Entertainment

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But – what has this to do with broadband?

Once the realities of global commerce and of our digital future are understood, the distribution of filmed entertainment will change dramatically. Once the reality that offensive technology will always beat defensive technology is internalized, the necessity will switch from minimizing viewing of that content through region codes, distribution windows and encryption, to maximizing viewing of that content by making it available at a reasonable cost, much as Apple has done with music via iTunes.

And making that content as ubiquitous as the consumer devices on which people want to watch it will – is fast becoming – the watchword. And this will usher in a whole new age of entertainment, and truly take us into a digital future.

This brings us back to broadband to the home, and to a change in business models that can make it a profitable reality for all, for it is broadband to the home that will allow the consumer to download the content they want to watch on these soon-to-become ubiquitous video devices, or simply to watch it on their schedule rather than one dictated by others.

Telcos and cable providers both are capable of providing broadband communications to the home. Cable providers are doing it now to a limited extent via shared pipelines. Many consumers will bet on Internet Service Providers (ISPs) and cable providers to compete successfully with the telcos.

There are problems with this bet, however. Regardless of the penetration of Voice over Internet Protocol (VoIP), and of telephone service provided by your cable company, the fact remains that when a power outage occurs, your phone still works, and your cable and DSL and satellite modems will not. Try calling 911 when your VoIP modem is down and your cell provider doesn’t cover your neighborhood.

Telcos always will have communication capability, just as they now do. Whether one will be able to count on promises of a cable future of always- available digital “dial tone” is an unknown. The current level of customer service of ISPs has inspired more than a few jokes. The level of customer service of the cable industry has inspired its own movie.

What are the steps that need to be taken to modify the business model, opening up the studios to enable their prospects to become their customers? To provide those who want to watch their product, with, well, their product?

One Solution – Global, All Formats, All Media Release

Filmmaker Steven Soderbergh and industy mavericks Mark Cuban and Todd Wagner already have that answer, and it will be interesting to see how it plays out in their capable hands. But let’s go back to digital piracy to discuss it.

Professional pirates, in addition to working often in cultures that do not respect the Western notion of digital piracy, also require working capital. This capital is gained by selling pirated products. In a global day-date release, all media, all formats, where will the pirates get their money?

An executive at Universal Studios once told me that they believed a $50 bribe to a Malaysian telecine6 operator caused him to make an exact duplicate of the digital transfer of the film Jurassic Park 3 and give it to professional pirates in China. This cost Universal the Chinese market for that film, estimated at around $750M --three-quarters of a billion dollars. Even if the pirated version was sold for 1% of that figure, that represents a profit to the pirates of $7.5M. Can this really be prevented in a part of the world where annual earnings are on the order of a few thousand dollars, at best?

As Detroit discovered decades ago, if one’s industry is going to be cannibalized, it is best to cannibalize it oneself rather than allow others to do so – either way it’s going to change. Detroit began building smaller, better cars. What will Hollywood do? How does it fit with the Cuban/Soderbergh/Wagner plan?

Working with Cuban and Wagner, Mr. Soderbergh is going to release his next few movies in what is called in the industry, global, day-date release. That means opening the movie globally on the same day. Rather than 3,000 or even 5,000 screens in the U.S., open the movie globally, all formats, all media.

The Future of Content Delivery

Like the movie? Buy the DVD at the concession stand on your way out. This is an impulse buy currently absolutely lost to the studios. Will people buy the movie later when it reaches - finally -the current consumer purchase window, months later? Not as many; interest will have waned, the impulse will be gone. Lost opportunity cost. Ask retailers how much of their sales come through impulse purchases. In the entertainment industry the answer is, “Zero.” Not a good business model.

Not sure if it’s worth a trip to the megaplex? Download the trailer and see. Not a big-screen value? Download the movie for $5.00 and watch it at home. Again, if it isn’t worth going to the theater to see (dinner, tickets, concessions and $3.00 gas to get there and back), right now the studio isn’t making any money on it at all. $5.00 is a zillion-percent increase over that, right?

But – once out there, will people then transfer it all over the place, to all their friends, making the first $5.00 the only revenue booked for that movie? Are you or your friends really going to go to all that

trouble for $5.00? But seriously… Do people still buy CDs even though the songs are on the Internet? Yes. Do they buy as many? No. Is Internet content delivery going away? No. Is Apple making money with iTunes? Yes. It is better to cannibalize oneself than to allow others to eat you.

