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.

Waiting for the Rewrite

If Kalanick’s math is right, why isn’t Hollywood interested in P2P technology? “Because they didn’t create it,” Kan argues. Rather than do business with the inventors of promising technology, critics say the movie studios want to stop it dead in its tracks. The massive — often unauthorized — swapping of music files via Napster hasn’t exactly eased fears in Tinseltown. “Another factor,” says Kan, “has been that media concerns have been slow to decide upon and champion DRM-enabled formats.” (DRM is short for digital rights management.)

But some analysts argue that the major motion picture studios are simply biding their time, waiting for a clear-cut winner to emerge from the P2P pack. “The studios seem happy to have [companies like Scour and Angry Coffee] improve the technology and business models through trial and error, and then move forward,” asserts Scheirer of Forrester. “Is that fair? It’s business.”

Staying in business could prove a monumental task for many of these P2P upstarts. The Internet generation — a generation raised on free MP3 downloads — may not be willing to shell out for online entertainment. A recent poll of juror pools by the National Law Journal revealed that almost half the jurors said there was nothing wrong with downloading or sharing digital movies or music for free — without compensating the creators or distributors of the product.

But P2P backers remain convinced of the profitability of peer-to-peer entertainment. “There are all sorts of ways to monetize the experience,” Atomshockwave CFO Cansler insists, “from advertising to pay-per-view to fees based on the quality and speed of the download.” The Seattle-based company makes money from advertising and sponsorship, not pay-per-view. “Our content is monetized via a splash commercial — a 15-second advertisement appearing at the beginning of the film,” explains Cansler.

SightSound, on the other hand, employs a pay-as-you-go model. The site’s main attraction is the animated comedy South Park, which customers download by using an Internet connection. The site also boasts the first feature created exclusively for the Net, appropriately called Quantum Project. The 36-minute film, which was made for $3 million, stars John Cleese of Monty Python fame. Viewers who want to watch the movie using Gnutella are whisked to SightSound’s billing site, where they must pay $3.95 by credit card before opening the file.

But some observers believe Angry Coffee’s Percolator model holds the most promise. Why? Because it directly involves the movie studios. A Percolator user will be licensed by a studio to store a movie in his or her computer. Each time the movie is downloaded, that host will receive a commission paid by the studio that owns the film. Meanwhile, the person downloading the film — the other peer — will pay a fee to the studio by using a credit card. Obviously, the fee paid to the storer of the movie will be less than the fee paid by the downloader. “We have a sustainable revenue model that is long term and able to make a significant profit for the studios,” interim CFO Choy claims.

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