Embracing Change
~New business models in entertainment media~
By Cheryl L. Slay

As recently as 25 years ago, when on spoke of “the Big Three,” the reference was not solely to Ford, Chrysler and General Motors; in the entertainment and media context, the term also referred to CBS, ABC and NBC. Network television was an unchallenged oligopoly that seemed unthreatened, save by a few independent television stations whose airwaves and influence were localized.

At that time, the prediction that cable television, despite its subscription-based revenues, would expand and revolutionize the industry seemed far off, stretching the imagination with its suggestion that viewers would prefer to buy a commodity that had always been available completely free of charge. Yet today we live out the fulfillment of that prophecy and can scarcely imagine television without cable.

This reality is reflected not only on the sets of subscribers but in the economy as well. Cable and satellite programming have ushered in new business models for the television industry and the industries it affects. The combined revenue of subscription sales and advertising dollars makes cable an attractive media venture. As of the second quarter of 2004, the Cabletelevision Advertising Bureau stated that revenue derived from cable advertising “earned a significant 20 percent ad revenue increase, up $660.7 million from $3.3 billion last year to $4 billion this year.”

Increasing revenue streams from cable have spawned mega-conglomerate subsidiaries that, while competing with each other, keep revenues “in the family” by funneling them to a parent company. For example, Viacom owns both CBS and UPN – free TV – while concurrently owning MTV, BET and Comedy Central. By mid-2003, the company realized a 14 percent increase in earnings, attributable in large part to its cable and broadcast media outlets. Cable TV has also affected the sports industry; ESPN channels provide new ways for advertisers to target sports audiences. Disney also acquired a hockey expansion team in 1992. Not surprisingly, these conglomerates also encompass the motion picture industry, where for example Viacom owns Paramount Studios and the Walt Disney Company owns ABC and ABC-Family, a cable television channel.

Brave New World

The impact of digital technology on the music and film industries rivals and will surpass that of cable on television. The digital revolution marries computer technology and entertainment media, thereby evolving new information formats, including: (1) digital audio recorders – now used by recording studios to record music, replacing analog equipment; (2) Musical Instrument Digital Interfaces (MIDI), which operate on synthesizer keyboards to imitate the sound of any musical instrument; (3) MP3 and MPEG-2 file formats, which compress audio and video data, respectively, thereby making the data easier to transport without loss of quality; and (4) DVD-audio or super audio CDs, which transcend current CDs, offering surround-sound and superior quality. (Digital technology is also transforming television and radio through digital cable, digital satellite radio and TV and via new ways to record programming, such as TiVo.)

These new formats have changed the way music and film content are created and transmitted. Digital keyboards provide the means to create full orchestral sound with the programming of a few keys, obviating the need to hire and pay scores of musicians to record a song. Digitally-based music software programs make it possible to transform a home basement into a professional sound studio. Digital audiotape produced in such studios can be dispatched to pressing houses that reproduce, package and distribute a finished CD project. The result is a digital economy, fueled by the information superhighway, the Internet.

Distribution of music, films and electronic books via the Internet has breathed new life into independent record labels, film production companies, smaller book publishing houses and self-published authors who have all traditionally faced challenges in marketing their products and competing with the mega-conglomerates. Additionally, the Internet is affecting radio business models with the introduction of webcasting (which gives listeners the ability to specify the type of content they want to hear or see) and streaming (the ability to play audio as it is being received, like in traditional radio, versus downloading an entire audio file).

Alternatively, transmission of digital media over the Internet has also created disputed business models, like Napster and Grokster – both services which facilitate digital downloads of music and movies free of charge – which have left content owners (artists, recording companies and other rights holders) vulnerable to consumers seeking to obtain entertainment through these convenient, accessible and cheaper/free vehicles.

Accordingly, the courts are sorting out the rights of Internet service providers (ISP) and rights owners while defining new landscapes in copyright and Internet law. The recording and movie industries have initiated several legal actions, including:

A & M Records, Inc. v. Napster, Inc. (9th Cir. 2002; music download services have a duty to police their systems to help protect copyright owners’ rights)

Recording Industry Association of America, Inc. v. Verizon Internet Services, Inc. (D.C. Cir. 2003; upholding safe harbors from liability for copyright infringement for compliant Internet Service Providers)

MGM Studios, Inc. v. Grokster Ltd. (9th Cir. Aug. 2004; no vicarious or contributory copyright liability for peer-to-peer file sharing service where service does not provide the “site and facilities” for the infringement; also applied Sony-Betamax test). On October 8, 2004, MGM filed cert in the U.S. Supreme Court to decide the issue of file-sharing liability. (The Court has not yet granted certiorari to hear the case at the time this article goes to print.)

Digital wars are also being fought on the consumer front, where the Recording Industry Association of America has filed suits against approximately 3,000 consumers who have downloaded unauthorized music, identified only by their computer ISP addresses (but see Sony Music Entertainment v. Does, requiring ISPs to disclose identities of subscribers).

Congress joins the courts and regulatory agencies in addressing the digital divide. Passed six years ago, the Digital Millennium Copyright Act was specifically designed to address the new pressures, opportunities, and potential abuses of digital technology. However, its reach is not all-encompassing, and many new legislative proposals have since emerged. Over a dozen bills were introduced in 2004 alone, including the Piracy Deterrence and Education Act of 2004 (to broaden criminal enforcement and public education concerning copyright piracy) and the Protecting Intellectual Property Rights Against Theft and Expropriation Act of 2004 (proposing a civil action for copyright enforcement by the Justice Department, and expanded remedies).

Earlier this year, U.S. Attorney General John Ashcroft formed a Federal Intellectual Property Task Force, positioning the agency to take action. The task force’s recommendations concerning how the Department will handle theft of intellectual property were announced on October 12, 2004, signaling the high priority the Justice Department may accord these issues. Their recommendations include:

Charging and prosecuting all intellectual property crimes whenever federal law applies;

Encouraging respect for intellectual property rights through youth education programs; and

Increasing cooperation with individuals, businesses and industries that have been victimized by intellectual property theft.

This is a stimulating and challenging time to serve these industries. The MSBA Entertainment & Sports Law Committee supports practitioners in the field during this pivotal era and invites your participation.

Cheryl L. Slay is an Entertainment and Intellectual Property law attorney in Owings Mills, Maryland, and Chair of the MSBA Entertainment & Sports Law Committee.