Digital Media

Woo wee, did Hulu's fortunes flip-flop fast.

Jason Kilar, Hulu CEO

(Credit: Greg Sandoval/CNET Networks)

The Web's deepest stockpile of full-length TV shows and feature films is seeing some very public infighting over its future. The disagreements are over how Hulu should generate revenue and even how to sell ads, according to a report in Mediaweek.

Things were going so well. Since Hulu's October 2007 launch, the Web video site founded by NBC Universal and News Corp., has grown its audience, generated big ad revenue, and been bathed in positive press.

Hulu has mounted the only serious challenge to YouTube. The site also enables its TV network backers to offer viewers an alternative to pirate sites. But the indications are Hollywood is dismayed over Hulu's earnings. On the issue of Web revenue, the studios seem to be saying: "Is that all there is?"

The first signs that Hulu may not be the cash cow that everyone involved had hoped for came earlier this year. Instead of ballyhooing the selling out of ad inventory like it had done a year earlier, Hulu's managers hushed up.

Then, NBC Universal CEO Jeff Zucker and News Corp. Chairman Rupert Murdoch said publicly that Hulu may charge for some content. In an interview with Dow Jones last week, News Corp. COO Chase Carey said it's important that Hulu have "a real subscription aspect," but added some content will always be free.

Want to bet that the content you'll have to buy will be the latest and most popular TV shows and films?

Hulu's management is wrestling with these issues at a time when the public increasingly develops an appetite for high-quality Web video.

The number of U.S. households with broadband access that watched full-length movies and TV shows online doubled in the past year, according to research firm, Parks Associates. According to the firm, 45 million households regularly watch either TV shows or films via the Internet.

Jayant Dasari, a research analyst at Parks, said people like the control that sites like Hulu give them. If they miss a favorite TV show, they can get caught up on Hulu.

"If they're on the road or don't have access to a (Digital Video Recorder) they are more than willing to consider the option of broadband video," Dasari said. "This is a trend that can no longer be ignored."

(Credit: Greg Sandoval/CNET Networks )

Dasari said Web video's growth is being stifled by the lack of content available at Hulu and other sites. For example, there are only a handful of feature films available at Hulu. Crackle.com, Sony Pictures' Web service, only posts a fraction of its vast library of films on the Internet, but there's not another studio even offering that.

So what? What does it mean if the studios hobble Hulu? Consumers have watched TV for over half a century. They can still go back there. Right?

Big Champagne CEO Eric Garland, whose company tracks traffic on peer-to-peer sites--where most illegal file sharing occurs--told me recently that consumers are heading online for video entertainment and he doesn't expect them to return to their traditional viewing habits ever again. Garland's data shows that Hulu is the first legal Web service to snatch market share away from the pirate sites.

He also said that the lords of video, with their rejection of Internet businesses, are behaving much the same way the music industry did when confronted by the digital age. If network and film studio executives are dissatisfied with the returns they see from Hulu and similar sites, they should consider the possibility that this is all the new media landscape will yield, Garland said.

LOS ANGELES--There are a lot of reasons why the entertainment industry is still trying to figure out how to wrangle Twitter: real-time tabloid drama, on-set spoilers, and the fact that 140 characters offers a lot of ways to say a movie really sucks.

The 140Conf LA event, which took place on Tuesday and Wednesday at the Kodak Theatre on Hollywood Boulevard, had a great opportunity to be the definitive discussion hub for tackling those tricky issues and complications that arise when the much-talked-about "real-time Web" collides with the old-school entertainment industry. That didn't happen. Instead, the event was a general showcase of the possibilities of Twitter, much like at the previous 140Conf event in New York this summer.

Conference organizer Jeff Pulver said that despite the Hollywood setting, he didn't want to take a purely entertainment-focused angle. "This really is not a Twitter conference, it's a gathering of people who use it as a platform and speak it as a language," he explained at a post-conference cocktail event on Tuesday. Pulver said he intended 140Conf LA to be "a celebration" of the possibilities of Twitter and the people who are passionate about using it, a disparate crowd that includes marketers, public servants, and yes, entertainment industry professionals. Indeed, 140Conf featured panels about police chiefs who use Twitter, teachers implementing it in the classroom, and how it's affecting the photography profession.

True, there were a lot of entertainment types there, mostly those talking about how Twitter has positively affected their business. Industry bloggers talked about how the blast-it-out nature of Twitter makes it easier to harness and report fast-breaking news. "Access Hollywood" personality Billy Bush talked about what he's learned from Twitter, like "no TUIs. Twittering under the influence is not a good idea." And "Tonight Show" blogger Aaron Bleyaert talked about the program's popular "Celebrity Twitter Tracker" feature, in which it makes fun of banal celebrity tweets. "Making fun of how celebrities think that everything they do (matters)," Bleyaert said, "Twitter's been great for us."

More interestingly, Sarah Ross, head of digital at the Ashton Kutcher-founded Katalyst Media, said paparazzi interest in the Twitter-happy Kutcher has actually declined since he started documenting his life on the microblogging service. That's fascinating, and it would've been cool to see whether the case is the same or different for other celebrities who tweet. It would've been great to hear from an industry personality who doesn't tweet, or one who's quit the service, or some perspectives from the production or public relations side of things, or perhaps someone who manages celebrity Twitter accounts. There's a lot out there.

