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Information World – Geneva Sapp
07/01/2000

THE EMERGENCE OF broadband technology, with its promise to reach an even greater number of Internet users, is forcing many digital-media companies to rethink their business strategies. Specifically, companies such as Miramax, Sony, Time Warner, and Universal try to take advantage of a channel that unites sales and delivery.

Scott Sander, president and CEO of online movie and music distributor SightSound, in Mt. Lebanon, Pa., approached companies in the music and movie industries as early as 1993 with the idea of selling downloadable music and movies.

“They looked at us like we were from another planet,” Sander said. “We told them if they don’t do this, every kid on the face of the earth with a computer will be able to steal every piece of music ever made at will.”

Sander’s proposal to media companies in 1993 may now appear as prophesy. With college kids accessing the Internet via T1 lines installed in their dorm rooms, the way in which music, movies, and video games are bought and sold is being redefined. As broadband reaches an even wider audience, many companies are betting that the demand for digital content will grow as well.

The music industry in particular has been hit hard by the download dilemma. According to Sander, piracy has become commonplace because music companies did not immediately embrace the new technology.

“One of the best ways to deter piracy is to make things available at a good price,” Sander observes. “We have absolute rampant wide-scale piracy of music.”

Media companies may be late to the party, but they are coming in droves, as evidenced by a number of media maneuverings in place or under way. Virgin Entertainment Group already sells digital music through JamCast.com, a joint venture between Virgin and Wavo. Universal Music Group, BMG Entertainment, and Time Warner all have plans to offer downloadable music.

The movie industry may have learned from the music industry’s mistakes, Sander says. Miramax is testing the waters via a partnership with SightSound in April to enable digital downloads of 12 of its movies.

“Perhaps the motion picture industry benefited from 20/20 hindsight,” Sander says. “They’ve seen that the music industry tried to fight technology instead of channeling its power.”

Gaming companies also are feeling the broadband lure. Sega of America will launch its own ISP this fall, called SegaNet, for downloading Sega online gaming and content. Also, Sony Corp. of America’s recent investment in wireless broadband company Arraycomm is driven by Sony’s gaming interest, says Herschel Shosteck, president and CEO at Shosteck Associates, an analyst firm in Washington.

But Sony’s broadband interests may not be limited to gaming. The media giant recently declared its future is broadband, according to Kei Sakaguchi, director of corporate communication at Sony, in New York.

All of these companies face challenges in reinventing their sales and distribution systems to take advantage of broadband technology, says Shawn Willett, an analyst at Current Analysis, in Sterling, Va. These challenges include channel conflicts occurring both within the company and with external suppliers; pricing pressure, which essentially forces the company to compete with itself; and the loss of control over marketing and promotion.

“I think the big issue is pricing pressure, which is related to channel conflict,” Willett says. “When you put out your product as something that’s also downloadable, that creates tremendous pricing issues for that company.”

Sony may be a prime example or channel conflict occurring within a company. Sony Electronics launched Musiclub to enable digital-music downloads, much to the dismay of Sony Music, according to industry observers.

Willett says these kind of channel conflicts are indicative of the reinvention problems experienced by any company that wants to do business on the Internet, but those problems become exaggerated when the Internet becomes both the sales and delivery channel.

Sony addressed its channel conflict problem in April by creating Broadband Services Company to manage its broadband and cable-related interests. Similarly, Time Warner last year created Time Warner Digital Media to manage its diverse digital-media businesses, which the company expects to be an important element of future growth. The division will create a companywide e-commerce infrastructure to explore digital content aggregation, Time Warner sources say.

In addition to channel conflict strains, loss of marketing control may pose a challenge to these companies, Willett says.

“When you have your own Web site, you do have some control over things,” Willett says. “But when it’s even one step removed from that, when it’s being put into a third-party site or an e-marketplace… now you’ve really lost control.”

SightSound’s Sander says the biggest challenge will be in overcoming the reluctance to embrace new paradigms.

“I think the biggest obstacle to all of these companies is that they have a very successful current business model,” Sander observes. “That’s not a bad thing, but it’s often a hard thing to change.”