If people want to see a Gladiator on the big screen, or see any large-format movie in a large- format theater, great. If they like it, they’ll also like the DVD they buy on the way out. If they’re unwilling to see it on the big screen, give them what they want on a format they desire, and make money doing so. Is that so difficult?

What You Want at the Price You Want

Everyone will be able to get the content they want for a price they are willing to pay, and in a format in which they want to watch it – and at a quality they expect. As people migrate to HD televisions, their quality expectations will rise – so will all the jobs to invent, design and build new systems at that definition level. And we’re not even discussing home media servers, a computer server on which enthusiasts already are copying DVD (and other) content to then pipe around their homes to watch or listen to whenever and wherever they want. This is a market all technology companies are trying to conquer right now as the next big splurge in consumer device spending, based on: entertainment.

Suppose they download a movie for $5.00, like it, and then burn it to DVD, or copy it to the media server? This is a bad thing? Your customer likes your product so much they want to keep it forever and watch it wherever they go? Like laws already on the books are going to stop them? Get the $5.00! Make it up on devices consumers buy to watch the stuff.

Industry Convergence

Does this mean studios may gravitate toward mergers between content owners and consumer electronics? Did Sony just buy MGM’s library?

Not only will titles from Sony and MGM be released as packaged media (DVDs, Blu-ray Discs), all of these titles are now owned by one of the premier consumer electronics companies in the world. Doubtless these titles will begin showing up

on PlayStations and any future consumer video- delivery device they invent. That’s convergence.

So now that studios have all this cool digital video content they want consumers to watch, how much will a studio spend to keep them from doing so? They are spending millions annually right now. This is intelligent?7

The Farce of Protecting the Content

What about the costs to protect their content? Copying is a business problem that needs to be addressed by changes to business processes. Engineers inventing whiz-bang technology, promising the next version of “unbreakable” encryption, are not businessmen. Frankly, they are wasting the time and money of those whose business is making stuff people want to see, by trying to make that stuff impossible to see – except under their terms. This is freedom of the marketplace? It doesn’t even make sense.

Making copying of studio content redundant, by making their movies available globally in the format their customers want, will increase their earnings, just as did the VHS revolution, against which they also fought tooth-and-nail. This stuff isn’t rocket science.

Hollywood right now is suffering from one of its periodic downturns. They could use a change that would let them stop throwing money down this particular technology rathole. Recognizing that A- list talent isn’t the only way to open a movie, that impulse purchases will bring in entirely new revenue streams, that opening up distribution channels their customers already use and are

begging for content owners to use to fulfill product orders, will increase their revenues, cut their costs and increase their profits. But it must be enabled.

Or, they can stand around and watch others move ahead as they continue to try to cling to a past that is as long-gone in the technological twilight of history as is a star-studded movie opening in a first- run theater in Westwood or Hollywood, not being shown even in San Francisco for weeks, and not reaching Kansas for months.

Baby, those days are over.

The DRM Roll Please: Filmed Entertainment and Digital Piracy

In addition to the distribution window model, content providers are dealing with the issue of digital piracy – which, again, is a business model issue. The only asset content providers have is, interestingly enough, their content – their intellectual property, or IP. In order to maximize their revenue from that IP, they need to maximize the eyeballs watching it. Digitization allows just that. Once digitized, content can be viewed and listened to anywhere at anytime and on a fast-increasing family of digital entertainment devices, from video iPods to PlayStations to advanced cell phones.

Why haven’t the content owners digitized all of their IP and ensured its availability for a price? After all, Steve Jobs is making a bundle with digital music in a sustainable business model, even though free files sharing services abound. The content owners share in this revenue.

The answer lies in the extraordinary conservatism of the filmed entertainment industry. This is an industry, remember, which would rather greenlight James Bond 85 or Rocky 62, than to make an original movie; would rather find a vehicle for celebrities, no matter how silly (Gigli, anyone?) than to take a chance on a literate product. This is an industry that never would make 12 Angry Men, On the Waterfront, To Kill A Mockingbird today, other than as remakes. When the cost of an original negative is over $80M, and no one knows if the movie will be a success, this strategy seems sane. But those finances are eminently fixable.