But, Jeff Pulver said, he didn't think a Twitter-and-Hollywood conference would have much draw.

"I don't think anyone in L.A. would give a damn if we had a conference about the entertainment industry and Twitter," Pulver said. "It's not as interesting to people here as it is elsewhere."

Another conference attendee at the same cocktail party voiced a similar opinion. "This is not a studio crowd," he said of the people who'd showed up for 140Conf. Studio executives are "not innovators, not movers. They're very reactive."

Fair enough. Folks like Pulver, who have been using Twitter since its early days, are probably pretty sick of hearing about the latest gossip-blog diatribes getting plastered all over their conversation tool of choice. But headlines in the likes of Variety, The Los Angeles Times, and the Hollywood Reporter beg to differ. "Bones" creator Hart Hanson inadvertently created a mini-firestorm when a tweeted joke about swine flu on-set was taken seriously. Some studios have reportedly started inserting "no tweeting" clauses into contracts. As the likes of Perez Hilton and TMZ continually remind us, it's also given train-wreck pop stars a whole new outlet to hate on one another.

The entertainment industry has historically been reliant on the deft spin of public relations to keep a gaggle of wild personalities under wraps. Social media, not surprisingly, is a real problem. That goes double for Twitter, which can be updated on-the-fly from any mobile phone on the set of the latest hyped-up teen vampire flick or on the sidelines of a velvet-rope tiff at the Roosevelt Hotel. 140conf, rather than focusing on the glittering possibilities, could have given these very real issues some more face time.

Take the no-tweeting rules that are getting imposed by studios, production companies, publicists, and even sports leagues. "The majority of celebrity tweets are inane and not of concern to studios, but they still need the stronger contractual protections to cover themselves against the minority," entertainment attorney Jonathan Fuhrman, who previously served as vice president of business and legal affairs at The Weinstein Company, explained to CNET News.

"Every talent agreement--with writers, directors, producers, cast, and crew--has a standard confidentiality provision," Fuhrman continued. "That's what really is at issue here. In a world where anyone can tweet, the new, buffed-up confidentiality language is an important protection for the studio to prevent any of the talent from releasing this. And this is before you take into account the whole other issue about publicists and marketing campaigns: we are talking huge, million-dollar organized campaigns that can be compromised by an ill-advised tweet."

But on the flip side, that potential benefit of Twitter was paraded onstage at 140Conf. "Heroes" creator Tim Kring, for example, gave a well-attended talk on Tuesday about how Twitter has allowed the NBC sci-fi show's team to interact with fans in an unprecedented way. "You can follow the escapades of the show by following the people involved in it," he said.

Still, Kring also hinted at the complications of using Twitter as a vehicle for connecting with TV audiences: "We're now making Episode 13 and we are airing Episode 8, so at the beginning of the season we're up to two or three months ahead of where the audience is," Kring said. "The making of the show is so far ahead of where the audience experience is that it's hard to have a real-time relationship." Unfortunately, he didn't elaborate on how the show keeps tabs on its Twittering team. Have they ever had any accidental leaks or near-missteps? Kring didn't talk about that.

"Twitter has become hugely important in marketing movies," Fuhrman said. "The perfect example is 'Paranormal Activity.' What Twitter did for that movie, every studio would love to bottle that formula, and believe me, they'll try." In other words, it's a delicate balance. Twitter, for all its 140-character simplicity, has the potential to make or break a big Hollywood success.

Even though he didn't think it merited its own two-day event on the Kodak Theatre stage, 140Conf creator Jeff Pulver did acknowledge that he thinks the Hollywood-Twitter relationship is only going to get more complicated, especially when it comes to the big movie studios.

"They're scared because they want to be the gatekeeper," Pulver said. "It's a big conflict and it's going to get worse."

This post was updated at 11:33 a.m. PT on October 30 to correct the spelling of Jonathan Fuhrman's name.

Asked whether the film industry is doomed, Big Champagne CEO Eric Garland predicts that it has more advantages in the Digital Age than music labels.

(Credit: Big Champagne)

During a visit to Hollywood last week, I wanted to talk to people who knew a thing or two about the film industry's burgeoning meltdown. One of the people I sought out was Eric Garland, CEO and co-founder of Big Champagne.

Beverly Hills, Calif.,-based Big Champagne has collected data on file sharing and sold it to media companies for almost 10 years. Garland's company has survived all that time, even while making the same sad pitch. He tells the music labels and film studios they are going to be chopped down at the knees by the Internet and online piracy--but that doesn't mean they can't survive.

As anyone might have guessed, almost everybody in media initially told Big Champagne to stick a cork in it. Back in the early part of the decade, nobody wanted to hear it, and Garland logged lots of five-minute meetings. Thanks to his persistence, though, he saw up close how digital technology buffeted the music industry. Now, some of the big labels are striking partnerships with his company.

What makes Garland an important speaker on this subject is that despite his gloomy message, he's bullish on both the Internet and movies. His interests and Hollywood's are aligned, he says, because if the studios don't survive then he loses customers. He wants them to do well but he just doesn't think that telling them what they want to hear, the "bedtime stories" as he calls it, is going to help.