Sander believes that any company uncertain about making the transition to digital download should simply go to a university and knock on any dorm room door.

“People always talk about convergence,” Sander says. “You just walk into any dorm room and you’ll see convergence. We have millions of broadband users on campuses that are using a personal computer for everything.”

The New York Times – John Markoff
06/14/2000

SAN FRANCISCO, June 13– A digital video and music distribution company plans to announce on Wednesday that it will make its movies available as encrypted files on the Internet using the controversial Gnutella software, a company spokeswoman said today.

The company, Sightsound.com, based in Mount Lebanon, Pa., obtained national visibility in April when it announced it would make 12 full-length feature films from Miramax available in a pay-per-view format.

The company now has several films available from its Web site that can be viewed using Microsoft’s Windows Media Player and its digital-rights management technology, which is intended to prevent piracy. The files are generally larger than 100 megabytes, which can take a long time to transfer, but the company is focusing on users of new high-speed cable and digital subscriber line network connections.

The new distribution plan, analysts said, is an effort to leverage the file-sharing qualities of the Gnutella system to increase the marketing reach of commercial products.

Until now, Internet file-sharing software like that developed by Napster, iMesh, Scour and others has created a bitter dispute over the threat that the Internet might pose to the music and video industries as they move into the digital world.

Some analysts argue, however, that while the Internet might force content distributors to jettison their traditional business models, the current controversy over music piracy does not present an ultimate threat to intellectual property in the digital era.

“We believe that these kinds of distribution schemes will become increasingly common as the music and movie industries realize the kind of threat they are under,” said Rob Enderle, an Internet industry analyst at Giga Information Group in Santa Clara, Calif.

Sightsound is both renting and selling digital movies online using Microsoft’s software to view and charge for the films. Although the company plans to issue a news release on Wednesday announcing the distribution using Gnutella, a company spokesman said today that its executives would not be available to comment on the announcement because the company is in a “quiet period” before an initial public offering.

Gnutella was originally developed by programmers at Nullsoft, a subsidiary of America Online, but the company forced the programmers to stop developing the software soon after it was made available to the public because of its potential use in pirating content.

Since that time, other independent software developers have continued to refine the software. Gnutella differs from the Napster music distribution system in that there is no central index. Rather, indexes are created in a composite fashion based on each Gnutella client program querying other Gnutella users.

The various files that are shared are stored locally on individual users’ machines.

Mike Monasco, a developer at Cxc.com, a small group that is refining the Gnutella technology, said today that this was the first such effort to use Gnutella commercially. “We also plan to offer encryption for Gnutella, using our own patented technology, which we will be offering as an open-source project,” he said.

A potential Achilles’ heel of all the efforts to protect digital information is that software pirates have so far had great success in attacking various protection schemes. Last year, for example, the encryption scheme underlying Microsoft’s Windows Media audio format was broken only a day after it was introduced.

A Sightsound spokeswoman said today the company did not want to challenge pirates but that it would use commercially available encryption technology to protect its content.

USA Today – Josh Chetwynd
05/04/2000

When SightSound.com unveils Quantum Project at midnight ET Thursday(9 p.m. PT), the Internet revolution -and Hollywood’s role in it -will get a serious test.

The 36-minute Quantum is billed as the first feature film to be made for and distributed exclusively on the World Wide Web. While it’s unclear whether the film deserves that claim to fame (after all, any filmmaker can post a film online), one thing is certain: This is the first Net movie with legitimate Hollywood credentials.

The movie, which cost $3 million to make, stars Stephen Dorff (Blade), Fay Masterson (Eyes Wide Shut) and John Cleese (A Fish Called Wanda) and is produced by Metafilmics, which did What Dreams May Come. With slick Hollywood visuals but little character development, it tells the story of a quantum physicist (Dorff) trying to figure out love.

For $3.95, viewers can download the movie from www.sightsound.com or www.quantumprojectthemovie.com. Whether they do in large numbers will help answer a pressing Net question: Are the masses ready for full-length computer cinema?

