Digital Media

Apple was engaged in a bidding war with Google when it acquired music service Lala, The Wall Street Journal (subscription required) reported on Friday. That helps to explain why Apple agreed to pay $85 million, a sum that I (and others) believed was far too much for a down-on-its-luck start-up.

What has surprised some in the music sector, however, is that Apple is considering a plan to create some kind of streaming-music service and is turning to Lala's managers to help oversee the new offering. Sources in the music industry I interviewed Thursday gave varying descriptions of what position Bill Nguyen, Lala's chairman and founder, will occupy at iTunes. But virtually all of them said he and his staff will have plenty of influence over the service should Apple decide to go ahead with the plans.

One of the technology sector's most unlikely rags-to-riches stories may be unfolding before our very eyes.

Consider that Apple--the undaunted music powerhouse that altered the way people buy and listen to music and that will likely generate $2 billion in iTunes sales this year--is now seeking help from a group that cast about the digital-music sector for years, swapped out business models multiple times (without ever finding a profitable one), and basically did little to distinguish themselves.

If you're just looking at Lala's performance in the music sector, this is like the New York Yankees' taking advice from the minor leagues' Lehigh Valley IronPigs.

The big question is what can Lala possibly teach Apple about digital music?

From car sales to tech riches
Apple and Lala representatives aren't talking, but here's the first thing you should know about the deal: Nothing is set in stone yet. The Journal reported that the plans are in the earliest stages and may get altered. My music sources said that Apple has not spoken to any of the four major labels about changing their licensing agreement, which Apple would need to do before launching any new service.

To understand what Google and Apple may see in Lala, one must start with Nguyen, the company's jovial founder.

The son of Vietnamese immigrants, Nguyen (pronounced "win") is charming, wild about surfing and is well known as one of Silicon Valley's smoothest communicators. A so-so student who attended but did not graduate from Houston Baptist University, Nguyen started out selling cars but cashed in big in 1999 when he sold Onebox, an e-mail technology company, for $850 million.

Since then, he has started several other companies in addition to Lala, including Seven, a Wi-Fi software firm.

Eric Schmidt's Google charges were trying to get their hands on Lala, but Apple got the company instead.

(Credit: Greg Sandoval/CNET )

He is very close to Eddy Cue, the revered Apple exec who runs iTunes. What may be most important about Nguyen is that he has long had plans to take down the MP3 format. (In Apple's case, the company uses the unprotected AAC format) He has often said that MP3, the digital audio format embraced by so many music fans, is on its way out. He believes downloads have outlived their usefullness and that in the future, consumers will store their music in the cloud instead of on their hard drives.

"Will you ever (in the future) use an electronic device if it's not connected or doesn't have a browser?" Nguyen asked me a year ago. "You've got to face it, there's nothing you don't do in a browser."

Palo Alto, Calif.-based Lala started as an online marketplace where users arranged to swap CDs with each other. Lala then began streaming music to Web-enabled devices. The company would scan a users' computer hard drive and then enable the person to access the same songs--provided Lala had the rights--via the Web.

According to a report in The New York Times, Lala had concluded that it wouldn't reach profitability anytime soon and approached Apple in the hopes of making a deal.

The end of iTunes downloads?
The natural conclusion to make here is that by acquiring Lala, Apple may be laying the groundwork for a move away from the traditional song download. If this is correct, it would be stunning in that Apple has built a retail empire by selling downloads.

If Apple is preparing such a plan, that would suit the music industry just fine. Plenty of people at the top four labels have long been uncomfortable with unprotected music files. The major recording companies favor formats that protect music from being copied and shared. Label executives have also said that selling individual songs isn't a good business as the profit margins are small and it's a not a model that can't grow. Nguyen's ideas appealed to many at the music labels, particularly those at Warner Music Group, which invested $20 million into the company.

In May, Warner announced that it had to write down about $11 million of the Lala investment.

Some of the music execs I've talked to say they see a world where music buyers will leap at the chance to buy a song for life. In a world where music is stored on the servers of big companies, a consumer never has to worry about losing a song library to a broken hard drive or lost music player.

Of course, consumers would likely pay a premium for this life-time ownership and cloud-based service, but many in the industry feel that the public is ready for that kind of offer.