In his interview with CNET, Garland predicted that the film business is in for a period of downsizing and cost cutting; that Hollywood's digital evolution will likely be similar to the music industry's but will unfold much faster; and that great wealth will still flow into the sector.

Question: Your business is watching file sharing. So is it spreading to the mainstream? Is Mom and Dad from Sheboygan pirating content?
Garland: Oh yes, particularly Mom and Dad in Munich; Mom and Dad in Seville; Mom and Dad in Paris. When we talk about video the reason I single out the European cities is because that's where people are forced to wait a long time to see content legally. In the digital world, we don't want to wait three months, six months. We're just not accepting that anymore...we want it all, we want it right now and even Mom and Pa Kettle are getting to the point where they say if it's not on, let's just fire up the computer and watch it. If they want me to wait six months, I've got other options. And people don't really have a conscious or qualms about that, or at least it's mitigated by their feeling that they are entitled to keep up with the Jones'. It is the Twitter, real-time Internet expectations.

What we're seeing is a tremendous pile-on of feature film and television content, led by TV worldwide. In terms of growth, it is eclipsing the sharing of these little music files. I mean most of the new adopter activity, most of the increase in terms of people, transactions, and downloads is coming on the video side.

That means that this year or next year is going to be Hollywood's year to really start to lose audience--not just at the fringes but in regular middle-American living rooms. They'll lose them to the other box, to the smart box.

Q: Reed Hastings (the CEO of Netflix) wants to see every TV set come equipped with the ability to access the Internet. That will only accelerate Hollywood's demise, no?
Garland: Again, I think it drives both. The winner is the one who ultimately wins on the merits, and those are ease of use. Certainly the legitimate markets should win there. It did in music. Remember, iTunes wins in large part because it works so much better than anything else. So, Reed should win. His competitors should win on ease of use. Quality of content? They should at least be competitive in terms of having great on-demand, high-definition, rich audio, video. But when it comes to depth of catalog, that's where pirate markets have the edge. They have it also in timely delivery. Sorry. Go to Hulu right now and type in 24. There's just a clipped sort of terse message that says "Sorry about season 1 and season seven...

Q: Because they want to sell me past seasons on DVD, right?
Garland: Yes, but Surfthechannel.com, (an online site where users can find links to a plethora of unauthorized shows and films) doesn't care about that. They're happy to serve up current and past episodes of "24." And just like music, Hollywood's first reaction to that will be "Well, that's just not fair. That's jumping the turnstile, that's breaking the rules. We have to shut that down, because if you remove that option then people will be more patient." You won't remove that option, and you're losing valuable time if you focus on removing that option at the expense of improving that option and bettering that option, beating that option.

The music people used to say, "How can you can compete with free?" And now you ask anybody in digital music and they'll tell you, "I'm just trying to compete effectively with free." They've embraced the very condition that up until very recently they said they would reject. I'm telling you, you are going to compete with free. Sometimes you're even going to win, once you make the commitment to living in the marketplace as it is and not as you wish it were or as it once was.

Q: That's got to be hard for people in that industry or in any industry to hear. After hearing that, I almost want to start collecting donations for Matt Damon.
Garland: But I want to be clear that I was far more bearish on music than I am about Hollywood's prospects.

Everything that the customer demonstrated that they wanted starting with the original Napster was diametrically opposed to what the music industry needed. Everything that the distributor or the (bandwidth providers) wanted was diametrically to what the music industry wanted. In other words there was no place to hammer out a marketplace that would work for both sides. Customers would say "I want MP3s" and the music industry would say "We can't do MP3s because we have to have (digital rights management)." The customer would say "deal breaker!" The customer would say "I want every piece of music ever recorded. I want access to everything, everything I can remember dancing to no matter what year I went to prom and I want it right now."

Napster said sure. The music industry said "We can't do that. We can only license these titles." Deal breaker.

The customer said "I want to eat all I want at one low price that feels like free." The music industry said "No my friend, it's a dollar a track." There was no point of agreement. Hollywood conversely, is very different.

Hollywood says we like DRM, we would like to extend to you this content but on terms that we control and the customer says "Yeah, that's cool. I've always been good with that. I like renting. I'll give it back to you when I'm done." The music industry says "How come we can't we do that?" The customer says "No, because it's not my expectation. It's not the contract that we've had all along." But in video this is in the contract we've had all along. Blockbuster has always given us stuff and we paid for it and then we had to bring it back. We're good with that. There are all these places where what the online consumer is demanding is actually a workable proposition to Hollywood. There's a lot of alignment but some really some important places where there isn't any. There's no easy fix. When I tell the film studios "The good news is that you want people to rent and not just own and people are happy to do that. Check."

I say "You want some DRM--people are accustomed to DRM. There's DRM on DVDs." But when you get to one where you want customers to wait two months for a DVD, then they say that's not negotiable.

Anybody who really understands the film business will tell you that's the end of our lives as we know it. That's the end of our industry as we know it. We have to be able to preserve those windows. We have to regain at least enough control to say you can have it, but not today. And when I tell them you're never going to get that, that's when the conversation breaks off and curse words are uttered and we go back to our corners.

