Digital Media

Electronic Arts has closed the door on its game developer unit Pandemic Studios.

EA shut down Pandemic as a separate unit on Tuesday, laying off 200 employees, according to published reports, but moving a small core team to EA's Los Angeles headquarters. Those exiting include Pandemic's two founders, Andrew Goldman and Josh Resnick.

An Electronic Arts spokesperson confirmed the news to CNET, but called it a consolidation rather than a closing, saying that the company merged Pandemic with EA's nearby LA campus. The core team of developers integrated into EA will continue to work on Pandemic properties.

An internal memo by EA Games Label Senior Vice President Nick Earl also confirmed the closing, as reported by the Web site Kotaku.

"I want to make it clear that the Pandemic brand and franchises will live on," wrote Earl in the memo. "In the months ahead, we will announce plans for new games based on Pandemic franchises. This type of change can be difficult. But the situation calls for us to act decisively, to take control of our destiny and to run a stronger, more focused development operation. That's how we will continue to make great games in our LA studios."

The EA spokesperson also confirmed that the Pandemic brand and franchise are still alive and well, and that EA is still very committed to it.

Started in 1998, Pandemic Studios was later bought by Electronic Arts in 2007 as part of a deal for which EA paid $860 million for both Pandemic and Bioware. Pandemic is behind the design of many popular titles, including Star Wars: Battlefront, Mercenaries, and Full Spectrum Warrior. The studio's most recent game for EA, The Saboteur, will hit stores next month.

On the plus side, Bioware seems in little danger of closing. With its slew of blockbuster games, such as Mass Effect and Dragon Age: Origins (which triggered more than a million downloads of premium content in its initial week), Bioware has proved to be one of EA's more successful studio purchases.

Hit by weak game sales, EA has been hurting since last year when it warned that 2009 would be a tough one. The company said at the time that it would need to cut staff, trim product lines, and close studios. EA initially announced job cuts of 10 percent of its workforce, then later revised that to 11 percent. In January, EA also jettisoned Pandemic's studio in Brisbane, Australia.

Electronic Arts has indeed struggled this fiscal year, announcing higher losses and lower sales for its first quarter and again for the second quarter, ended September 30.

The continued downturn forced the company earlier this month to announce additional job cuts of 1,500 employees beyond the initial 11 percent. With the layoffs scheduled to occur by March of next year, the game maker hopes its actions will trim annual expenses by at least $100 million.

"Laying off employees and closing facilities is never pleasant--we have a lot of compassion for those impacted--but these cuts are essential for transforming our company," said EA CEO John Riccitiello in an earnings call following the announcement of the cuts.

One major obstacle seems to have been settled in Comcast's quest to buy NBC Universal from General Electric--how much to pay for it.

Both companies have reportedly agreed on a price of $30 billion for GE's movie and TV unit, according to sources cited Monday by Reuters and The Wall Street Journal (subscription required for full story).

The agreement on the worth of NBC Universal (NBCU) is a major step toward paving the way to create a new, privately held company that would combine NBC's TV stations and Universal Studios with Comcast's TV and cable stations. NBCU's Web properties include iVillage and the online video site Hulu, in which it is a co-owner along with News Corp. and Walt Disney Co.

Under the terms of the proposed deal, Comcast would own a majority 51 percent slice of the new entity, with GE owning the remaining 49 percent.

Further, the two companies have discussed an option whereby GE would sell off all or most of its ownership of the new company to Comcast over the next seven years, according to sources cited previously. Recent reports say that GE and Comcast have now decided how to price the new entity after the deal goes into effect so that GE faces no problems selling off its remaining stake.

The valuation of NBC Universal was seen as a major challenge in advancing the deal, according to sources. Comcast naturally was intent on maximizing the value of its own networks and minimizing the value of NBCU to limit the amount of up-front cash it would need to invest in the new firm. Latest reports say that Comcast would inject anywhere from $4 billion to $6 billion into the new entity.

However, both companies have reportedly agreed to base Comcast's final cash payment on NBCU's financial performance before any finalized deal closes. If its performance tanks, Comcast could end up paying less.

Other challenges remain, too. French media giant Vivendi owns 20 percent of NBCU. Vivendi has reportedly told GE that it wants to sell its stake but has yet to voice approval on any deal of its own. A valuation of the company's 20 percent ownership is currently being discussed, said the source cited by Reuters.

Of course, even if Vivendi agrees to a deal and all looks good, regulatory approval would be required, especially since Comcast would own a huge chunk of national and local media outlets. The Journal said that people close to the talks believe regulatory approval could take at least eight to 12 months.

Comcast's bid for a majority stake in NBC Universal was first revealed in early October.

Requests for confirmation to GE and Comcast were not immediately returned.

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.

YouTube wants to offer movie rentals and is in talks with several top movie studios about obtaining licenses to stream feature films on a rental basis.

YouTube is discussing the service with Sony Pictures, Lions Gate Entertainment Corp., and Warner Bros. Studios, according to a story published Wednesday in The Wall Street Journal.

