e.Digital Corporation (fka EDIG)

[cksla]

re: divx

TO INVITE OR FIGHT

MAY 24, 2001 / Gotta hand it to Vivendi-Universal. Having sued MP3.com to within an inch of its life, helping to knock down its stock price from almost $70 to less than $3, it's now scooping up the rubble for $5 a share. Who says old media companies don't understand the new economy?

With last week's announcement that Vivendi would acquire MP3.com for roughly $350 million, the twin scourges of the commercial record business--MP3.com and Napster--are now firmly under corporate control.

Earlier, Bertelsmann struck an alliance with Napster after the record labels routed the file-sharing service in court.

Among the conspiracy-minded, in fact, there's a strong sense that the record companies' legal campaign against online music services was never really about combating piracy or protecting copyrights but about control over a new distribution channel. Vivendi's move to snap up a defanged MP3.com on the cheap is all the proof they need.

That probably gives the record companies more credit than they deserve, however.

The legal thrusts against Napster and MP3.com were sparked by panic more than anything else after the record companies were blindsided by a technology for which they were unprepared.

It also understates the degree to which Napster users were engaging in a form of copyright infringement (the MyMP3 service from MP3.com is another story).

What the new alliances with Napster and MP3.com represent, more than the culmination of any preconceived plan for gaining control over online distribution, is a belated recognition on the part of the media companies that they lack the expertise themselves to launch compelling online music services. They need to preserve some of the expertise developed by their former adversaries, even if that means sleeping with the enemy.

Bertelsmann, for instance, has said that it plans to incorporate its alliance with Napster into the MusicNet online service it is developing with AOL Time Warner, EMI and RealNetworks. Vivendi plans to fold MP3.com into the Duet online service it's developing with Sony.

That history poses some interesting questions for the record companies' cousins down the hall at the movie studios. Although no one has yet developed an unauthorized movie-swapping service to rival Napster, pieces of such a service already exist.

Movies are being traded through services such as Gnutella, while an unauthorized video compression system in the form of DivX is slowly establishing itself as a standard for online movie trading to rival MP3.

While DivX is now trying to go legit, it is following the same sort of "open-source" development process that led to MP3 taking over online music distribution.

If the music industry's experience is any guide, a significant amount of the expertise needed to develop compelling online movie services is likely to develop outside the studios.

The question the studios must soon confront is whether to get in bed with the DivX development community now or shun it and hope their own developers have learned enough from the record labels to beat DivX to the punch.

The answer to that question may not lay entirely in the studios' hands, however. The deals between Napster and MP3.com, on the one hand, and the major media companies on the other, were made largely by the record companies' corporate parents, just as the establishment of the Duet and MusicNet alliances were. The labels themselves have had relatively little to say on the matter.

In scooping up MP3.com, for instance, Vivendi established a unique reporting structure in which MP3 CEO Michael Robertson will report directly to Vivendi chairman Jean-Marie Messier, not to anyone at Universal Music.

Likewise, Bertelsmann's deal with Napster fairly blindsided its own record company, BMG, which until then had taken the hardest line of all against the service among the major record labels. So badly out of the loop was BMG, in fact, that CEO Strauss Zelnick and marketing head Kevin Conroy left the record company shortly after the decision was made.

That history could provide yet another incentive for the studios to get serious about embracing online distribution. Clearly, the corporate behemoths of which they're now part have made a strategic decision to embrace it, even if some of their own division heads are less than enthusiastic.

Even if the studios themselves aren't keen on the idea, no one in Hollywood wants to get caught out of the loop.

http://www.videobusiness.com/052401_sweeting.asp.