Q: What windows are you referring to? They have windows that allows cable channels and broadcast stations to get exclusive access to a film title for a specific amount of time. But you can't be talking about theaters too. What is Hollywood if it can't promise theaters exclusive access to films?
Garland: I think the theatrical experience is totally viable. We love going to the theater. But when we walk out to the lobby I want to be able to pick up the DVD. If I got my 3D glasses on and my kids say "Can we watch it when we get home?" The answer has to be "yes." If the answer's no, the film industry loses.

Garland: These are tough lessons. By the way, I don't want to sound like the armchair pundit. You end up sounding not very empathetic. You sound like some ass who says "This is how it's going to be and if you don't like too bad." I'm not trying to be dismissive. I'm not trying to be glib about this. I understand the implication may well be tens-of-thousands of jobs lost, billions of dollars pouring out of the industry, shutterings, downsizings...I'm not trying to make light of that. I'm just telling you that in the final accounting i think some things we now know. Some of them are very unpopular even in concept and some of them are very hard to incorporate into strategic thinking, but that doesn't make them any less avoidable or inevitable.

Q: Are paywalls one of the solutions? That's what Hulu's leaders are considering.
Absolutely not. What you have is a very effective antipiracy tool in Hulu, and I'm specifically drawing on the numbers and not just citing anecdotal evidence. People really do prefer the Hulu experience. So you actually have cannibalization, for once, of a pirate market by a legitimate market. You have a legitimate market stealing share and audience away from a pirate market. Put that behind a subscription wall and they'll just go back.

Q: But it doesn't appear that Hulu is making the kind of money that will satisfy content owners, at least those News Corp. and NBC Universal (Hulu's backers).
Garland: The cute answer, which is probably the truest answer, is that growing a sector is a privilege and not a right. There is no right size. There is no correct or God-given size for any sector. Why do we get to make movies that cost $300 million to make? Because we have found venues where people will spend more than $300 million on the result. If people spend only $50 million then the price of a movie must be $49 million or less.

I think in today's dollars no one could make "Gone With The Wind" because at the time this movie was made when everyone went to the movies. It was something like 79 percent of the population. The cute answer is that movies will get smaller.

I know people are tearing out hair and spinning in graves, but maybe "Transformers" has to be made for $75 million next time. Oh my God, what am I saying? Put the words back in your mouth. That is just a pretty plain faced observation. One outcome might mean that in the Digital Age the return on investment on a major International tent-pole franchise is not a billion dollars. It's a quarter of that or a third. Therefore we have to get our costs in line with the market value.

When we talk about this in 3 or 5 or 7 years, one thing we will all have to concede is costs have to come down. We don't have the total control over the distribution chain that we exploited so well as industries for so long. Without that you can't take advantage of the consumer in the same way.

Q: I feel like I just heard the doctor give his prognosis and the patient is a goner.
Garland: It's just "Lose weight man (laughter). Get on a treadmill, change your diet and lose weight."

Q: Has Hollywood given up on fighting piracy?
You mean has changing the name from "antipiracy" to "content protection" a symbol of a retreat or a softening? No. Not at all. It's likely that (the Motion Picture Association of America, the trade group of the six major studios) is trying to be more focused, more strategic. They are upping their game because that's how seriously they take it and that's how high a priority it is. On the contrary this is not the end, this is early days.

We now have the benefit of hindsight. We have watched an industry go through this. I think we can say with some confidence we know how this unfolds. What will happen is the studios will exhaust every available remedy and there will be a series of evolutions, meaning they will exhaust one remedy and a new one will present itself. These things will be pursued in tandem. They will pursue technological intervention on the Internet. This goes to the study at NYU that basically says this has had no effect. Ultimately, because they are spending a lot of money and not getting results, they'll become disillusioned with these vendors. They'll clean house. But something else will present itself.

"Well, maybe we were focused on trying to disrupt the networks and we should have focused on a technological solution to mass notification." Well be on to the next thing. Well spend some number of months--I'm just essentially recounting the music industry's journey--filing vast numbers of infringement notifications, letting everybody and their granny know you're infringing our content. They'll take the temperature and they'll do surveys and collect data and they'll try to convince themselves that this is having a real effect in reversing the tide and then after some period it will just not have been convincingly demonstrated to have worked. And they'll realize that by any number of measures the piracy problem has only grown worse. But they will have to exhaust all of those things and more. They will have to chase legal remedies, legislative agendas, all the way to what they view as being the end of the line before they say "OK, so this really is the landscape we're stuck with. As much as we didn't want it, this appears to be it. Now we have to just dive in and make businesses that work here."

And that's where music has only just arrived in this country and note it hasn't even come close to arriving in a lot of European countries. If you ask Universal Music Group in the U.K. "Are you going to win this war on piracy?" They will say "Oh yes, swiftly and decisively and soon. The rate of peer-to-peer infringement will be down 70 percent in the U.K. in the next few months. They have specific targets. Not here. We've exhausted all of those paths. There's a big gap. If the music industry in this country just now sort of arrived at the conclusion where they say "We just have to play on this field even through it ain't home court and there isn't a lot of advantage." And in some territories, music hasn't even gotten there yet, then how can Hollywood be there? This is early in the journey. I do think it's going to be a quicker path. It has to be. The economics are going to come down faster.

