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[whitespace] Andrew Wolfe Sonic Boom? Andrew Wolfe, senior vice president and chief technical officer of SonicBlue, says technology like the ReplayTV 4000 comes down to the issue of control. 'Five or fewer media companies,' he says of those opposed to the device which stores up to 320 hours of programming, without commercials, and allows viewers to send copies to friends over a broadband Internet connection--'want complete control over everything you see and when you see it.'

Photograph by George Sakkestad

The Battle for Your Eyeballs

An epic battle is shaping up over who gets to control how and what you watch on TV--and whether there are any TV shows left for you to watch

By Loren Stein

THREE YEARS AGO, Anthony Wood, the co-inventor and then-CEO of ReplayTV, sat in his corner office at the company's former headquarters on the outskirts of Palo Alto and confidently predicted his invention would revolutionize the way people watch television. "This product will affect everyone's lives," he promised.

Wood's invention, now in the hands of Santa Clara-based SonicBlue, has reached its make-or-break moment. Wood (now SonicBlue's senior vice president for "connected home products") may get his revolution. But if his rivals have their way, the uprising will be stopped dead in its tracks.

Like its cross-town competitor TiVo, another pioneer in the field, SonicBlue's ReplayTV division makes digital video recorders (DVRs), set-top boxes that record and store television programming on a hard-disk drive, allowing users to customize their TV viewing like never before.

In a nutshell: DVRs can automatically record every episode of favorite programs with a single command regardless of when those shows are broadcast. They let users pause, instantly replay or "slo-mo" live television while the rest of the program is being recorded. They can also create theme channels of, say, actors or directors--a Halle Berry or Billy Wilder channel--or cooking shows or sports events or whatever else strikes a viewer's fancy.

There's another critical benefit to consumers, if not to advertisers: depending on which DVR you have, you can either zip through commercials using three different speeds or jump over them with a 30-second skip button.

Since hitting the market in 1999, both Replay (later SonicBlue) and TiVo have secured financial backing from big-name media companies. They've forged promotional and programming partnerships with the major studios and TV networks, and struck licensing agreements with consumer electronics companies.

But the similarities end there. Trailing behind TiVo in the market, SonicBlue decided to go for broke in late November when it unleashed its most cutting-edge DVR to date: the ReplayTV 4000. Not only does the new device store up to a massive 320 hours of programming, it also allows viewers to send copies of recorded shows to friends over a broadband Internet connection. What's more, the new DVRs can be programmed to automatically eliminate all commercials in recorded programs.

The ReplayTV 4000 is nothing less than a shot across the bow of the major media conglomerates, which fear the devices will trigger the collapse of mass media as we know it. Programming will be Napsterized by ReplayTV 4000 users, they charge, allowing large numbers of people to share ad-stripped television shows illegally.

And they're not about to sit idly by and watch.

Just days before the first ReplayTV 4000s were shipped, 28 top movie studios, TV and cable networks--including many of the world's largest and most successful media companies--sued SonicBlue for copyright infringement and unfair business practices.

"SonicBlue is freeloading on the back of content providers who are paying good money to develop quality programming," says an entertainment industry spokesperson who declined to be named due to the ongoing litigation. "What they're doing will ultimately hurt consumers by blowing up the business model. Consumers will have to pay money for content or have no content at all."

Andrew Wolfe, SonicBlue's senior vice president and chief technology officer, doesn't see it quite that way.

"Five or fewer media companies want complete control over everything you see and when you see it," he says. "They want to decide what kind of technology you can have in your home. They want to make it impossible to change channels during commercials."

Trench Warfare

At the same time that SonicBlue is busy defending itself in court, it has also gone on the attack. One week after winning its first DVR-related patent last December, SonicBlue slapped Alviso-based TiVo, its main rival in the DVR market, with a patent-infringement suit over the basic workings of DVR technology. TiVo, citing patents of its own, fired back and countersued SonicBlue in February.

If the companies don't reach a compromise to share their patents, the winner will walk away with the rights to market the most advanced DVRs--that is, if the courts rule that people are allowed to own them in the first place.

"If one company does win patent rights, I think it'll be very big news," says Tracy Swedlow, editor and publisher of Interactive TV Today, an industry newsletter in San Francisco. "People will see the winner as a long-term player."

The outcome of these legal battles is not only of interest to the protagonists. It will also define the balance of power between viewers and programmers, as well as how the rest of us watch TV for the next decade or more. The result may also determine whether there's anything worthwhile available to watch. On trial is the viability--and future--of the current model for commercial television programming.

