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.

At P2P specialist Angry Coffee Inc. (, CEO Adam Powell was so nervous about possible litigation that he pulled the switch on the company’s much-trumpeted file-sharing service, Percolator, before any files were swapped. “After what happened to Scour, we decided not to have the company hanging by some judge’s decision,” Powell recalls. “We didn’t want to incur the MPAA’s wrath in the form of litigation.” Adds Todd Choy, the company’s interim CFO: “We wanted to take the high road, to send a message that we want to work with the industry long term.”

Pic Bigs Nix Vid Vig?

The industry seems to have its own plans. In many circles, the Net is seen as the next big distribution channel for studio-backed movies. According to Forrester Research, online delivery of films will account for 20 percent of motion picture revenues by 2003. Given that the industry took in $77 billion in exhibited movie revenues and $20 billion in rented or sold videos and DVDs last year, that’s a $20 billion cash stream.

But it’s not revenues that make executives at the six major studios (Paramount, Warner Brothers, Universal, Disney, Sony, and 20th Century Fox) sit up and take notice. It’s the unparalleled profit margins that come with virtual channeling. “There’s no videotape store or movie theater chain carving out a chunk of the distribution dollars,” notes Eric Scheirer, an analyst at Forrester. Blockbuster, for instance, takes a 50 percent cut for distributing videos and DVDs for the studios. As Scheirer says, “The motion picture industry would obviously prefer to keep more of this money.”

Toward that end, Hollywood is looking to do a little disintermediation of its own. The MPAA confirms that the major studios plan to unveil movies on the Net once they have content encryption, watermarking, and digital rights management procedures in place.

While representatives from the six studios declined to be interviewed for this article, the MPAA’s Valenti says: “I can tell you that several major studios will be online in four to six months, and have been testing various business models around the country.” He predicts most major studios will offer their movies over the Net by year-end, with smaller companies at their heels: “We would be fiscally insane not to use this magnificent delivery system.”

Asked if the studios would use a P2P delivery model, Valenti laughed. “The whole idea of file-sharing is absurd,” he says, noting that there are already millions of homes and sites at colleges and offices with broadband access. “These numbers will only increase.”

Maybe so. But SightSound CFO LePore says P2P file exchange is a whole lot cheaper than video-on-demand. “Basically, we don’t incur the bandwidth costs,” he explains. “And, by letting people freely exchange these movies, we gain tremendous marketing value.”

Kalanick goes further. He claims the co-location, data center-to-PC technology the studios are backing is, in fact, cost-prohibitive. “In the Co-location model, if you deliver 10 million movies a month, each at 3,500 megabytes, the monthly cost for bandwidth would be $16,203,740,” he explains. “Delivering the same content in a P2P model would cost $162,037 a month. The financial difference is tremendous.”


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