I spent years when everyone ignored what I was saying because I know it's not pleasant to hear. But my job is to help businesses all over this landscape to get from point A to point B with the least amount of pain. But that means getting smart and getting ready for the transition before the competition. I want them looking in the mirror now and not when it's too late. It's tricky. I want these guys to do well but l don't' want them to tell themselves bedtime stories. That's what the music industry did.

They spent a lot of money going back to antipiracy and spent a lot of emotional dollars on vendors who sold them panaceas and told them everything is going to be okay. "Don't listen to Eric Garland," they said. "He's a gloom-and-doom guy. He gets off on telling you things are going to be terrible. Spend a few million dollars over here and we'll clean up the Internet for you. Hey, I understand that. I want to open up my wallet for that guy too. It's comfort food.

But my message to media companies is they don't have that kind of time anymore.

Ross Levinsohn of Velocity Interactive.

(Credit: Rafe Needleman/CNET)

LOS ANGELES--Ross Levinsohn, former president of Fox Interactive Media and now partner at media venture firm Velocity Interactive, spoke to the execs at the OnHollywood conference here Tuesday to deliver a warning to the entertainment industry: "Take action now or be replaced."

The nut of his argument (and hardly news, to be fair) is that media consumption is changing dramatically. The old ways are dying: Newspapers are drying up. Magazine publishing is off. Music revenues are down. Even DVD sales are slowing. And the areas that are growing--content downloading and subscriptions--run at lower margins than the media they're replacing. So it's time for fundamental change.

The good news, he says, is that there are areas of growth: Google searching is up (56 percent year over year), video streams are up (45 percent) and new platforms like Twitter are way up (2,565 percent yearly growth, he said). Three-quarters of Internet users watch online videos every month. Also, three-quarters of the top iPhone apps are games. There is a robust new entertainment economy. It's just not the old entertainment economy.

Levinsohn's favorite numbers: "29 vs. 8," which is the percentage of media consumption time consumers spend online vs. the percentage of ad spending there. Dollars follow eyeballs, he says, and this indicates a huge money-making opportunity for online content. But the old regime in Hollywood will miss the money boat if it doesn't change fast.

He cautions that "If Hollywood chooses not to act now, there will be a whole new set of owners." Those owners: Google, Apple, Cisco, and the like. But do these tech companies want to own Hollywood?

During Levinsohn's talk, I twittered his warning and got a pretty fast @ reply back from Dan Scheinman, SVP of the Media Solutions Group at Cisco. He said, "Cisco does not want to own H'wood! We want to make it $$$." I followed up with him after the conference.

"We're here to build value for Hollywood," Scheinman told me. "We can bring the assets together in a way that helps media companies make money."

Levinsohn likes these numbers.

(Credit: Rafe Needleman/CNET)

"Digitization and broadband are changing forever the consumer usage patterns. The consumer is far more in control," Scheinman said. Some in Hollywood are "trying to preserve existing business models while transitioning to the new world." He said that Cisco, "wants to work with these guys to work them through this," and by "work through this" I think he meant "help them to see the light and change course." But it was clear that Cisco is content to provide infrastructure technology to the entertainment industry. Scheinman doesn't want to see the Silicon Valley switch and router manufacturer in the middle of the content business.

Both Levinsohn and Scheinman quote Jeff Zucker of NBC Universal, who has famously said that in entertainment, analog dollars become digital dimes. Scheinman wants to help turn the tide on the lowering margins of entertainment content, and turn the digital content back into dollars. His prescription to reverse the course of declining margins has three steps:

1. Know the customers--something that's easier with metered and measured online delivery than it is with broadcast.

2. Technology needs to be an enabler, not a burden and not a threat. It's too expensive right now. Running Web sites, paying for bandwidth, and in some cases even paying the utility bills for new media technologies costs too much. Companies need to get aggressive about pushing the cost down.

3. Entertainment companies need to own their own data, which means opening a channel directly to consumers, even if there are middlemen distributors in the value chain.

At the beginning of his OnHollywood keynote, Levinsohn said that it "wouldn't be hard" to chart the correct course for the entertainment industry in the 15 minutes he was allotted to talk. Rather, in 15 minutes he very clearly laid out why the content industries need a financial reinvention. He was very precise about where Hollywood is leaking. Users are consuming content differently. But the important subtext was this: They're still consuming, and they'll still pay, either directly or through vehicles that monetize their attention, for quality entertainment and information.

Updated at 8:50 a.m. to include disclosure by National Consumers League that RealNetworks helped finance survey. More details at bottom of the story.

(Credit: A survery commissioned by the National Consumers League showed consumers overwhelmingly want to be allowed to backup their DVDs. )

It's not just the Internet's so-called freetards who are criticizing the movie industry for stating last week that consumers are not within their rights to make backup copies of legally purchased DVDs.

Count the National Consumers League, a 100-year-old consumer watchdog group, to be among those who argue the Motion Picture Association of America is much too inflexible when it comes to blocking DVD buyers from backing up their film discs.

The issue of whether consumers have the right to make copies is at the heart of a legal dispute between RealNetworks and the MPAA. Last fall, Real attempted to distribute RealDVD, a software that enables people to make digital copies of their movie discs and store them on hard drives. The MPAA filed a lawsuit accusing Real of violating copyright law and breach of contract. During a hearing on Friday, MPAA lawyers made it very clear what they think the rights of consumers are when it comes to copying.

