by Patrick Gregston

Digital Hollywood, a three-day conference presented at the Beverly Hilton in September, brought together representatives of the many factions involved in digital convergence -- the

One company's view of the unified future of digital media: a screen from Microsoft's Windows XP Media Center Edition. The system can manage home video, TV, music, DVDs and an online program guide.

marriage of Hollywood entertainment with Silicon Valley technology. Though the issues were different, this event, after a hiatus last year, revealed once again how much work remains before the marriage is consummated. This time, the computer faction dominated and traditional Hollywood seemed to be represented only by people who were once in production, but now run video-on-demand (VOD) services or work in corporate administration at the studios. The theme of the various seminars was that while Intel, Microsoft, Motorola and others have invested billions in the creation of high speed VOD networks, little progress will be made as long as Hollywood holds its cards -- its content -- too closely. In the wake of the collapse of the peer-to-peer music file sharing service Napster, the studios are proceeding cautiously, unwilling to see their precious libraries distributed digitally without ironclad copy protection. But the Silicon Valley faction would prefer to implement digital distribution models quickly, without the potentially crippling side effects that copy protection schemes could bring to powerful general-purpose PCs or appliances. The factions are currently fighting a pitched battle over these issues in Washington, and the conference reflected that conflict.

In addition, the studios are now developing their own VOD venture, Movielink, and are more reluctant than ever to share content with independents. As described by Jonathan Taplin, who began his career in motion pictures as co-producer of Mean Streets, and who is now the CEO of pioneering VOD provider Intertainer, "Last year I had 2,000 Hollywood titles on the service. This year I have fifty. Is there a relationship between this and [the fact] that the studios have created their own service?"

Frustration and Fear

At the same table, Tom McGrath, executive vice president of Viacom Entertainment Group, compared Hollywood's experience with that of the music industry. Ironically, the giants of music distribution have experienced a surprising decrease in sales since the successful legal battle against Napster. But McGrath suggested that a careful approach to business models, combined with robust copy protection, was the prudent path. "Why should we add to our dilemma?" he said when asked why the studios were moving so slowly.

Over the course of the conference, a variety of chicken-and-egg questions were brought up, regarding digital distribution, home networking and digital rights management (DRM). In many cases the Silicon Valley representatives were frustrated with Hollywood's cautious attitude that in their view has prevented the testing of new business models and privacy solutions. Whether the fix was copy protection, embedded rights management, hardware restrictions or legislation, many felt that "Hollywood fear" was a principal impediment to adoption. Representatives from a wide range of companies focused on this as a key reason the broadband revolution remains perpetually five or ten years in the future. But Hollywood has the most to lose if the proposed privacy solutions don't work.

Venture Capital

Another limiting factor is uncertainty in the current equity markets, which makes it hard for companies to raise money and make the big investments needed to build new systems. "As long as there is a threat of war, capital is going to stay on the sidelines, " said Tony Conrad of Venture Strategy Partners. Now that the stock market bubble has collapsed, all the methods and rationales for technology investment are being rethought. "Three years ago we only would talk to people who had a two-year plan to create a hundred million dollar company. Today we don't look at anything under three years and the goals are much more modest," commented Ravin Agrawal of EastWest Venture Group.

Many thorny legal issues surround the digital distribution issue, including challenges to Congress' extensions of copyright, and pending rulings on the "Fair Use" of copyrighted digital material (what a consumer can legally do with a copyrighted work). While some suggested that legal challenges may absorb the industry for the next several years, McGrath preferred direct protection of content (with a hardware system such as the one employed on DVD players) over a DRM standard, which would allow material to be copied freely in encrypted form, but viewed only when rights had been purchased. He also focused on the need for new business models, which would provide content owners with the majority of the revenue from any particular title.

Silicon Valley tends to view many studio strategies as anti-free market and counter to the strengths of the Internet revolution, namely that it is open and available to all. Whether it be hardware copy protection or legislative initiatives to police file sharing, many fear that they will take 3-5 years to unfold and will then fail, leaving the technology firms and their investments devalued and still waiting for content.

Compelling Consumer Experience

Another oft repeated phrase was "compelling consumer experience." Whether invoked in discussing VOD, digital distribution of theatrical films, networked homes, or interactive services, everyone agreed that this was the necessary but elusive quality required. Few speakers were willing to describe that experience specifically. John Canning, Microsoft Windows eHome's technical evangelist, made the best attempt by showing a short movie that offered a Microsoft vision of the totally digital, connected life -- the entertainment events of a single young man's Friday evening. He watches a movie with guests after dinner, works with them to make a short video of themselves, and listens to a preprogrammed music list. After the guests leave, he watches a televised auto race that he paused when the doorbell rang. He and his guests see all of this on a PC with an 18" LCD display perched on a desk, which pointed to one of the key questions that proponents of computer-television convergence have yet to answer definitively -- in what room and on what device are we going to watch all this merged entertainment?

Canning's presentation was part of a seminar entitled the "The Networked Home." One member of the audience asked, "How can you expect consumers to network their homes with TCP/IP technology when they haven't set the clocks on their VCRs?" Panelists suggested that this would be a service that the cable companies or computer retailers would provide. In response, the questioner suggested the panelists take a look at the movie The Cable Guy.

Technology and Business Models

At the end of the conference, this much was clear -- technology is way ahead of business models. The money that has already been invested in fiber-optic cable and the other infrastructure to support VOD represents a bigger investment than the valuations of many Hollywood studios. Yet that investment can't generate income until questions about piracy protection, revenue participation and control in these new markets are resolved. Many of the digital services companies think the Hollywood folks can't clearly see the future. The studios were wrong about television, cable, and the VCR, thinking each of them would destroy their bottom lines. Yet today, without those sources of revenue, few features would get made.

But Hollywood has a decades-long, proven track record managing the creation and distribution of entertainment, and the studios clearly feel confident that this will protect them today. As long as the Silicon Valley companies are fearful about learning a different kind of new technology, namely the management of human relationships, Hollywood will remain in control of its key trump card -- content.

2002's Digital Hollywood illustrated that the future isn't as much fun or as potentially lucrative as it seemed just two short years ago. "We are all in for some tough times. There is going to be a lot of pain," is how Intertainer's Taplin put it. Just two days later, his firm sued three studios, accusing them of engaging in anti-trust violations to protect Movielink.