This kind of trench warfare is familiar territory to SonicBlue. In 1998, Diamond Multimedia, a small San Jose technology company, began selling the Rio PMP 300, the first portable MP3 player available in the United States. The recording industry had won a temporary injunction that was later reversed, which allowed the company to sell the device while the trial proceeded. But big-name competitors such as Sony were reluctant to sell their MP3 players until the legal issues were settled.

The result: The tiny company clobbered the larger firms by selling tens of thousands of MP3 players with virtually no competition. Diamond eventually won the copyright lawsuit. Two months later, S3 Inc.--which would become SonicBlue--purchased Diamond Multimedia, which had reaped huge sales and become a hot property. Meanwhile, MP3s have become one of the world's most popular consumer electronic products.

The brash business plan paid off, and SonicBlue is banking that it will again. "[The industry] is working with a model where viewers have no choices," says SonicBlue's Wolfe. "We've added one more. They've drawn a line in the sand, saying it's the breaking point, but it's been a continuum for 50 years."

SonicBlue says the ReplayTV 4000s, which are now being sold by direct order from the company's website as well as from audio-video specialty stores and Amazon.com, are already showing a profit. Analysts say reviewers are so delighted with them they don't want to return them.

"It's a nice box, a solid device, and the commercial-skipping feature is especially nice," says media analyst P.J. McNealy, research director for San Jose's GartnerG2, who personally tested the ReplayTV 4000. "Many consumers haven't figured out what digital media means yet, but those who have love these devices. They're great across the board. The only way to get them out of people's hands is if they're dead and clutching them."

A new, independent website called Planet Replay already has 256 members who are swapping tips and comments on the ReplayTV 4000, among other Replay devices. They're also posting requests for shows and sending TV programs between ReplayTV 4000 users.

"[The ReplayTV 4000] is very innovative," says Chad Little, a web designer and owner/operator of Planet Replay. The allure of the "Commercial Advance" and "Send Show" features spurred him to preorder the new DVR last September. "These two features definitely make it the best DVR out there," he says.

Because of steep prices, DVRs have yet to catch on widely. But with models now ranging from as low as $200 (for a TiVo-made DVR) to $2,000 (for the highest capacity ReplayTV 4000), analysts say the market is set to explode in the next few years. Forrester Research, a Cambridge, Mass., market research firm, estimates that the number of U.S. households with a DVR will jump from 800,000 now to 42 million by 2006.

"I definitely see the space taking off, especially when DVRs are incorporated into cable set-top boxes," says Greg Ireland, a digital and interactive TV analyst with International Data Corp. in Framingham, Mass. "We're already seeing a trend of consumers opting for intelligent units. I see this as a huge business."

Adds analyst McNealy: "You don't have to be there to watch the shows [when they're broadcast] or watch the ads. These boxes have the ability to kill prime time."

The Engine of Content

In looking to the future, both SonicBlue and the media firms are keenly aware of historical precedent. Threatened by the advent of the video recorder, Hollywood sued and lost to VCR makers in the landmark 1984 Sony Betamax case, which went to the U.S. Supreme Court. In that case, the justices ruled that consumers should be allowed to record programs for time-shifting purposes. Specifically, it decided that VCRs were "fair use" under the law because they did not substantially cut down the network's profits, so using VCRs did not constitute copyright infringement.

But the networks and studios suing SonicBlue say the copyright laws as written are not designed to cover companies eager to exploit new digital technologies and easier Internet distribution in an era of technological convergence.

They maintain the new DVRs differ radically from VCRs and as such clearly violate copyright owners. Take the case of HBO, which relies on subscription fees to survive, says an industry insider. "SonicBlue allows you to copy all of the programming you paid for and send it to numerous other people over the Internet without paying a dime. You can see how fundamentally unfair that is to HBO, who had to pay many times what they charge subscribers to create their programming. The SonicBlue device is cheating them out of the value of their programming; it's like giving away 10 additional subscriptions for free. And who's profiting from that? SonicBlue."

The situation may be even worse for so-called free television, which depends on advertising revenue to finance the creation and distribution of programming. For TV programmers, who will earn an estimated $20 billion on commercials this year alone, it's clearly a scenario worth worrying about.

"[SonicBlue's] unlawful scheme attacks the fundamental economic underpinnings of free television ... and hence the means by which the [studio's] copyrighted works are paid for," reads one studio complaint. "Advertisers will not pay to have their ad[s] placed within television programming delivered to viewers when [they] will be invisible to viewers. ... By undermining the engine by which content is produced, this unlawful feature will inevitably dry up the source and diminish the quality of the programming that most Americans have come to expect and demand."