"The studios have the right to be compensated for additional copies made of their copyrighted materials," Bart Williams, an attorney representing the MPAA, told U.S. District Judge Marilyn Patel. "That's the whole basis of copyright."

For consumers who buy a DVD version of a film and then want a digital copy for their iPod, the studios apparently want to dip into their pockets a second time. After being informed of the MPAA's statements, Sally Greenberg, executive director of the National Consumers League called the comments "troubling," and said Hollywood is out of step with consumer needs.

"I'm not in favor of copyright infringement," Greenberg told CNET on Sunday. "I want artists to get their due. But there is a level of resistance from the (film) industry that drives consumers crazy...we've been DRM'd to death."

MPAA representatives were not immediately available for comment. Last week, Greenberg wrote on the NCL blog that the group commissioned a survey--and helped finance it with money received from RealNetworks--that showed consumers overwhelmingly want to do more with the DVDs they purchase and all the respondents said they believed they should be allowed to back up their DVDs to preserve film collections.

"Consumers are currently limited by digital rights management (DRM) restrictions on most DVDs," Greenberg wrote in the blog. "Without illegal ripping software, we can't currently save the contents of most DVDs to our computers, whether for backup purposes or simply to access our DVD libraries without carrying around the actual discs."

According to Greenberg, the mean number of DVDs in consumers' collections was 77.8 discs.

"Some "expanded" editions of DVDs come with the ability to save an additional copy to a computer," Greenberg continued. "But these editions generally come with a higher price tag."

The expanded editions Greenberg referred to are the digital movie copies that some of the studios have begun packaging with discs but they general cost several dollars more.

Greenberg said this is the wrong time for the huge entertainment conglomerates to be sticking it to consumers.

"If our entertainment budgets are shrinking, it's more important than ever to get value from the DVDs we already own," Greenberg said. "The entertainment industry would be wise to pay attention to the attitudes and purchasing desires of the typical American consumer, who, according to our survey, is very interested in being able to back-up his or her collection."

Note: I learned about the NCL's position on DVD copying from Greenberg's blog post. Greenberg never disclosed in her blog post or in our conversations that RealNetworks helped finance the survey. A tip from a reader led me to ask an NCL spokesman on Monday morning about the relationship between NCL and Real. He informed me that a press release was issued last week disclosing the relationship.

Move over Hotforwords, Lonelygirl15, and all the other YouTube stars. The video site is bringing in more professionally made content and plans to make it a marquee product.

Some of YouTube's most-watched contributors will get some competition from the likes of Sony Pictures.

(Credit: YouTube)

The Internet's largest video site on Thursday announced that it has struck deals with a host of entertainment companies, including Sony Pictures, CBS (parent company of CNET News), Metro-Goldwyn-Mayer, Lionsgate, Starz, and the BBC, to acquire "thousands" of TV episodes and hundreds of films. The new content will only be available in the United States.

YouTube executives also said during a conference call that they have redesigned part of its Web site to create separate areas for professionally made content. On the site's front door will be two new tabs.

"The 'Shows' tab allows you to browse shows by genre, network, title and popularity," YouTube said in a statement. "The 'Subscriptions' tab will grant logged-in users one-click access to fresh content from their favorite creators."

At this point, it appears the most significant partnership is with Sony Pictures, one of the largest Hollywood film studios. The studio has agreed to post several full-length feature films and TV shows to YouTube. Some of the TV shows include, "Bewitched," and "Charlies Angels" and among the films are "Blue Lagoon," "Single White Female," and "Nowhere to Run." CNET reported earlier this month that the companies were in talks about a feature-film deal.

Representatives from Sony Pictures declined to comment.

Movies from Sony Pictures will only trickle on to YouTube, at least initially. YouTube has agreed to display the films using a video player from Crackle, Sony Pictures' own video site. The studio will control all the advertising for the films and Crackle will also get credit for the traffic.

Also on Thursday afternoon, Eric Schmidt, Google CEO, suggested during a conference call about the company's earnings that YouTube could someday charge fees.

"With respect to how it'll get monetized, our first priority is on the advertising side," Schmidt said. "We do expect over time to see micropayments and other forms of subscription models coming as well, but our initial focus is on advertising."

YouTube, acquired by Google in 2006, also announced it is launching a test version of Google TV Ads Online. Advertisers will be enabled to insert their advertisements into the ad breaks within TV shows displayed online. But to do this, advertisers must first enter bids for the shows it wants.

YouTube said pre-roll and post-roll ads may also be bid on.

While most of the TV shows and films YouTube acquired are at least several years old, the Sony news marks YouTube's most significant Hollywood deal yet. YouTube was once called a "rogue" by Viacom executives, who claimed in a 2007 lawsuit that the company encouraged the posting of unauthorized copies of its material to the site.

The feeling by many in Hollywood was that YouTube was hostile to content creators. But over the past year, Google and YouTube have made the service more attractive to big movie and TV companies. The site has upgraded the quality of its streaming video and began filtering content to eliminate pirated material.

Another concern was that the site offered no copy protections on its streams, according to film industry insiders. YouTube solved that problem with Sony Pictures at least, by using the studio's own video player.

YouTube reportedly wants the William Morris Agency to make it a star.

