The Terrors of Tinseltown

Think the VCR scared the motion picture industry? Peer-to-peer file-sharing, which enables users to swap digital content, could cut the major studios out of the distribution loop. Here's a look at the CFOs behind the Napsterization of Hollywood.

Litigated to Death

Tell it to Travis Kalanick. Kalanick, co-founder and finance head of Scour Inc., can best be described as a new-media revolutionary. In 1997, he and four other UCLA computer science students started Scour, a search engine and file-swapping software that made it ridiculously easy to share movies online — without paying Hollywood a cent.

Alarmed by the exploding popularity of Scour, the entertainment industry marshaled its forces. In 2000, the Motion Picture Association of America (www.mpaa.org) and others filed a $250 billion lawsuit against the company for copyright infringement. Even the reputation of super-agent Michael Ovitz, an investor in Scour, failed to sway the MPAA from its legal course. Unable to fund a defense, the startup teetered, then went bankrupt. In December, management eventually sold its remaining assets to CenterSpan Communications Corp. (www.centerspan.com). Says Kalanick bitterly: “We were litigated to death.”

Hollywood’s litigiousness is not hard to fathom. Virtual sharing of films — from one personal computer to another — threatens the entire film industry. At the top of the endangered species list: the major studios, which would effectively be cut out of the loop by cyber-swapping of movies. After all, what more perfect distribution medium for a digital product than a digital highway?

Studio heads can already see what unauthorized file-swapping has done to cash flow at music companies. The numbers are staggering. The Recording Industry Association of America (www.riaa.com) reported that shipments of CD singles fell by nearly 40 percent last year. A music industry spokesperson says the drop in singles sales was “principally brought on by new options provided by the Internet.”

Further, many people in the film business honestly believe peer-to-peer (P2P) technology is little more than a license to steal. “[These sites] profess to defend technological advancement, but in truth treat copyright with a brazen disdain for laws and rules,” says MPAA president and CEO Jack Valenti. “The bottom line is that people are stealing movies on these sites that they do not possess or have not paid for.”

Kalanick vehemently disagrees. “Scour was no more an illegal device than your VCR is, or a Xerox machine is,” he says. “If Scour users broke the law by sending copyrighted files, then they’re the ones who should have been sued — not us. You arrest the burglar, not the company that made the burglar’s tools.”

Litigate or Lunch?

The jails would be full up. According to the latest estimates, 12 million copies of Project Mayo (www.projectmayo.com) have been downloaded from the Internet. Project Mayo, which is based on something annoyingly called DivX ;-) technology, enables users to freely exchange illegal copies of movies over the Internet. Some industry watchers reckon that, with Project Mayo, Gnutella, and other peer-to-peer file-exchange software in cyberspace, 400,000 movies are swapped on the Net every day.

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