SightSound is banking on the answer being yes.

“There is a totally alternate world out there,” says SightSound CEO Scott Sander. “For a certain generation, I think the Internet is the primary” source for entertainment.

College kids, he says, already are downloading and watching pirated versions of films like The Matrix off the Web. And, with the superfast connections on university campuses, films such as Quantum can be downloaded in 10 to 25 minutes. (For a 56K modem, though, it will take a mind-numbing four hours.)

Filmmakers also hope to lure viewers by offering computer-only options. They plan to eventually offer alternate cuts of the film (at a still-to-be-determined price) and deleted footage, making it possible for fans to craft their own versions.

“With a regular movie, it is extremely difficult and expensive to re-cut it,” says Quantum producer Barnet Bain. Changes to a digital movie can be done so easily that “we are currently working on three or four versions of the film that emphasize different aspects or directions.”

Despite the extras, analysts are skeptical about Quantum’s prospects for success.

“They have a couple of strikes against them to begin with,” says David Card, a senior analyst at Internet tracking firm Jupiter Communications. “One is the download issue, which is serious because most people don’t have (the quicker) broadband connection, and the other is, who wants to watch a movie on a computer, anyway?”

Simply informing people that the project exists is another challenge. SightSound has chosen not to spend much on publicity and is counting instead on good word-of-mouth, which can spread quickly on the Internet.

But entertainment industry analyst David Davis of Houlihan, Lokey, Howard & Zukin believes that strategy probably won’t be enough. “If you can’t spend $10 million to $15 million in marketing, it is very hard to get into the public conscience,” Davis says. “It would have to be something on the order of The Blair Witch Project or maybe more to succeed.”

Regardless of the reaction, Bain seems certain that over time the film will be seen as significant. “Quantum Project,” he says, “is The Jazz Singer (Hollywood’s first talkie) for the Internet.”

The Wall Street Journal – Bruce Orwall
04/18/2000

Walt Disney Co.’s Miramax Films unit is making its first foray into online film distribution via a new agreement with Web company SightSound.com to make 12 Miramax films available online for downloading on a computer.

Miramax and other big film concerns have taken a slow approach to the Web as a film-distribution outlet, even as tiny, independent concerns have raced to find ways to use the Internet for showing their films. The studios’ caution stems from a variety of reasons, with the potential for piracy at the top of the list.

Now, Miramax has made a deal with SightSound.com, of Mount Lebanon, Pa., that will make a dozen titles available on a pay-per-view basis. The nonexclusive deal will allow Web users to download the film for viewing during a specific time period, probably a day, after which the movie will be disabled.

Bob Osher, co-president of production at Miramax, said the company is “trying to find another way to exploit our copyrights.” He added: “The main thing for us is being very cautious to make sure that our copyrights are not stolen. We’re relying on SightSound’s technology to protect our rights.”

SightSound.com President and Chief Executive Scott Sander vowed the films will be adequately encrypted and encoded to block pirates. He said SightSound.com has developed a filter that will allow only users in the U.S. to download the films. That is important because Miramax frequently doesn’t own distribution rights to its films outside of the U.S.

“What SightSound.com has built is capable of handling substantial demand, with encryption and digital-rights management,” Mr. Sander said. SightSound.com is negotiating with other big studios to make similar deals. “We built a system that works the way the consumer wants it to work and also has the controls that work the way the studios want it to work,” he said.

Mr. Sander said the 12 titles haven’t been determined, nor has a date when they will be available. The rental price also hasn’t been determined and could vary from film to film. SightSound.com charges about $2.95 a film for the independent titles it offers at its SightSound.com Web site. SightSound.com owns distribution rights to several hundred films.

Viewers won’t find the Miramax films on SightSound.com’s site. Instead, the films will be available only through Miramax’s Web sites -either the company site or sites devoted solely to each film.

Miramax will retain a majority of the revenue generated under the arrangement, though Mr. Sander didn’t disclose how the companies will split revenue. In the past, SightSound.com’s share of the revenue generated by films on its own Web site has ranged from 30% to 50%.