PPV Encryption: A Wait-and-See Game

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As digital-cable boxes get closer and closer to becoming a
reality, the issue of copyright protection has become a major concern for Hollywood
studios, which fear that digitally transmitted pay-per-view offerings could mean pay dirt
for pirates.

The clarity of digital signals and the ability to make
quality copies have studios calling for PPV films to be encrypted. But just how far they
will go to demand this protection has generated much speculation among all players in the
industry.

Some industry observers believe that shortening the windows
between PPV and home video will give cable operators the incentive that they need to buy
digital boxes containing some type of copy protection, while others said lengthening
windows would be a threat to those that don't. Still others believe that the solution
lies in legislation.

Cable operators, of course, have concerns of their own, and
they wondered just how tolerant subscribers would be if they were no longer able to tape
PPV movies. They were also concerned about the expense of digital boxes that contain the
encryption technology, and about who's going to pay for a service like that of
Macrovision, which deploys a "per-use" charge.

Currently, Macrovision is the only company that both
studios and operators discuss when talking about copy protection, although there are other
encryption technologies being researched by the Copy Protection Working Group, which is
being financed by both the studios and the cable industry.

"We asked studios if they would give us a shorter
window if we used copy protection in this situation," said Ted Hodgins, manager of
PPV at Media General Cable in Fairfax, Va., "and many said it would just never
happen. So what's my motivation to buy these boxes? They're expensive, and the
Macrovision-compatible ones cost even more."

Digital technology, of course, greatly improves picture
quality, but it also allows for more channels, which, for a company like Media General,
isn't a concern. It already has a large channel capacity via the use of "A"
and "B" cables, so the incentive to switch to digital would have to come from
somewhere else. Some studios believe that it would come from them taking a much harder
stand.

"It was never written that pay-per-view was designed
for taping," said Ed Bleier, president of pay TV, cable and network features at
Warner Bros. "It's an accident that it has been tolerated for such a long period
of time, but when things go digital, it won't be tolerated any longer. In time, copy
protection will be the terms under which cable companies will get the movies."

Holly Leff-Pressman, vice president of worldwide PPV at
Universal Pictures, took a similar hard line.

"Whenever you have a digital signal, you have the
ability to download, and the copyright can be pirated. Many people assume that taping is a
God-given right, but that has never been fully addressed," she said.

It's comments like these, of course, that make cable
companies bristle.

While many are sympathetic to filmmakers and studios that
want to protect their copyright, cable operators believe that should home taping no longer
be a threat to home video due to encrypted signals, they're entitled to a shorter
window.

"Copyright protection is a big concern, and it's
legitimate," Hodgins said.

"If the signal is so good that you could hook up 20
VCRs and sell the copies on a street corner, there's cause for alarm. But that's
not where the piracy is coming from. The pirates aren't making copies off PPV taping,
but from distributors or dub houses."

Still, studios said, they'll want those digital
signals protected, but even they don't know how far they'll go to enforce it.

Some cable operators worried that the Motion Picture
Association of America is preparing legislation or legal action to stop the practice. If
that happens, they feared, it will discourage their subscribers from buying digital boxes.

But Rich Taylor, vice president of public affairs at the
MPAA, said there is currently no move to legislate encryption. He declined to comment
about the possibility of legal action, saying that the MPAA was simply "working with
all of the players to ensure a safe environment in the digital age."

"We'll need to guarantee the protection of the
signal," he said, "but we don't want to prevent all copying. We don't
object to someone taping Seinfeld, but pay-per-view is something that we'd
like to ensure."

The Supreme Court has only ruled on taping as it relates to
television broadcasts, saying in the landmark "Betamax" case in the early 1980s
that since these broadcasts are free, taping them is not illegal. Whether this same
reasoning would apply to pay services has never been tested.

One company that would love to see encryption legislation
is Macrovision.

"Home taping seems like such a harmless activity,
until one calculates the amount of revenue lost in terms of repeat PPV buys or displaced
home-video rentals and sales," said Tom Carroux, director of business development,
PPV copy protection at Macrovision. "The increased availability of digital-quality
movies on DBS [direct-broadcast satellite] and digital-cable networks [means that] many
consumers can now make commercial-quality videos of PPV programs with a simple press of
their VCR button."

Carroux pointed to two studies. One, conducted in 1996 by
Chilton Research on behalf of the Video Software Dealers Association, found that 24
percent of surveyed households taped PPV movies. And in the second, in 1997, Nielsen Media
Research found that 14 percent of Digital Satellite System households taped PPV movies
frequently.

"If you average those two figures, you could say that
19 percent of all pay-per-view viewers tape what they're watching," Carroux
said. "You would think that cable operators, which are spending tremendous sums of
money to upgrade their networks from analog to digital, would welcome copy-protection
technology, as it helps to maximize their return on investment."

This argument, which was shared by a few operators, is that
encryption will actually increase PPV buy-rates. Instead of subscribers turning away from
PPV in anger, they may actually order movies and events more frequently if they can't
tape them.

And as PPV companies make their selections more available
with all-day movie tickets, the need to tape programs for later viewing isn't as
great.

"If subscribers can't tape, they may order that
pay-per-view movie a second time," Carroux said. "And they won't be able to
share that tape with a neighbor, who will now order that movie for the first time."

Denny Wilkinson, senior vice president of marketing and
programming for PrimeStar Inc., agreed.

"When copy protection is put in, buy-rates will go
up," he said. "Subscribers will understand if we are forced to use it. We really
don't have this fear that if we must enforce copy protection, people will get
angry."

Wilkinson said he doubted that PrimeStar would have to use
copy protection unless a dramatic downturn in PPV or home-video revenue showed studios how
the lack of it was actually hurting them.

"I think that the studios have a wait-and-see
attitude," he added.

Others agreed. Both Mike Luftman, vice president of
corporate communications at Time Warner Cable, and David Speigelman, vice president of New
Line Television, said it will take some time before the whole issue is sorted out. Both
said it's in their companies' best interests to keep consumers as happy as
possible, yet not at the expense of having their copyrights pirated.

"We haven't made a firm decision yet on how we
want to handle this," Speigelman said, "nor have we decided which direction we
want to go in."

"We all want to maximize our revenues," Luftman
said, "and no one is going to do anything that will get in the way of that. It's
a very complex situation, and much will depend upon the choice of technology that will
make all of the players comfortable."

It's the technology, in fact, that may ultimately
resolve the issue. Bleier said film companies are currently working with technical
companies on developing an effective encryption system.

"How it will get embedded in films and converter boxes
remains to be seen," he said, "but there are a lot of good technical minds
working on it right now."

One of those minds is that of Jerry Bennington, senior vice
president of Internet technology at Cable Television Laboratories Inc. He said that
typically, to copy-protect the interface between a conventional television and a digital
set-top box, companies would use an encryption system like Macrovision's.

But once high-definition television sets hit the market,
Macrovision isn't going to work, he added.

"Most of the research so far has not been on the
analog interfaces, but on the digital interfaces," Bennington said, "and that
process is being driven by IEEE 1394," which is a digital-interconnection method used
for digital data.

"Right now, there are no digital set-top boxes that
will support high-definition television. But by the time high-definition TV shows up next
year, there will be," Bennington added. "It would be a mistake to infer that
Macrovision has it in the bag, and that everyone will be building things [with their
technology]."

In the meantime, cable operators are just sitting tight.

"We have not been notified by the studios that there
are any time lines or schedules to put this protection on their product," said Joe
Boyle, vice president of corporate communications at Viewer's Choice. "This
story will continue, but, at this stage, it's not yet fully cooked."

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