VIDEO RETAILING: A DOWNLOADABLE FUTURE? 2004-01-19 (1)

AL HELLER / Additional reporting: DAN ALAIMO

Hollywood's concern over pirated movies may lead to more growth of industry-led downloading solutions in the year ahead. How this will impact retailers who now sell and rent home entertainment software is an open question.

The movie industry is advancing on numerous fronts to stem losses from piracy. Among them are: ethics-themed ad campaigns, data encryption, court fights to protect copyright laws, a Code of Conduct for students using their university Internet systems, a new law against camcorder use in theaters, limited distribution of screener copies, as well as the use of technology services to catch file sharers.

"Piracy is the central concern of studios and filmmakers. The battle against piracy has to take precedence over everything," said Jack Valenti, president and chief executive officer of the Motion Picture Association of America.

However, the manufacturers of hardware with recording capabilities -- some owned by the same parent companies as the content providers -- have a different perspective.

"We face the threat of a content industry concerned that our products diminish theirs," said Gary Shapiro, president and CEO of the Consumer Electronics Association, Arlington, Va. "They lobby regulators to tax or restrict our products." Shapiro spoke at this month's Consumer Electronics Show in Las Vegas.

"Twenty years ago this month, the U.S. Supreme Court Betamax decision clarified the law and said home recording is fair use and that our products are legal if they have legal purposes. Since then, Hollywood and others have tried different ways of reversing that decision," Shapiro said.

Taking a cue from the music industry's handling of downloading, which Hollywood insiders consider too heavy-handed, studios and other major entertainment companies are moving forward more aggressively with their own Internet solutions.

More than 400,000 movie files are illegally downloaded each day through sites such as KaZaa, Morpheus, Grockster and Gnutella, according to Viant, a Boston-based consultancy. When an illegal site is found, MPAA sends it a cease-and-desist letter rather than a lawsuit -- a velvet glove approach that stops some of the activity without the harshness and consumer alienation that was brought on by music industry lawsuits. Valenti noted that in 2001, MPAA "dispatched 54,000 such letters to 1,680 ISPs [Internet service providers] around the world."

One central issue for the future is whether the industry can provide appealing pay-per-download services, possibly in partnership with retailers. "There's not enough movement to involve retailers in the digital delivery of movies. That needs to grow," said Bo Andersen, president of the Video Software Dealers Association. "Put a retailer name on an Internet vehicle, and consumers would have confidence. As an industry, we need to provide many more alternatives than Movielink and CinemaNow."

In the music industry, for example, Echo at www.echo.com is one example of collaboration between recording studios and retailers. A consortium of seven retailers -- Best Buy, Borders Group, Hastings Entertainment, Tower Records, Trans World Entertainment (FYE Stores), Virgin Entertainment and Wherehouse Music -- invested equally in a 2003 venture to secure competitive licenses to distribute music.

"Each retailer participant will independently market and price the digital entertainment products it offers, in the manner that will best serve its consumers," said antitrust counsel Alan Malasky, Porter Wright Morris & Arthur, Washington, in the Echo launch announcement. Too, the business model will have each partner deliver digital music products and services via individually branded or Echo co-branded offerings.

For instance, a December 2003 circular from Tower Records offered digital downloads of songs at 99 cents each or $9.99 per album at the www.tower.com/digital site, which had over 350,000 songs available.

Among movie industry-sponsored Web sites, Movielink LLC, Santa Monica, Calif., began as a joint venture among Metro-Goldwyn-Mayer Studios, Paramount Pictures, Sony Pictures Entertainment, Warner Bros. and Universal Pictures in 2001. CinemaNow, Marina del Rey, Calif., was founded in 1999 by investors including Lions Gate Entertainment, Microsoft and Blockbuster.

What prevents these sites from being major forces today is their limited assortment of titles and the lack of broadband in most of the nation's homes, although high-speed access is growing.

Meanwhile, what bodes well for supermarkets is the high demand for DVD content and "consumers' strong preferences for packaged goods and physical shopping," added Andersen. "Online solutions won't be immediate. And it will always be a strength of this industry that a packaged product is favored by consumers."

Still, he cautioned that "[unpaid] downloading could have a double-digit negative impact on demand from the most active buyers and renters. We have to make sure a culture of illegality doesn't grow up on the Internet with respect to movies. VSDA is linked arm-in-arm with studios to respond to piracy. This has to be fought on a hundred levels."