By all appearances, Nguyen could be the architect of this vision at iTunes.

Regardless of Lala's shortcomings, the company created something good enough to lure Google and Apple, two of technology's most successful companies. That alone isn't a bad resume.

And when you look at the $85 million purchase price, Nguyen engineered by far the best exit in the the battered digital music sector in at least a year.

There's something else to keep in mind about Nguyen; he recovers from spills quickly, usually in time to catch the next big wave. Hang 10, Bill.

Two prominent technology writers are reporting vastly different stories about what Apple paid for music service Lala.

Peter Kafka, from The Wall Street Journal-owned blog All Things Digital, cited anonymous sources in a Monday report who said Apple plunked down $80 million for Lala. In a story published Tuesday, Michael Arrington at TechCrunch cited his own sources who disputed that price and said Lala was acquired for $17 million.

I wish I knew who was right, but my reporting came up with nothing solid. I will say that from the second I heard Kafka's number I was skeptical. After covering the shutterings of Ruckus and Spiralfrog, as well as the sales of Imeem, iLike, and Lala, I can say that the $80 million figure is way out of line with valuations of other companies in this sector.

Lala's service isn't significantly superior to Imeem or iLike, but those companies, according to Arrington, sold for $1 million and $20 million respectively. Lala scanned users' computer hard drives and enabled them to access music libraries stored in the cloud. The benefits of this were complicated and tough to sell to consumers.

I reported on Friday that one reason Apple is interested in Lala is to get its hands on the music service's payment and fulfillment technology, which could save it big money, according to my sources. The company's management and engineering team are well thought of in both music and tech sectors.

Combine all of that and you're still a long way from $80 million.

We still don't have a single profitable player in digital music of any note. The sector is rife with closures and high overhead. There isn't any standalone digital music service, other than iTunes, worth that kind of money.

We might get the truth one day, but don't bet on it. Remember, Apple is in control now and the company distributes information like the Kremlin. One thing we can do is wait to see what Apple does with its Lala assets.

MySpace on Wednesday acquired social-networking site Imeem for an undisclosed sum, but sources with knowledge of the deal say is worth about $8 million.

The News Corp.-owned MySpace has agreed to pay $1 million in cash, but the total figure also includes money for accounts receivable and employee earn outs. Regardless, the price is a big loss for investors who poured upwards of $30 million into the pioneer ad-supported music service.

(Credit: Imeem)

An Imeem spokesman declined to comment.

Imeem will continue to operate as a standalone site, at least initially, according to the sources. One source said that Imeem's brand will unlikely live on as they expect Imeem's assets will be folded into MySpace Music.

At least half of Imeem's staff will likely lose their jobs, according to the sources.

One interesting note is that Imeem was once backed by all four major music labels, but one of the record companies dissolved its position in Imeem weeks ago, the sources said.

Imeem is the fourth ad-supported site either to go bust or sell for peanuts. The sector is starting to look like a graveyard; Ruckus and SpiralFrog shut their doors earlier this year, and iLike was acquired--also by MySpace--for a song.

Backers launched these risky ventures hoping that if the services could attract large enough audiences, ad-money would follow. It hasn't worked that way.

The ad-supported services couldn't generate ad rates high enough to cover the licensing fees the record companies charged--even as in Imeem's case, the labels reduced their fees. Sure, a soft ad market and ailing economy didn't help, but the information that's surfaced about these sites is that they struggled to convince advertisers that streaming music was a good vehicle for delivering ads. It's not.

Internet users don't want ads and don't look at them when listening to songs. That's the dilemma.

Against this backdrop, all eyes should now be on MySpace Music. The question it must answer is how does acquiring Imeem and iLike help turn the lackluster and underachieving site around?

When MySpace Music launched in September 2008, big promises were made. The site was supposed to sell concert tickets and merchandise and branch out overseas. The site hasn't come close to living up to the hype.

While it's difficult to see what Imeem assets might give MySpace an advantage, It might not be a bad idea to tap into the experience of Dalton Caldwell, Imeem's CEO and his top lieutenants.

Sure, they couldn't make Imeem's iffy model work but they know where all the mines are buried. My music industry sources said the labels were always impressed with Caldwell and guys like Ali Aydar, Imeem's chief operator officer as well as Matt Graves, the company's vice president of communications.

