January 16, 2001 4:00 AM PST

Studios look to sidestep antitrust issues

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As Hollywood builds new online distribution networks, antitrust issues loom as a possible spoiler, some legal experts warn.

Several major Hollywood studios, led by Sony Pictures Entertainment, are shooting for an April target date to debut a new service that would allow consumers to buy movies over the Web.

Though details of the service are still scarce, Metro-Goldwyn-Mayer (MGM) has confirmed it is in talks with Sony about an online video-on-demand system. Sony's discussions may also include Warner Bros. and Universal Studios, according to published reports.

But as Hollywood develops video-on-demand Internet services, its plans must be carefully drawn to avoid antitrust scrutiny, according to legal experts.

A Sony representative said the company has "carefully studied the issues" and is "confident the business development will be in compliance with all antitrust guidelines." The service calls for an open-access technology that does not exclude competitors, the representative said.

Still, some legal experts said the video-on-demand plan deserves a close look by regulators, pointing out that the Justice Department has intervened in the industry before over studio control of distribution channels, including blocking a proposal to create a studio-owned pay-TV channel in the 1980s.

"Whenever big movie studios get together and collaborate on a project, it draws the attention of regulators. And sure, there should be an antitrust concern," said Barry J. Brett, who handles entertainment cases for the New York law firm Jenkens & Gilchrist Parker Chapin.

Studio plans to launch video-on-demand services come as the industry is trying to scratch its way into an electronic format before a popular free service beats them to the punch: The studios are determined to avoid the troubles of the music industry, which was blindsided by the MP3 file format and file-sharing services such as Napster.

Battling bandwidth
Beyond online piracy, the studios face a major bandwidth hurdle in jump-starting commercial online distribution of feature-length films, which require ultrafast connections to deal with the hefty size of digital video files.

Some legal experts said cooperation between studios will likely be allowed in the interest of developing standards that could help ease some of these problems and ensure consumers are not left to choose between several competing and incompatible systems.

"The guidelines are such that competitors are encouraged and permitted for efficiency to develop new technology," said Carole Handler, an attorney at the Los Angeles law firm of O'Donnell & Shaeffer and an adjunct trademark professor at the University of Southern California. "The Justice Department recognizes that it's in the interest of consumers for competitors to get together."

Although studio cooperation may be desirable, and even inevitable, it could require a careful balancing act to avoid running up against antitrust concerns that have hounded the industry for decades.

The Justice Department has intervened numerous times to prevent movie studios from controlling distribution. Chief among these actions, the Justice Department forced studios to spin off theater chains in the 1950s and blocked plans for a pay-TV channel in the 1980s.

Los Angeles lawyer Gerald Phillips, who represented the United Artists studio in the 1970s, remembers when a dedicated agent was assigned to monitor the industry's moves.

"He was constantly looking over our shoulders," Phillips said.

Serious trouble for the industry began sometime in 1938, when government agents cracked down on the top eight movie companies that controlled not only how films were made but also the theaters where they were distributed. In 1950, a Justice Department lawsuit forced movie studios to divest from the theater business.

By then, televisions had come on the scene, stealing audiences from the movie houses. Before long, cable movie networks such as Time Warner's Home Box Office filled a deep consumer demand to watch films on TV sets, charging households a set fee for the service.

The developments essentially left the movie industry out of the loop as profits for HBO and other cable channels leaped. In 1979, for example, cable TV profits hit $400 million, double what it was the year before.

In an effort to get a piece of the action, four Hollywood studios created a pay-TV channel dubbed Premier to compete with HBO. Premier had promised subscribers that it would offer motion pictures from its participating studios at least nine months before the same films would be offered to HBO.

Break it up
Regulators quickly blocked the project, calling it an anti-competitive initiative that engaged in price fixing and group boycotting. Premier was forced to shut down four months after it was announced.

Sony's online movie service has similar markings to the Premier project.

It involves several large movie studios that will cooperate to determine how its movies will be distributed online.

But there is one important distinction, according to Sony.

"We intend to license on a nonexclusive basis from other studios," a company representative said, "just as we intend to license our product to other businesses that may offer similar security and services."

In other words, the company doesn't plan on excluding any one service, nor does it intend to limit distribution of its films to its own venture.

Indeed, not all of the studios appear to be lining up behind Sony.

It is unlikely, for example, that Paramount Pictures, a subsidiary of Viacom, will take part in the consortium. Viacom owns video retailer Blockbuster, which recently hooked up with broadband provider Enron to stream full-length feature films on the Internet as part of a trial program that will reach 1,000 households in the United States.

Another factor that could help Sony, industry experts say, is that regulators aren't as keen to target movie studios as they once were. For instance, no longer does the Justice Department assign an agent whose sole responsibility is to watch over Hollywood.

"The rules have liberalized a lot in the past few years," Handler said.

Handler, who has represented movie studios, explained that industry standards for Internet movie viewing need to be set, and the only way to achieve that goal is for competitors such as Sony and MGM to collaborate.

"Eyebrows always go up whenever competitors, particularly large companies, get together," she said. "But this kind of cooperation is permissible unless the standard is used in an anti-competitive matter, and I don't think that's the issue on the table in this case."

 

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