Studios, cable and satellite companies, TV makers, and consumers will all
lose until copyright issues over high-definition content are sorted out .

Imagine this: The latest sci-fi thriller is finally being shown on your
premium-cable channel in crystal-clear, high-definition video. So you switch
on your new digital TV, record the film on a digital videorecorder, upload
it to your computer, and zap it off to your sister in Boston, who has been
dying to see it. Is this a vision of the digital future, or is it
Hollywood's worst nightmare? The answer: both.

Fears of digital-content swapping didn't end with Napster's agreement to
start charging for music downloaded online. If anything, the horror of
copyrighted music being spread freely around the world via the Internet has
fueled fears among movie executives that digital video will be the Net's
next victim. This time, though, Hollywood is taking no chances. The Motion
Picture Association of America, which represents the major Hollywood
studios, is waging a quiet war in negotiations with distributors of its
products to prevent the "Napsterization" of digital video -- and the
presumed ruination of moviedom's multibillion-dollar business model.

Having all but defeated Internet foes such as Scour, a video version of
Napster, in the courts, Hollywood is now focused on pressuring its friends,
the cable and satellite operators, which are making big strides in the
effort to deliver digital video to the mass market. In complex negotiations
over the past few months, the studios have been strong-arming the cable and
satellite companies into decreasing the resolution of high-definition
digital video -- lowering the broadcast quality so there's less incentive to
copy it -- and restricting consumers' right to record what's on TV. The
studios defend their actions in the sacred name of copyright protection.

"REASONABLE BALANCE." Problem is, keeping digital-video content in a lock
box is bound to alienate an entire roster of movie lovers -- and ultimately
push the matter to Capitol Hill. Consumers paying $3,500 to $12,000 for a
digital TV expect to see high-definition quality and to be able to record
programs, just like they can on their VCRs. Anything less would anger not
only them but also technology companies and cable and satellite providers,
which stand to make a good buck from digital video.

"The idea that improvements in technology have to stop so that Hollywood
doesn't have to change its business model is crazy," says Jim Burger, a
lawyer with the Washington firm of Dow, Lohnes & Albertson who focuses on
the intersection of technology and media. "Looking for perfect protection in
the Digital Age will put you in a loony bin. What they should be looking for
is a reasonable balance between making money and making life easier and
better."

Finding such a balance has proved elusive. TV-set makers don't want to
include copy-protection technology in new sets because it would raise
prices. Yet Hollywood doesn't want its content on TV if it isn't fully
protected. Satellite and cable companies won't openly challenge Hollywood
because of fears that the studios won't sell them the high-definition
movies, original dramas, and comedies that viewers, and consequently the
content carriers, want.

ALREADY HAPPENING. Hollywood is afraid that without protections, hackers
will make millions of high-quality, black-market copies that, unlike copies
of VHS tapes, are every bit as good as the real thing. It's particularly
agitated over the fact that, for now, there's no way to prevent widespread
copying on the more than 750,000 digital-TV sets already are in American
homes.

These sets have no hardware or software to control which digital material is
recorded and redistributed. And the number of such sets is expected to hit 2
million by the end of 2001 and perhaps 20 million by 2005, according to the
Consumer Electronics Assn. While later generations of digital-TV sets will
probably have copy-protection capability -- though the studios and TV
manufacturers are still arguing over how that will work -- digital TVs with
no copy-protection capability continue to roll off the assembly lines.

Don't count on TV makers for a solution. The MPAA wants satellite and cable
companies to "downres" -- or downgrade -- high-definition premium content so
that what consumers see isn't high-definition at all but roughly equivalent
to what you would see on regular digital cable or satellite. And that isn't
all. Hollywood also wants to limit what consumers can copy on personal
videorecorders, the digital successor to the VCR, which are being built into
satellite and cable set-top boxes. If Hollywood has its way, consumers will
be able to record only about 90 minutes of TV programming -- just less than
the average length of a feature film.

"PLAYING OFFENSE." To just about everyone but Hollywood, this is tantamount
to turning back time. Ever since the 1984 Supreme Court decision in Sony v.
Universal Studios, consumers have had the right to record anything on TV for
personal use. Consumer-electronics manufacturers and consumer-advocacy
groups argue that this right shouldn't change in the Digital Age. "The
content providers portray themselves as being besieged by new business
models like Napster, but in reality they aren't playing defense, they're
playing offense," declares Michael Petricone, general counsel for the
Consumer Electronics Assn. "They aren't trying to preserve but to cut back
the rights consumers have had for 20 years to record video -- so as to make
even more money."

The studios insist that digital is a whole new ballgame that requires new
rules. To be sure, the studios do need the right to protect their material.
Hollywood is already plagued by piracy in the videocassette market -- losing
$250 million annually in the U.S. alone, according to the MPAA. Worldwide,
video piracy costs U.S. studios more than $2.5 billion a year. With digital
technology, making pristine copies becomes especially easy because picture
quality doesn't degrade with each copy made, as it does with traditional
videocassettes. "There is no technology other than downresing to protect it
from being copied and retransmitted on the Internet," says MPAA
vice-president Fritz Attaway.

Hence the deadlock. What's going to break it? Angry consumers. That's one
thing that all parties agree on. As digital-TV sets become more common,
there'll be an outcry from consumers who feel they're being ripped off by
cable and satellite operators. "The public is going to be pretty incensed
that the quality of programming they were promised isn't delivered," says
Representative Rick Boucher (D-Va.), who is following negotiations on
digital copyright in anticipation of congressional hearings sometime during
this session.

WATERMARKS? That anger will put pressure on the heretofore "recalcitrant"
movie studios to come to an agreement, Boucher predicts. Public agitation
for consumer protection also will give Congress the freedom to legislate a
compromise. That might include investments in new copyright technologies
such as watermarking, which encodes hidden digital noise in a film so that
illegal copies would be unwatchable. Policymakers might also require TV
makers to include an add-on that will let content providers monitor home
recording.

Of course, legislation of any kind would be a rich irony. At the dawn of the
21st century, it has been all but assumed that "market solutions" would
provide the answers to even the thorniest Digital Age questions. The
prospect that Congress will be able to find a way to protect Hollywood's
intellectual property and simultaneously spur the spread of digital TV seems
dim at best. This drama will no doubt feature many plot twists before the
final credits roll.