Boucher, a Virginia Democrat, says the law is too punitive for ordinary people. He's sponsoring a bill to amend the DMCA so consumers can circumvent privacy protections if they're doing so only for personal use.
Case in point: DVDs won't work on a computer using Linux, the free operating system that competes with Windows. Using Johansen's DeCSS decryption program, a Linux user can make them work. Trouble is, doing so is a felony under the DMCA, Boucher says.
Going Too Far
Boucher's bill also would help companies avoid lawsuits that charge they contribute to piracy. ``The DMCA went way too far,'' he says.
In another tack, the studios are pursuing ways to make movies copyproof. In November, the U.S. Federal Communications Commission approved a rule that MGM and other studios pushed, which lets them embed ``broadcast flags'' in digital programming. The flags tell TiVo machines and DVD recorders if content can be copied.
Starting in July 2005, makers of TVs and computers must program their products to recognize the flags. Pioneer Corp., for one, has combination TiVo-DVD recorders that read them, says Chris Walker, a manager at the Tokyo-based company.
Alex Curtis, a policy analyst at Public Knowledge, a Washington, D.C., advocacy group, says the law may render obsolete VCRs that can't read protected digital content.
PCs Compromised
PCs may be compromised, too, if the studios have their way, says Ross Anderson, a professor of computer science at Cambridge University in the U.K. Microsoft is working on a new system called the Next Generation Secure Computing Base, or NGSCB, previously known by the code name Palladium.
With it, the studios could decide which videos will play on a PC, Anderson says. Disney could deny access to a downloaded version of ``Snow White'' if the viewer's PC and everything attached to it didn't have approved security, he says. A lawfully purchased copy of ``Snow White'' on DVD may stop playing on your laptop if you don't install the latest security patch from Microsoft, he says.
Mario Juarez, a product manager on NGSCB, says Microsoft isn't designing the system to augment security for the entertainment companies. It's aiming at companies that want to ensure information on PCs remains safe.
Steal It
Sumner Redstone, CEO of Viacom, the third-largest U.S. media company, would rather avoid such fights with his customers and embrace the Internet. He says the music industry blew it.
``There was no legal way to buy music on the Internet,'' Redstone said in a panel discussion sponsored by the Milken Institute in Los Angeles on April 28. ``The only way to get music on the Internet was by stealing it.''
Viacom's Paramount Pictures is a partner with MGM, Sony Pictures, Universal and Warner Bros. in Movielink LLC, a company started in 2002 that lets people download new movies onto their computers for $5 and watch them as much as they like for 24 hours. Then, access to the movies expires. The service has less appeal than pirate sites because it gets new films after they've been out on DVD.
`Top Gun' Dilemma
Viewed on Microsoft's Media Player or RealNetworks Inc.'s RealPlayer, the picture is the same quality as on digital cable, says Movielink CEO James Ramo, 57. ``On pirate sites, you might go looking for `Top Gun' and get an adult movie or one that doesn't have an ending,'' Ramo says.
RealNetworks and Liberty Media Corp.'s Starz unit started selling an Internet movie service in June. For $13 a month, customers can download from a rotating menu of 100 films.
Such services may become more compelling once more people can beam movies from their PCs to their televisions. It's possible today using WiFi, the wireless standard that PCs use to connect to the Internet in airports and coffee shops. Or they can use a cable to connect a laptop to a newer TV.
Microsoft plans to release software this year that will connect PCs and TVs. The software will run either on a set-top box or inside the TV itself, says Amir Majidimehr, vice president of Microsoft's Windows Digital Media division.
`Rendezvous With Rama'
Lori McCreary, CEO of Revelations Entertainment, agrees that the industry needs to embrace the Internet. From an office in Santa Monica, California, piled with scripts and videotapes, she and her partner, actor Morgan Freeman, 67, are plotting Hollywood heresy. In the next 18 months, they plan to release a movie online and in theaters at the same time. And they plan to charge customers to download it, betting would-be pirates will pay.
McCreary, 43, who worked in repairs at a Computerland store while getting a bachelor's degree in computer science from the University of California, Los Angeles, says she and Freeman are deciding which of the 25 films they have in the works will go on the Web.
``Rendezvous With Rama,'' based on the eponymous book by Arthur C. Clarke and a favorite of Freeman's, would be perfect, McCreary says. The science fiction story about a massive object hurtling toward earth would appeal to hard-core Internet users. It's unlikely to be ready in time, though. ``We need to move soon,'' she says.
Cool Reception
McCreary says she and Freeman have been talking about their idea around Hollywood and have met skepticism. The fear is that putting a movie on the Web first would disrupt Hollywood's lucrative ``windowing'' system, she says.
Feature films hit the theaters first and then go to home video four to six months later. New video-on-demand systems from cable companies get them a month or two later. Premium cable stations like HBO follow in three months. At every stage, the studios get paid, albeit a little less each time.
Hollywood executives worry that putting a movie on the Web will anger theater owners and preempt the release windows, McCreary says, adding that since that's already happening with movies on the Internet, the studios should capture the dollars.
History suggests that Hollywood will rant. Then, through something like Movielink or even eDonkey, it will find a way to make money with the Web. When the VCR made its debut, MPAA head Jack Valenti, now 82, said the player and videocassettes would mark the death of American movie making.
Boston Strangler
``The VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone,'' Valenti, who is retiring as head of the MPAA this year after almost 40 years, told the U.S. House of Representatives in 1982. Then Hollywood started putting movies on videocassette and DVD -- inventing an industry.
Garland at BigChampagne, the download-tracking firm, says studios will fare better than the music business in their clash with pirates. People were angry at the music labels because they overcharged for CDs and made consumers buy the whole album to get the song they wanted, he says.
DVDs are a better value. They have features you don't get in a theater or on cable, like interviews with the director and outtakes, he says. ``All they have to do is keep us from getting off the couch,'' Garland says.
Hollywood can't bank on movie lovers' staying put -- be it on the sofa watching a $25 DVD or paying $10 to enjoy the latest Harry Potter film at the multiplex. With thieves already siphoning off $3.5 billion a year, and the time to retrieve a film from the Web heading toward seconds, the studios must figure out how to make money from downloads themselves or stop the pirates' raids.