The video-sharing site is reportedly close to clinching a deal with the William Morris Agency, in which the talent agency's clients would create videos for YouTube, according to a report Thursday in The New York Times.

The deal apparently would give William Morris Agency clients an ownership stake in videos they create for YouTube, and, in return, YouTube would receive professionally produced videos, according to the Times report.

For YouTube and its owner Google, the question is whether such efforts will eventually generate advertising revenue.

YouTube and Hollywood have been increasing been playing nice, as evidenced by a deal struck back in November, under which Metro-Goldwyn Mayer Studios plans to post full-length films on YouTube.

YouTube and Google have previously engaged in verbal sparing with Hollywood, over accusations of copyright infringement on the YouTube site. However, the two camps have recently sought middle ground, as each tries to leverage what the other can offer.

Hollywood has the top content, and YouTube has become a distribution channel that cannot be ignored.

According to Wikipedia, some of the agency's top talent includes Russell Crowe, Denzel Washington, Natalie Portman, Clint Eastwood, and Jackie Chan.

CBS was one of the first TV broadcasters to lock up a lucrative broadcast license for the Wizard of Oz.

(Credit: Metro-Goldwyn Mayer)

Apple is an Internet retailer and Netflix is a Web video rental service, but Hollywood treats them as if they are potential competitors to TV broadcasters.

In the past two weeks, customers of iTunes and Netflix's streaming digital-movie service have noticed that a growing number of titles are disappearing from the sites or are scheduled to be removed. MacWorld wrote a story last week about how one of the site's contributors noticed that of the 15 films he bookmarked for future viewing at iTunes, 9 were no longer available. Among the movies that vanished were Charlie Wilson's War, Eastern Promises, and Michael Clayton.

"One would presume that there is some sort of licensing issue at stake here," wrote MacWorld's Dan Moren. "But it's a little odd that these movies just vanished into thin air. Man, it's like a bad horror movie."

Yes, Dan, it is. And the culprit here is a system that for decades has pumped billions of dollars into the coffers of Hollywood studios and the television industry. What has happened is Apple and Netflix have crashed into windows. "Release windows" is the term used to describe periods of time a certain type of media is allowed to show a movie. Typically, a feature film is first released in theaters, then on DVD, followed by pay-per-view channels and finally on broadcast TV.

Normally, release windows don't affect retailers or video-rental services after they've begun selling or renting films. Warner Bros. doesn't go into Best Buy and pull DVDs off the shelf when Comcast airs Casablanca. The corner Mom and Pop video store doesn't surrender copies of Gladiator to Universal Studios when the film appears on ABC. But Internet stores are being treated differently. What this means for iTunes and Netflix customers is that movies will pop in and out of the services.

Spokesmen for Netflix and Apple confirmed that they pulled titles due to these licensing requirements.

The big question many Apple and Netflix fans will have is why are Web stores being treated as though they are entertainment companies instead of merchants?

The answer, of course, is because broadcasters say they are.

You have to go back decades to understand how entrenched these release windows are in the film industry. The major movie studios were once afraid of television until they realized TV represented a big new revenue stream. CBS (now the parent company of CNET News) scored a major hit in 1959 by purchasing exclusive broadcast rights for The Wizard of Oz. The classic movie, starring Judy Garland, aired exclusively on the network for years.

More money from TV deals
The cash really started to roll in with the rise of premium cable and pay-per-view channels. These outlets often pay big money for exclusive rights. If they say they don't want Apple, Netflix, or any other Internet retailer selling or renting films inside their window, then that's the way it is, according to two high-level studio execs.

The situation comes down to basic dollars and cents. At this point, the revenue from TV deals dwarfs the money Netflix and iTunes generate.

One recent study found that movie downloads make up only 0.06 percent of studio revenue, said Jan Saxton, an analyst with Adams Media Research. She said her firm estimates that the return is a little higher but is still tiny.

Saxton said the studios can't be expected to dump these very lucrative release windows until the Internet sees much wider adoption.

"The challenge for the studios is that the business is changing," Saxton said. "As these licensing deals come up for renewal it's possible that Hollywood will alter them to fit the new reality of digital distribution. Digital definitely has enormous amount of buzz right now and the studios understand that if you don't get control of the Internet consumers will rip the content and share it.

"On the other hand they do have series of exploitation windows that keeps the profits coming in and helps the business stay viable," Saxton continued. "(The studios) aren't going to rush out to shut those windows and shift to digital distribution without carefully planning a strategy and finding some kind of reasonable return."

The big media companies aren't sitting on their hands when it comes to Web. Several of the largest studios now offer catalog titles on Hulu, and Metro-Goldwyn Mayer recently posted a few films to YouTube. Warner Bros. has offered a digital copy of the hit Batman film The Dark Knight with every purchase of the movie on Blu-ray disc.

One studio exec said Hollywood is trying to manage the transition to digital but is trying to do it in a way that doesn't kill their biggest money makers. "It wouldn't make any business sense to do it any other way," said the source.

To be fair, he has a point. Look at the music industry. Atlantic Records just became the first label to see Internet sales equal that of CD sales and that benchmark took almost a decade to reach. It took that long even though it was easier 10 years ago to download music than to download the huge digital movie files now. As far as quality, the Web appears to be a long way from delivering true high-definition images.