They won kudos for helping to keep keep Imeem going when a a cash crunch threatened the company last spring.

In the wake of acquiring smaller digital music services iLike--and now, it looks like, Imeem--MySpace continues to attempt to align itself as the foremost player in the digital music industry. On Wednesday, the News Corp. division rolled out a music charts page to track the most popular music getting listened to on the social site.

It's fairly self-explanatory. There's a prominent "movers" section featuring artists that have seen an uptick in activity recently, and music can be filtered by genre, country, and label category (indie, unsigned, or major). Then there are links to "friend" an artist, buy songs, and watch music videos on MySpace's recently launched music video portal.

(Credit: MySpace)

The design, regrettably, isn't very user-friendly and requires quite a bit of scrolling. And in a world of finely tuned "music discovery" and personalized recommendations, charts can seem a little bit static. A blog post from MySpace Music head Courtney Holt assures that it's "just the beginning of a product and platform evolution that reinforces the key messaging, vision and direction of the new MySpace Music."

MySpace launched its music service last year as a joint venture with major and independent record labels, and has received a mixed response as the industry continues to grapple with the fact that no non-iTunes digital music service has proven to be a huge moneymaker yet.

Multiple sources are reporting that MySpace is in talks to acquire Imeem, the social-networking music service that has struggled with financial problems for some time.

(Credit: Imeem)

Peter Kafka at All Things Digital is reporting that negotiations are in the late stages and that MySpace is making the deal to acquire some of Imeem's talent and technology. News of the talks was first reported by TechCrunch.

Here's my contribution to the news: two sources with knowledge of Imeem say CEO Dalton Caldwell was in New York recently looking for new investors. Imeem was again running short of cash after coming perilously close to a financial crisis last spring. After Imeem received new funding from some of the music labels, sources told CNET that the money would last only through the end of 2009.

An Imeem representative was unavailable for comment, and a MySpace representative declined to comment.

Nobody has reported the asking price but don't expect it to be very much. One of my sources said that Imeem had been looking for a buyer for a while. Nothing had come of it. But Imeem, which made a name for itself by being among the first to offer ad-supported streaming music and being free to users, is likely to be thrilled by this kind of exit.

A sale is another sign that the ad-supported sector is amid a shakeout.

The truth is the sector is in shambles. Ruckus and SpiralFrog shut down earlier this year. Qtrax, a proposed legal peer-to-peer service hasn't even formally launched yet and has struggled with financial problems.

MySpace purchased iLike in August for a price that was reported to be barely enough for investors to break even.

For a breakdown of the challenges that ad-supported music services face, read "How turf wars and miscues crippled SpiralFrog" and "Plenty of proof that ads don't support Web music."

Update at 9:05 a.m. PST: MySpace representative's statement added.

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.

Though more computers have been landing in living rooms, digital TVs are adding new features to help them hang onto their role as the family's entertainment center, says a report released Tuesday by In-Stat.

As DTVs replace old analog sets throughout the world, manufacturers are beefing them up with new network features, including Internet access, Ethernet, and Wi-Fi, noted an In-Stat report called "DTV 2009: Declining Costs, Increasing Shipments, and Network Capability." In-Stat predicts that 36 percent of digital sets sold in 2013 will be network-enabled.

(Credit: In-Stat)

Technologies for wireless high-definition, such as the competing 60GHz WirelessHD and WHDI standards, will also bring wireless HD streaming into households, forecasts the report.

"DTVs are competing with computers to be the entertainment hub of the home," said In-Stat analyst Brian O'Rourke in a statement. "Sets with Internet connectivity are already commercially available in the U.S., Europe, and Japan. Models from Hitachi, LG Electronics, Mitsubishi, Panasonic, Samsung, Sharp, and Sony can connect directly to the Internet without a home computer."

With the conversion from analog to digital broadcasts in progress among major countries, DTVs are now the only TVs available in most of North America, Western Europe, and Japan, noted In-Stat. However, DTVs are still competing with cheaper analog sets in markets that have yet to make the switch.

The 2009 Nobel Prize in Physics has been awarded for "two revolutionary optical technologies."

