What The Movie Industry Can Learn From Napster

It's often said that you can't learn from the mistakes of others. But a lot of people in Hollywood are hoping the major studios can prove the adage wrong.

With its digital future gradually unfolding, Hollywood has a role model for how not to approach online distribution--the music industry. Few in the music business argue with the premise that Napster, and the file-sharing bonanza it created, compromised the best interests of copyright holders. But stopping the popular service dead in its tracks may prove to be a bigger bad-will blunder than the music industry foresaw.

With that example, the movie studios will have only themselves to blame if they fail to learn the lessons. Their industry, too, could be reduced to the quagmire of litigation and finger pointing that effectively paralyzed the major music labels while unprecedented opportunity was staring them right in the face.

So far, the movie industry is doing fine. Despite the few legal actions it's taken, it seems to understand how the Internet can fit nicely into its established practice of "windowing," or releasing its product in multiple stages--theatrical, video-on-demand, video rental and sales, cable broadcast, etc.--to create a sequence of revenue streams. Now if it can only put the issue of digital rights behind it quickly.

The Rights Stuff
"The movie industry has the opportunity to be much smarter than the music industry about the online world," says Jeremy Silver, a onetime EMI Music VP and former executive VP of defunct online music listing service Uplister. "Its intellectual-property rights situation is much clearer and simpler than for music, and the industry is already used to making windows part of its ongoing release schedule."

But as good a case study as the music industry has provided, none other than Konrad Hilbers, CEO of Napster, the object of the music labels' litigious scorn, suggested during a recent keynote address that the movie industry might have a better lesson in its own past. It was about two decades ago, Hilbers reminded attendees at last month's Webnoize 2001 conference in Los Angeles, that Hollywood fought against a threat that was expected to spell doom for the business. Today, that onetime threat--the videotape--generates 55% of the industry's revenue, according to Booz, Allen & Hamilton. And still, theater revenue has continued to break records year after year.

Why the music industry didn't recognize more quickly that the Internet could be an opportunity is anyone's guess. But Napster certainly is a big reason. Allowed to grow unimpeded for two years, the notorious service had built a following of 60 million users and was growing at a rate of a million new users a week when the Recording Industry Association of America's campaign against the file-swapping free-for-all finally forced Napster to shut down its network last March.

The RIAA's goals--making sure artists, composers, publishers, and other rights holders were paid appropriately--have always sounded altruistic enough. But whether its actions have furthered the larger cause is debatable, said Ken Hertz, a partner with the Beverly Hills, Calif., law firm of Goldring Hertz Lichtenstein & Haft, during a Webnoize panel discussion on copyright issues. In fact, Hertz intimated that perhaps the RIAA has hurt the industry more than it helped it. "No one's suggesting that the RIAA's strategy hasn't been successful," said Hertz, gesturing to an uncomfortably amused audience that had shrunk by two-thirds from the previous year. "The question is whether this is the best result for everyone."

Hilbers offered the Webnoize audience evidence that quite the contrary is true: He said CD sales were up 5% during the first two months of 2001, while Napster was still up and running. It's only since the service shut down that CD sales have fallen steadily, Hilbers said, indicating that Napster was not cannibalizing sales, as some in the industry have claimed. James Glicker, president of music services for FullAudio Corp., which is developing an independent subscription service, goes one step further. According to Glicker, Napster has done the music industry a huge favor by encouraging users to learn how to download music and burn it to CDs, two skills it will want music buyers to master in fairly short order as legitimate subscription services begin to hit the market.

Free For All
As great a threat as the music industry perceived Napster to be, peer-to-peer communities hold perhaps even greater cause for concern for the movie business. "Once 'free' gains a grip in a market," says Silver, "it is very hard to compete with it." In other words, Silver suggests that the music industry should have recognized the threat a free Napster represented much earlier, and worked to convert it into a fee-based service for the industry. Doing so certainly would have saved a lot in legal fees.

Movie execs appeared--that is until recently--to have learned from their long-ago irrationality over video. Sure, the Internet terrifies many of them. But they'd resisted taking hasty action to stop movie file swapping, aside from a suit filed in July 2000 against Scour.com, a peer-to-peer network that went bankrupt, was acquired by Centerspan Communications Inc., and is now in beta testing as a legitimate subscription service. Originally a Napster phenomenon, Initially restricted by limited bandwidth, the sharing of movie files now happens with regular frequency on Napster clones like Grokster, KaZaA , and Music City, all of which run on the peer-to-peer network operated by Dutch company FastTrack.

Because of the increasing threat the FastTrack services are preceived to represent, several of the studios joined with music labels in filing a copyright-infringement suit last month against Music City, indicating that Hollywood is feeling growing pressure to suppress movie file-sharing.

But one gets the sense that if Silver had a say, he'd recommend that the movie studios take a different approach and start negotiating with the FastTrack services now, with the goal of creating a commercial service together rather than shutting down a powerful window to movie consumers. Given the impact Napster has had on the rollout of online music services, it probably wouldn't be a bad idea.