Among the media giants challenging SonicBlue in four separate lawsuits are Viacom Inc., which owns CBS and Paramount Pictures; The Walt Disney Co., which owns ABC and ESPN; NBC; AOL Time Warner Inc., which owns HBO; Showtime; and Columbia Pictures. Ironically, several of the entertainment companies suing SonicBlue (Time Warner Cable, Viacom and Disney) also have financial investments in the company; they are also suing for breach of contract.

With a court date scheduled for late August in Los Angeles federal court, it's no coincidence that SonicBlue has hired lawyers from Fenwick & West, one of the country's leading law firms specializing in technology and intellectual property--and also one of the firms defending Napster in its battle with the recording industry.

The DVR case closely mirrors arguments from the music file-trading lawsuits, but SonicBlue has learned some important lessons from Napster's defeat. To prevent the same outcome, they've designed the technology in ways that they hope will protect the company legally.

For starters, the new DVRs will only allow users to send a recorded show to a maximum of 15 other ReplayTV 4000 owners. Once they're received, copies of shows can't be forwarded to anyone else. This feature is designed to stopping unlimited and anonymous file-sharing over the Internet. Programs that are copy-protected by anti-piracy Macrovision technology also can't be recorded and shared. Finally, in a linguistic sleight-of-hand, SonicBlue claims commercials are not deleted by the devices but by consumers themselves.

SonicBlue denies it has "either designed or marketed ReplayTV 4000 as a tool to make it easy to infringe copyrighted material," states its legal reply to the studio's complaints. The studios can get revenues from copyrighted works from their many means of distribution, it says. Moreover, the studios "and their businesses have been able to adapt to new technologies (such as cable, the VCR, satellite, and television itself) so as to derive substantial revenue streams ..." The industry can once again "evolve to embrace" new markets and ways to make money, the briefs say.

"The networks are trying to undo [the Sony Betamax] decision 17 years later--claiming that consumers who choose to skip commercials, or who send a show to someone else who missed it, are copyright infringers," said Laurence Pulgram, SonicBlue's attorney, in a statement. "But if dodging commercials is against the law, you'd have to strap people in their chairs and snatch the remote control out of their hands."

In the meantime, Sen. Ernest "Fritz" Hollings (D-S.C.), the powerful chairman of the Senate Commerce Committee, has introduced what amounts to the industry's neutron bomb. With Hollywood's backing, the Security Systems Standards and Certification Act (SSSCA) would federally mandate the embedding of copy-protection technology in all interactive digital devices. If it becomes law, copying and sharing TV shows or other digital media for any purpose, including personal use, would become a crime.

"If these guys get their way, it'll be illegal to make copies of videos, time-shift shows, save shows for later or record DVDs," says Wolfe of SonicBlue.

"The same thing happened in the VCR case, with cable TV, with remote controls," he continues. "Every time there's a change in the business, [the industry] says it will destroy everything they do, but in fact, advances in technology have attracted more viewers and more money."

Photograph by George Sakkestad

Playing to Win

Meanwhile, the fight between SonicBlue and TiVo over key patents could potentially transform the DVR market. As they race to establish themselves as the premier providers of digital television technology, several other companies, including Microsoft, Moxi Digital and EchoStar, are waiting in the wings with less threatening approaches and could siphon off market share.

Although it's common practice for tech companies to contest patent rights, both TiVo and SonicBlue, while very different corporate cultures, seem prepared to go to the mat.

"TiVo plays hard and plays to win," says Swedlow of Interactive TV Today. The company is the leader in brand recognition for DVRs and as such has a lot to lose. "Having a TiVo has become the concept of the DVR itself," she says. Currently the leading DVR maker, the company has some 300,000 customers.

While SonicBlue tries to win market share through innovation, creative marketing of its products and splashy public confrontations with old media, "TiVo is a more formal company built on strategic relationships and tends to be more cautious," says Swedlow. TiVo has gained its edge because of its brilliant marketing and retail strategy, including its promotional, programming and licensing partnerships, analysts say. Big media backers include AOL, CBS, NBC, Showtime, Disney and Sony, among others.

TiVo refused interview requests--citing the pending lawsuits--but did release a statement. "We take litigation very seriously ..." it reads, noting that TiVo's countersuit against SonicBlue is the first lawsuit the company has filed to "aggressively protect" its patent portfolio. "Filing patent lawsuits is not the company's current strategy. We are more interested in licensing our technology and growing the DVR market. However, we will not hesitate to defend our position in the market when necessary."