Charles K. Kao, who discovered how to transmit light through fiber optics, and the team of Willard S. Boyle and George E. Smith, who designed the first digital-imaging sensor, split the Nobel Prize, announced by the Nobel Foundation on Tuesday.

Born in Shanghai, Charles K. Kao made a discovery in 1966 that would lead to today's fiber optics. A man ahead of this time, Kao calculated how it would be possible to transmit light over 100 kilometers (62 miles), compared to only 20 meters (65 feet) for the fiber cables available in the '60s. He discovered that by removing impurities and creating a more pure type of glass, the fiber could be made more efficient and absorb less of the light over great distances.

Kao's research stimulated other scientists to join the effort, leading to the first ultrapure fiber cable created in 1970.

Another breakthrough in technology was the invention of the first successful digital-imaging sensor, used today in everything from consumer cameras to surgical devices.

Working at Bell Labs in New Jersey in 1969, Willard S. Boyle and George E. Smith built the first CCD (Charge-Coupled Device). Using the photoelectric effect theorized by Albert Einstein, the sensor transforms light into electric signals. The team's major hurdle was determining how to gather and read out those signals into a large number of pixels in a short burst of time.

The first consumer camera with a CCD was designed in 1981, leading to a revolution in digital photography.

Willard S. Boyle, left, and George E. Smith of Bell Labs invented charged-coupled devices (CCDs). In this 1974 photo, they are demonstrating an experimental TV camera that contains a CCD substitute for the vacuum tube of a conventional TV camera.

(Credit: Alcatel-Lucent/Bell Labs)

"When combined with the laser and the transistor, the invention of an efficient, low-loss optical fiber has made nearly instantaneous communication possible across the entire globe," said H. Frederick Dylla, director of the American Institute of Physics. "This mode of communication is essential for high-speed internet and forms the optical backbone of 21st century commerce. The CCD sensor has revolutionized technical, professional, and consumer photography in the last few decades. Taken together these inventions may have had a greater impact on humanity than any others in the last half century."

Kao will take home one half of the award prize of 10 million Swedish kronor ($1.4 million) with the team of Boyle and Smith splitting the other half. Awarded by the The Royal Swedish Academy of Sciences, Nobel prizes are given each year for achievements in science, literature, and economics.

Lawyers working on a $1 billion copyright lawsuit filed by Viacom against Google's YouTube may have uncovered evidence that employees of the video site were among those who uploaded unauthorized content to YouTube.

In addition, internal YouTube e-mails indicate that YouTube managers knew and discussed the existence of unauthorized content on the site with employees but chose not to remove the material, three sources with knowledge of the case told CNET.

The e-mails, according to the sources who asked for anonymity because of the ongoing litigation, surfaced during an exchange of information between the two sides of the legal dispute. They are one of the cornerstones of Viacom's case, as well as that of a separate class action lawsuit filed against Google and YouTube by a group of content owners, the sources said. The group includes a European soccer league and a music-publishing company.

Such evidence could be a major blow to YouTube's defense. If managers possessed "actual knowledge" of copyright infringement on the site and did not quickly remove it, the company may not be entitled to protection under the Digital Millennium Copyright Act's safe-harbor provision, according to legal experts.

"The facts you described could very well be the smoking gun that puts a hole through Google's case," Roger Goff, an entertainment attorney not involved in the case, told CNET News. "(If the facts are accurate), Google will have a very difficult time claiming that (its staff members) don't undermine its protection."

The provision, established in 1998, was designed to give online services a measure of protection from liability for infringing materials uploaded to their sites--as long as they meet a certain criteria, including:

• (A)(i) The services don't have actual knowledge that the material, or an activity using the material on the system or network, is infringing.
• (ii) in the absence of such actual knowledge, is not aware of facts or circumstances from which infringing activity is apparent; or
• (iii) upon obtaining such knowledge or awareness, acts expeditiously to remove, or disable access to, the material.

The entertainment industry has been skeptical about YouTube's claims that it did not have knowledge of the once-plentiful amounts of infringing content available on the site. Clips from popular TV shows, feature films, or sports events would often bubble up in YouTube's Most Viewed or Most Discussed sections.