This is a natural progression for YouTube which has been engaged in a year-long campaign to secure more professionally made content. The Google-owned video company offers films on an ad-supported basis from Sony Pictures and MGM. YouTube declined to confirm or deny the Journal report.

One studio executive familiar with the talks downplayed the significance of the talks, saying no deals have been struck and the conversations are at best in the early stages. The executive pointed out that the studios have these discussions all the time and that there's a large host of services that already sell downloads or offer digital rentals, including Amazon, iTunes, Netflix, and Microsoft's Xbox.

"Why wouldn't the studios talk to YouTube?" the executive said.

There are also full-length films available to the public for free on ad-supported sites, such as Sony Pictures' video site, Crackle.com, and on Hulu.

But YouTube's U.S. audience is now over 100 million and the site's potential to generate big ad revenue from premium content is still not fully understood.

Sources in the film industry say however that if Google can prove it can protect streaming content from piracy and will offer a lucrative deal beyond just a percentage of ad revenue, there's no reason why YouTube can't be the Comcast of the Web.

Update 6:20 a.m. Thursday: To include more background on new witness.

RealNetworks introduced a new witness in the RealDVD case on Wednesday, a move that comes late in the court proceedings that could decide the software's fate.

Real is locked in a court battle with the major movie studios over RealDVD, a software that enables owners to copy DVDs and store them to a hard drive. The Motion Picture Association of America filed suit against Real last fall, accusing the company of violating copyright law and breach of contract. U.S. District Judge Marilyn Patel could rule on whether to remove a ban on the sale of RealDVD as early as Thursday.

Real on Wednesday filed with U.S. District Court for the Northern District of California a written declaration from Peter Biddle, an Intel executive who had dealings with the movie industry over a decade ago while employed for Microsoft. He disputes Hollywood's claims that the industry included in a license for its DVD-encryption technology a ban on copying DVDs while in a computer hard drive.

Real argues that because it possesses a license to use CSS and because the license doesn't prohibit the copying of DVDs in all cases, Real isn't guilty of breaching its contract.

What Biddle focuses on in his statement is the license for DVD Content Scramble System (CSS), the encryption technology designed to prevent copying of DVDs. Companies need the license to make DVD players. In his declaration, Biddle says that he was part of the "standards-setting" group that helped draft the CSS license between 1996 and 1998. According to court documents, he has not been compensated by Real. It is not yet clear whether Patel will allow Biddle to testify in court.

He confirmed that the film industry was initially against allowing the copying of DVDs under any circumstances. But he said eventually the studios relaxed their position.

Real says it couldn't find Peter Biddle until May 6th. Perhaps it should have tried simple Google search.

(Credit: LinkedIn)

"I repeatedly explained that such a prohibition would be extremely difficult to implement," said Biddle in his declaration, recalling what he said during negotiations on what language the CSS license should include. "Because computer and software products rapidly evolve, the CSS license was designed to enable computer manufacturers to have significant freedom."

He says it was never agreed to that the CSS license would ban all copying.

Marsha King, a retired vice president at Warner Bros., testified during the hearing that the entire reason for the CSS license was to prevent consumers from creating copies.

"The studios were adamant that no copy be placed on the (computer) hard drive," King told the court. "The only thing we authorized was playback of the movies...no copies were to be made...it was a mantra."

In the past week, Real has introduced Biddle and filed new allegations against the film industry, accusing them of antitrust violations. The question is whether these moves are just 12th-hour legal wrangling or will have legitimate impact on the case.

In a letter to Patel, Real's attorneys said that they were unable to locate Biddle until May 6, and weren't clear about what he would testify to until Wednesday. This makes little sense as Biddle, the man behind Microsoft's BitLocker technology and Darknet, is pretty high profile and a Google search quickly reveals he is Director of the Google Program Office at Intel and lives in the Seattle area.

Patel is scheduled to hear closing arguments on Thursday morning. There's no telling when she will issue a decision, but she has a history of ruling from the bench.

A premium movie channel backed by a trio of studios is expected to debut as an on-demand Web site months before its traditional TV launch.

The consortium of MGM, Paramount Pictures, and Lions Gate announced Tuesday at the NATPE television conference in Las Vegas that the channel will be called Epix (pronounced like the plural of epic) and feature more than 15,000 movies from the three studios. The new channel is expected to launch as a subscription-only Web site in May that will stream its content on the Internet--five months before its planned TV launch in October.

The Epix movie channel is expected to launch with "The Curious Case of Benjamin Button," among others.

(Credit: Paramount Pictures)

The new channel, which is intended to compete with HBO and Showtime, will feature such hits as The Curious Case of Benjamin Button, Iron Man, and other movies from the studios' libraries. The channel is also expected to produce original programming and present live concert performances, as other premium channels do.

However, as Mark Greenberg, chief executive of the joint venture dubbed Studio 3 Networks told The Wall Street Journal, the Web streaming service is "not our primary business model."