All this would indicate that it might be a while before digital film sales rival DVD sales.

Hollywood will only be persuaded to give better terms to Internet stores when large number of consumers show them that they prefer this to traditional TV viewing.

Updated at 8:16 a.m. to include mention of ZDNet's review of YouTube's filtering system.

YouTube will begin offering feature films produced by at least one of the biggest Hollywood movie studios possibly as early as next month, according to an executive with a major entertainment company.

For months, Google, YouTube's parent company, has been talking to the major film companies about launching an ad-supported, streaming movie service, two execs with knowledge of the negotiations told CNET News. "It's not imminent," said one of the executives. "But it's going to happen. I would say you can expect to see it, if all goes well, sometime within the next 30 to 90 days."

To be sure, not all the studios are prepared to give YouTube full-length movies. Canadian film company Lionsgate agreed in July to give YouTube access to only short movie clips. At least one other studio is trying to cut a similar deal for short-form content with Google, said a separate high-level industry insider.

There's skepticism in some circles about whether enough ads can be placed into a streaming movie to make it profitable without also overloading viewers with commercials. Another sticking point with some of the film companies is Google's insistence on using a specific ad format for feature films, according to two studio sources. They declined to specify which ad unit Google prefers--whether it's prerolls or postrolls or something else--but said some of the studios want the final say on how to advertise to viewers.

Google declined to discuss specifics, but a company spokeswoman issued this statement: "We are in negotiations with a variety of entertainment companies. Our goal is to offer maximum choice for our users, partners, and advertisers."

What is certain is that YouTube's original hope of building a behemoth business exclusively around short, homemade videos is, to this point at least, a bust. The company captured the world's imagination by showcasing 10-minute long user-generated videos but the strategy hasn't yielded much in the way of profits. Three years later, the company is turning to professionally made content.

YouTube vs. Hulu
By choosing this route, YouTube must go head-to-head against the Web's reigning king of streaming long-form video: Hulu.

A showdown between Hulu and the 3-year-old YouTube was inevitable. Consider that Hulu, the joint video venture formed by NBC Universal and News Corp., attracts only a fraction of the 80 million people who visit YouTube each month, but Hulu still managed to generate nearly the same revenue in its first year in business, according to reports.

Over the past year, Hulu's advantages over YouTube have become clear. Hulu attracts more ad revenue because advertisers are more comfortable with full-length TV shows and films than they are with user-generated fare. Something else Hulu has going for it is a superior viewing experience. Hulu's player offers some of the clearest images found on the Web.

YouTube's new wide-screen player presents video in a less pixilated 16:9 format than the site's standard player, but it falls short of providing Hulu-esque quality.

But here's what YouTube offers that Hulu can't: 80 million monthly visitors. No other video site comes close to reaching an audience of that size.

"We'd love to have our long-form content in front of that audience," said an executive with a studio close to reaching an agreement with YouTube.

YouTube's move to join the growing number of competitors trying to deliver movies over the Internet isn't entirely unexpected. Last month, CBS, parent company of CNET News, announced it had agreed to post full-length TV shows on YouTube. That same month, Google rolled out a new wide-screen video player built to display long-form content.

In addition, Google has lamented publicly YouTube's inability to generate significant income. Some people, including me, predicted it was only a matter of time before Google began obtaining rights to TV shows and films.

But I didn't believe Google could manage to shore up relations with Hollywood as quickly as it did.

Kinder, gentler relations?
YouTube was supposed to be despised by the entertainment industry. Viacom CEO Philippe Dauman last summer called YouTube a "rogue company." YouTube became the Web's No. 1 video site and amassed an enormous following, partly by becoming a favorite place for people to post pirated clips of TV shows and movies. YouTube got rich on the backs of filmmakers, or so it seemed to many content owners.

It didn't help that Google often took a hard line in negotiations with the studios, according to multiple sources. Things got hostile enough for Viacom, parent company of Paramount Pictures, to file a $1 billion copyright lawsuit against Google last year. That case continues to play out in the courts.

Then, Google's approach to Hollywood changed. Google actually began wooing the studios. The search company, which has said often that it doesn't want to be a media company, won over many a bitter studio suit by developing systems that help them either thwart piracy or profit from it. Google representatives also became more flexible about sharing ad revenue, according to insiders.

How far the relationship between Hollywood and Google will go is anybody's guess. It's going to be hard for YouTube to land Universal or 20th Century Fox because each has a parent company that owns a stake in Hulu.

"Will (Google) try to get into the same space as Hulu, of course," said one studio executive. "Lots of people will."

Google also wants to deliver all the ads and this is problematic because some other companies do a better job, according to one of the executives. He singled out Auditude, which enables a content owner to insert ads into clips wherever they might appear on the Web. This means that if someone posts a pirated copy to some blog or message board, Auditude can slip an ad within the player and allow the rightful owner to turn a buck.

The one thing that Google and YouTube should be encouraged about is the growing number of Hollywood executives who believe there is plenty of interest in viewing films on PCs.

"Our movies are consumed frequently and for long periods of time on the net," said the exec whose company is in talks with Google. "We're big believers in long-form feature film content on new media platforms."

Check out ZDNet's stories on YouTube's filtering systems. You can find the stories here and here.