It should be noted that the correspondence described by sources likely make up only a sliver of the material exchanged, and there's no way to know the full spectrum of internal discussions regarding copyright at YouTube.

"The characterizations of the supposed evidence, made in violation of a court order, are wrong, misleading, or lack important context and notably come on the heels of a series of significant setbacks for the plaintiffs," Aaron Zamost, a YouTube spokesman, said Monday evening. "The evidence will show that we go above and beyond our legal obligations to protect the rights of content owners."

Any questions about what YouTube employees may or may not have uploaded to YouTube must also be asked of Viacom's employees. Court documents show that on August 25, Viacom agreed to turn over records that shed light on "Viacom's decisions to upload or authorize the uploading of videos to YouTube" and on the company's policies "for allowing videos to remain on YouTube for marketing promotional or other business reasons."

This suggests that Viacom employees also uploaded clips to the site. A company representative declined to comment.

Viacom has long acknowledged that it was one of the first to promote shows online by posting clips to YouTube. But the conglomerate has also said the uploading of clips does not undermine or diminish its copyright claim.

YouTube's counterargument has always been, how is the company supposed to know the difference between pirated and legally uploaded clips when companies like Viacom are among those uploading material?

Google acquired YouTube for $1.65 billion in October 2006, a price tag that set the bar for Web 2.0 acquisitions. Long before that, many in the film and television industries claimed that YouTube was building a big audience by enabling people to pirate professionally produced television shows and films.

Since Viacom first filed its suit in March 2007, accusing Google and YouTube of encouraging users to commit intellectual-property theft, many online services and entertainment companies have closely watched the case because of its broad implications. What the YouTube-Viacom suit could help settle, to some degree, is who is responsible for policing and initiating the removal of pirated materials--the copyright owners or the operators of online services?

But should the case ever go to trial, the outcome may be less significant than legal experts once predicted. While the lawsuit has meandered in the courts for 30 months, other legal battles featuring companies with less marquee value have already gone a long way toward determining Web services' key issues surrounding copyright.

Two weeks ago, U.S. District Judge A. Howard Matz issued a decision saying video site Veoh was not responsible for copyright violations committed by users because it was entitled to protection under the DMCA. Universal Music Group, the world's largest record company, had filed a copyright suit against Veoh that experts said was very similar to the YouTube-Viacom case. Matz's decision appeared to set an important precedent that would help YouTube and Google argue against Viacom, the parent company of MTV Networks and Paramount Pictures.

"The issue is whether Veoh takes appropriate steps to deal with copyright infringement," Matz wrote. He concluded that it had.

YouTube supporters cheered Matz's ruling, believing that it would apply to YouTube's situation because the Web's largest video site had long established and enforced a "takedown policy," whereby the company removed infringing content, once notified by a copyright owner. And later, the video site took steps not required by the DMCA by establishing a state-of-the-art filtering process that helps block material from being uploaded to the site.

But attorneys for Viacom and members of the class action are expected to argue that YouTube's filtering system is a gaping hole in YouTube's defense. One of the major complaints that content owners had about YouTube was that before the company launched its filtering technology, they were forced to file takedown notices for every instance of infringement. In some cases, an entertainment company could remove a popular clip, only to see someone else upload it again seconds later.

Lawyers for Viacom and the class action group are expected to argue that if YouTube was notified that a specific clip was pirated, and had the power to prevent copies from going up but did not act to remove them, the company violated the DMCA.

The plaintiffs use as evidence a paraphrased statement from Chad Hurley, YouTube's CEO, and one of its three co-founders, which appeared in The New York Times in February 2007, the sources said.

"(Hurley) said the company was still working on its filtering technology," the Times wrote. "He said it had agreed to use it to identify and possibly remove copyrighted material from Warner Music, and it would discuss a similar arrangement with Viacom as part of a broader deal."

A Viacom representative said at the time, "They are saying we will only protect your content if you do a deal with us--if not, we will steal it."

The YouTube-Viacom suit is unlikely to go to trial before next year. Certainly, with YouTube wooing entertainment companies as it attempts to battle Hulu, Netflix, Crackle, iTunes, and other digital-video outlets, there exists the possibility that YouTube and Viacom will come to some kind of settlement.

A settlement might be anticlimatic, but could be the best for all concerned.