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In show business lingo, 2001 opened strong: Holiday moviegoers spent near-record amounts at the box office. But the new year’s good cheer masks nagging fears among Hollywood executives about a threat to the bottom line that they can neither see nor touch — or even know for certain exists. The threat is the specter of a new Napster-like sensation that would make it easy for Internet users to bypass the studios and to view and swap movies for free. No service with such wide appeal looms — yet — but studio executives have been studying the music industry’s experience with file-swapping services such as Napster. And while no one will say it out loud, privately they admit they’re terrified Hollywood will be Napsterized: that some college kid will post a movie-swapping program that will explode in popularity, swiftly creating a ravenous audience of millions of users who will expect free access to Hollywood blockbusters. The now-defunct Scour Exchange, which enabled its users to hunt for and exchange multimedia files over the Internet, came close enough to cause a scare — although lack of bandwidth and huge file sizes kept it from generating a feeding frenzy. But digital distribution of movies is inevitable, and studios are finally making moves that suggest they intend to control it. It’s do or die for the studios. Making and distributing movies costs hundreds of millions of dollars — and moviegoers, cable audiences and patrons of video rental stores need to pay to see them. “Paying” is the important part. Now the studios have been jolted to action and are making a Net strategy part of the core business. “The studios have a history of watching, waiting and studying. They would have preferred to be able to do that, but the experience with Napster has told them that option is not available,” says Skip Paul, a former Universal executive who is now chairman of iFilm, an Internet film portal. At Warner Bros., executives who dabbled online used to be relegated to dot-com ghettos. The most prominent example is the entertainment site Entertaindom, which was launched in 1999 with halfhearted corporate backing and then all but abandoned a year later. With overseers from America Online standing watch, all Internet projects fall under the aegis of a Warner corporate strategy executive. The studio is digitizing its film archives — making it possible to distribute the film library online — and is believed to be in talks with Sony about launching a joint video-on-demand service over the Web. Once it becomes part of a merged AOL – Time Warner family, Warner films will also have an outlet on the vast AOL network. In preparation, the president of Warner Home Video, Warren Lieberfarb, is looking into piracy issues and “doing due diligence,” a spokesman says. Sony’s online efforts until recently were limited to promoting the studio’s movies and developing game sites. The Net baton is now carried by Yair Landau, a longtime corporate strategy and finance executive who last year was named president of Sony Pictures Digital Entertainment. Unlike his predecessor, Landau has the backing of Sony president Mel Harris and is overseeing a video-on-demand project, dubbed MovieFly, that sources say could have customers renting movies over the Web by spring. Without commenting on the project itself, Landau says: “People want to see movies on the Internet, and we, along with other studios, plan to give them a chance to do that.” Disney, the top-grossing studio at the box office for the third straight year, would not comment on reports that it also is developing a Net-based video-on-demand system. But its technology staff at the Burbank lot has long been trying to come up with ways to distribute movies directly to consumers, without the usual cut going to theaters, rental stores and cable operators. Last year, Disney signaled its new emphasis on the Internet by putting its online business into the hands of rising star Steve Bornstein, who revamped the company’s Go.com portal as a promotional showcase for Disney movies and other products. Fox, which had long kept the Internet at arm’s length, has been bringing its dot-com activities in line with the rest of its media and entertainment businesses. The company formed an online division, News Digital Media, and handed the reins to a respected and seasoned executive, Jon Richmond. Fox also is believed to have held partnership talks with Disney on a joint video-on-demand service. Universal Studios is no doubt waiting, like Warner, to see what its new corporate parent wants to do. (Universal was recently purchased by the French company Vivendi, which is heavily invested in cable.) In the meantime, Universal is still trying to make original content work on the Web. It took a stake in online film site Hypnotic, which is now based on the Universal lot. Universal President Rick Finkelstein, who recently added Internet strategy to his list of responsibilities, says the partnership is meant to help Universal find new talent. He refused to discuss any plans for digital distribution. Paramount may be in the trickiest spot of any studio. As part of the Viacom family, it could run into conflict with sister company Blockbuster should the studio launch its own digital distribution. Paramount reps did not return calls for comment. Meanwhile, Blockbuster is moving ahead with plans to distribute movies over the Internet. Last summer, it unveiled a 20-year partnership with Enron Broadband. In December, the service, called EBEntertainment, launched in three small markets in the Northwest. Its movie supply is limited, however, to the MGM archives. In contemplating their future, studio execs can’t escape the unsettling parallels between the movie business and the music industry. It took the phenomenal rise of Napster, unveiled in 1999, to force the record labels to recognize the Internet as an obvious way to distribute music. Just as the music labels surrendered control of the Net to upstarts like Napster, the studios have let the history of online video entertainment be written by Web-based startups such as Shockwave and AtomFilms (now in the process of merging) and high-spending original content shops such as the now defunct Digital Entertainment Network and Pop.com. Like the music labels, the studios also chose to take on new online rivals first in court. The film industry last year filed a lawsuit that crippled Scour Exchange. Within months of the suit being served, the service went bankrupt. Hollywood’s six major studios, with the backing of its lobbying arm, the Motion Picture Association of America, also won a court fight in New York against the public posting of programming code that makes it easier to copy DVD movies. Earlier, the industry took on iCraveTV, an online rebroadcaster based in Canada, and RecordTV, an online video recorder made available to the public by an Agoura Hills, Calif., company. This year presents the studios with challenges on several fronts besides the Web. Strikes by writers and actors are widely expected to shut down production of films and TV series in late spring. The cost of making movies continues to climb. Warner and Universal have new corporate parents and so have new internal political concerns, while Sony desperately needs to rejuvenate its feature film business. In 2000, the studio languished behind all six major studios at the box office and took home only 8 percent of the receipts, losing out to the other majors as well as some independents. Still, the Internet remains the biggest threat. Once a “Napster for movies” becomes popular, it could be too late. The record labels “stood frozen like a deer in the headlights,” says iFilm’s Paul. The movie studios, on the other hand, “don’t want to be the deer on the hood of the car, but [want to] have their hands on the steering wheel.” Copyright � 2001 The Industry Standard

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