SonicBlue won its patent late last year covering the fundamentals of DVR technology, including 50 claims that center on using a program guide or other "user-specified criteria" to pick TV shows for a DVR to record. It took only a matter of days for the company to sue TiVo for patent infringement, demanding that TiVo stop making infringing products, strike licensing agreements on new DVRs and pay damages on every DVR TiVo has ever manufactured.

TiVo countersued in February. Its new patents cover basic functions such as pause and rewind of live TV (and fast-forward recorded shows), and another for connecting DVRs and other streaming media devices to a network in the home. A court date has not yet been set.

Interestingly, TiVo recently announced a new DVR model that, like the ReplayTV 4000, is also broadband-enabled but which appears to be designed primarily to facilitate pay-per-view programming.

"These are tough players," says Swedlow. "SonicBlue has chutzpah and TiVo has a great brand. [These companies] want to change how TV is experienced, and it's all about innovation and strategic partnerships. It's going to be a hard fight."

Free or Fee?

If the studios win their case to stop sales of ReplayTV 4000 and, by extension, other new digital technologies, it'll be business as usual. But only up to a point, analysts say. The real question is whether digital media evolves as a legal and legitimate business or is pushed into the underground economy.

"SonicBlue is making the industry very, very nervous," says Greg Ireland of International Data Corp. "They saw what happened with Napster, and it makes them feel very vulnerable, and rightly so. Their fear is justified in my opinion. It opens up a whole can of worms."

The possible plunge in advertising revenue will definitely damage the studios' ability to create quality programming, says a prominent entertainment industry attorney who asked not to be named. Undermining the studio's current business model could also trigger larger social repercussions, she says. "I worry that this technology and future iterations could irreparably alter free TV. Free radio and free TV are the only free media we have that's shared. It could widen the cultural divide in this country."

She adds: "Unlike the record business--where you can self-promote--go with God, you can't create quality TV programming on your own because it's far too expensive. Studios don't make money anyway until syndication--it's already deficit-financing."

Some 100 million people, or 80 percent of television viewers, already pay to get their television through cable or satellite services. Going to a subscription model to pay for all TV programming isn't that much of a stretch, counter some analysts. But, they add, habits are hard to break.

"If consumers want content they will pay for it with money or their attention," says SonicBlue's Wolfe. "It's a market economy--whoever offers the best content at the lowest price will win. Isn't that the way we buy everything?"

Analysts note that Hollywood is already exploring new ways to make videos more easily available through business ventures such as movielink.com and movies.com, which allow users to download videos over the Internet to computers or set-top boxes.

"Everybody recognizes that new models will have to be developed as we move towards delivering content digitally and over the Internet," says the entertainment industry spokesperson. "But SonicBlue is not interested in coming up with fair models that make sure intellectual property is protected. SonicBlue says they're only interested in consumers, but they've undermined the model by which we come up with content and deliver it to them."

If the new generation of DVRs, such as the ReplayTV 4000, takes off, and the commercial-skipping feature eventually becomes standard for all DVRs, advertisers will be forced to find alternative ways to get their messages across, say analysts. Dreaming up ads that are more compelling, effective and targeted will be the order of the day.

Advertisers can't tell if people are watching their commercials in the first place, analysts point out. "Advertisers now have an opportunity to exploit the DVR platform, make ads more innovative and build one-to-one relationships with viewers that would bring immediate results," says Swedlow.

Possible approaches range from 1950s-style product placements in programming to targeted advertising based on viewers' individual profiles. Interactive enhanced television could let viewers click on commercials or products in programs to get more information--such as a full interactive video of the product they're interested in--or send in requests to advertisers. Networks could even go so far as to strike agreements with viewers to watch a specific number of commercials or even watch an all-commercial channel.

Overall, the lawsuits will slow down the process of technological change, but the new platforms will not go away, says Swedlow. "The cat's out of the bag. Even if [the studios] curtailed it now, it'll emerge in some other fashion later. There is a desire for this platform. They will launch this technology because people want it."

Movie studios and TV networks will have to adapt by creating new revenue-sharing schemes with DVR and other digital media companies, says Adi Kashore, a media and entertainment analyst with the Yankee Group in Boston, Mass.

"The entertainment industry will figure out a way to finance and deliver programming because it's got to be done," Kashore says. "At the same time, SonicBlue and other companies have to recognize that unless content providers make money and have a viable business model, nobody wins. They're not going to be successful either."

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From the April 4-10, 2002 issue of Metro, Silicon Valley's Weekly Newspaper.

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