How, speaking of which, is this very expensive IP being protected in the digital world now? Other than suing one’s customers? It isn’t. Sure, studios and technology companies are creating all kinds of cool applications to administer what is called Digital Rights Management, or DRM. But this is a battle of defensive technology (studios) trying to beat offensive technology (pirates). Offensive technology by definition, however, always is advanced over defensive technology, for the simple reason that until one knows the offense, the defense cannot be designed. Simple concept, but seemingly too complex for the movie industry.

Of course, levels of encryption likely can be introduced to ensure no one can see the content, but it needs to be seen to be seen to be valuable. And, of course, encryption systems can be designed that are next-toimpossible to crack. But piracy rarely relies on cracking an encryption algorithm. The CSS encryption for DVDs was hacked because a licensee left source code out on the web – by accident and against the requirements of their contract. Movies also are pirated often by small bribes to insiders. Film cans get “lost,” digital files get sent to the “wrong” address. Happens all the time.

You don’t think that a new release showing up on the web before it’s released into its first theater is because of outside piracy, do you?

Studios refuse to implement technologies to protect their content during production. Why? Developing and implementing a security infrastructure at a studio costs money. Where will that money come from? Taxing each production? The production company will just go to a different studio; their production already costs enough, thank you very much. Remember – studios don’t make movies; they finance and provide space for production companies to do so.

No one has decided to be able to “afford” to secure their product. As one studio executive pointed out to me, it’s tough to keep going to Congress and ask for protection when “we don’t even protect our own stuff on our own lot.”

Increase Users, Increase Profits

OK, so now we know the future of content creation and viewing. But what does that have to do with broadband in the home?

Simple. That’s what this is all about.

Broadband to the home will allow the studios to meet the desires of their consumers, and that’s where the money is – in the consumer’s pockets. (It isn’t in theaters, which regularly lose money on the movie and make a profit only from concessions.) Broadband to the home will allow the continuing flourishing of a very large industry, one that creates thousands of jobs.

Once global releases are occurring, the majority of viewers may be in homes watching movies they have downloaded, playing electronic games based on the movies, often in Internet-enabled groups spanning the globe, and communicating with others about their experiences. Movie-based games are profit-making enterprises for these same studios. Enabling their access and play globally via broadband infrastructure will increase users, increasing profits.

Entertainment Drives Broadband to the Home

Broadband in the home will drive an increase in purchasing of HD television sets and high-quality sound systems, advanced gaming devices, more capable software -- all of which will drive high-tech jobs in the US and abroad, raising standards of living everywhere.

Once entertainment has drawn broadband into the home, the uses of that bandwidth will multiply enormously, with applications of which we have yet to dream, providing information, help, data and experiences we otherwise would not get.

The jobs created by this added capacity will be many in known technology areas - and likely many more in areas we have yet to think of.

Let’s Get It Started

How does this get started? If the expected value to the economy of the opportunities presented by broadband is sufficient, legislation ought to be considered to assist infrastructure providers in the implementation of broadband fiber local loops.

After all, today we subsidize entertainment by creating a football stadium for 80,000 folks to watch a game twice-a-month for four months a year. If we assist broadband implementation, we will provide entertainment to 280M people 12 months a year, and move our standard of living upward at the same time.

It seems a logical thing to do.

About the Author

The author of this paper is a long-time entertainment industry insider. Part technologist and part industry pundit, the author has watched the industry flail over the notion of broadband delivery of entertainment for many years. Because of the controversial nature of this paper, the author has asked to not have their name disclosed at this time.

About FirstMile.US

The FirstMile.US objective is to build demand for big broadband through grass-roots education activities – creating the “I need that. When can I get it?” broadband attitude across the nation. Visit us at http://www.firstmile.us.

6 A telecine is the machine used to transfer film images to digital images.
7 Had the music industry, as recommended by countless insiders and technology vendors, put their catalogs up on their own servers as soon as the power of the Internet began to be recognized, allowing all of us to create our own playlists from the tens of thousands of hours of content gathering digital dust on their computer tape cartridges, no one would ever have heard of Napster. Unwilling to go back to a previously- successful business model (remember 45s?), sticking their heads in the sand of a business model based solely on the album, they were unwilling to do so. Now they are reduced to suing their best customers and complaining that people don’t understand that talent must be paid to create. Like that argument will make it when talent is paid and behaves it does…