The joint venture apparently formed last year after negotiations fell through with CBS' Showtime network. (CNET News is published by CBS Interactive, a unit of CBS.) But perhaps most notable is the fact that the joint venture has yet to land any distribution deals with cable or satellite TV providers. "Those are coming," The New York Times quoted Greenberg as saying at the television conference.

A screenshot of Josh Lowensohn's Netflix queue featuring plenty of "long waits."

If you're a Netflix customer who's paying an extra $1 a month to rent movies on Blu-ray, you might have noticed that the discs aren't being delivered as quickly as DVDs.

Josh Lowensohn, one of my colleagues here at CNET News, was complaining that he's had Futurama: Bender's Game, in his queue for over a month. The flick Wall-E has been in the queue since November 18. Why is it taking so long for Netflix to ship?

I called Steve Swasey, Netflix's very accessible spokesman, and he said the Web video store simply doesn't have enough Blu-ray discs to go around, especially when it comes to hot new releases.

Hollywood just isn't providing enough Blu-ray copies of newly released films as the company would like to get, according to Swasey. That's the first bottleneck. But the spokesman said the problem isn't all the fault of the studios. Once larger numbers of Blu-ray discs for a film are available, the company won't necessarily buy them.

"There is an expense to that," Swasey said. "These things cost money. We deploy money where we think it's going to be most efficient to keep subscribers and investors happy. It's always check and balances."

Here's the final problem that affects frequent users of Netflix and this won't come as a surprise. If a movie is hot and the company doesn't have enough to go around, the film is going to the user that rents fewer new releases, according to Swasey.

"What we're doing is giving new releases to the person who hasn't rented as much," he said. "We've been doing this for a couple of years and fully disclose this in our terms of agreement. If we have a shortage of titles we do what we think is equitable and give the title to the person who hasn't rented as much or who hasn't gotten as much enjoyment from the service."

Lowensohn is among the unlucky Netflix users who rents a lot of new releases. He says he rents about 20 movies a month. When I tell him what Swasey's response is, he is less than satisfied.

"Sucks," Lowensohn said. "Why are they charging me more? I'm paying but I'm not receiving the movies I want."

Swasey said Netflix is bullish on Blu-ray, but right now only a small percentage of customers are asking for the discs. So far, Netflix's Blu-ray service has about 500,000 subscribers. Netflix's traditional DVD business has 8.7 million subscribers.

Swasey seemed to say that Blu-ray will get more of the company's resources when demand is greater. Sorry, Josh.

CNET'S Josh Lowensohn contributed to this story.

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.

Australian telecommunications provider iiNet on Thursday was dragged into court as major film studios filed a case against the ISP for allegedly letting its users download pirated movies and television series.

According to the Australian Federation Against Copyright Theft, speaking on behalf of Village Roadshow, Universal Pictures, Warner Bros Entertainment, Paramount Pictures, Sony Pictures Entertainment, Twentieth Century Fox Film, Disney Enterprises, and the Seven Network, thousands cases of pirated movies and television shows have passed through iiNet's network without iiNet doing anything about it.

AFACT Executive Director Adrianne Pecotic claimed that iiNet had ignored requests from the companies to discipline its customers for breaking copyright laws.

"We have provided in this instance, over a five-month period, the IP addresses of thousands of people who are iiNet customers who are using iiNet Internet access to infringe copyright. iiNet has several options within its power to prevent that. They have not done so," Pecotic told ZDNet Australia.

"This is not about iiNet policing its network. There's no suggestion that they have to police their network. What we're saying, and what the law says, is that when they know that copyright infringement is occurring, they have a legal obligation to prevent it," she continued.

Options the Internet service provider had, Pecotic said, were giving the customer notice, limiting download speeds, or suspending browsers or P2P protocols. She said 9 out of 10 people in the United States who were given notice did not pirate films again.

The companies want a court order forcing iiNet to prevent its customers from engaging in copyright infringement over its network. If the ruling goes their way, they will likely claim damages, but Pecotic would not name figures.

When asked if other ISPs were undertaking such measures when sent infringement notices, Pectotic made vague reference to unspecified agreements between ISPs and content providers in the U.S. and U.K. markets, saying only that she intended to focus on iiNet because it was the focus of the court case.

She would not say if any other ISP was also ignoring infringement notices, but when asked if there might be future court cases, she said, "We wouldn't rule out any future litigation, no."

On the choice of ISP, Pecotic said only that iiNet was the third-largest ISP in Australia, and as such, she didn't consider it to be small.

According to Pecotic, 50,000 people in Australia are employed in companies affected by the film industry, which all feel the brunt of pirating films and TV, and the faster broadband gets, the worse piracy gets.

The case will come back before the court on the December 17, and Pectotic considered that it would run for about 12 months.

iiNet did not reply to requests for comment in time for publication.

Suzanne Tindal of ZDNet Australia reported from Sydney.