Intertainer lawsuit claims studios conspired to raise prices
By Ken Kerschbaumer
When streaming-media technology led to an abundance of new business
ventures in the late '90s, it all seemed too easy. In 2001, it became
apparent that it was too easy as nearly all Internet entertainment
ventures fell by the wayside. The reason: not only a lack of funding
but a lack of quality content as well. Those broadband ventures
that had access to quality content had access to quality growth
opportunities. Or so it was thought.
A lawsuit filed last week by broadband VOD operator Intertainer
against three studio partners suggests that the broadband landscape
may change again. AOL Time Warner, Vivendi Universal and Sony all
worked closely with Intertainer over the past couple of years, giving
the service access to first-run movies like Shrek. But the three
studios, along with MGM and Paramount, are ready to launch Movielink,
their own broadband delivery service. Once the Movielink plans began
in earnest, so did the turning of financial screws on Intertainer.
"They want to own the customer and have complete vertical integration
without any middlemen," says Intertainer CEO Jonathan Taplin. "I
can't tell you how many studio executives have told me, 'We aren't
going to allow anyone else to build another HBO.'"
The lawsuit accuses the three studios of conspiring to fix prices
related to digital delivery as well as misusing confidential knowledge
of Intertainer's operations to help move their own broadband service,
Movielink, from concept to reality.
"I try to play fair. I'm not Sean Fanning," adds Taplin, in reference
to Napster's upstart founder who shook the music business to its
core. "I've tried to play by the rules. I've worked with these companies
for 25 years, and it's just been shocking to me what has transpired."
According to Taplin, his original financial arrangements with the
studios were for an equal split of revenue. Intertainer charges
viewers $3.99 to access films, making that split roughly $2 to each.
But, when the MovieLink venture gained momentum as a concept, the
studios revisited their deals with Intertainer. For example, Warner
Pay-TV and Intertainer had signed a deal in April 2000 extending
the 50%- share terms of their relationship through 2004, but, 18
months later, Warner Pay-TV also required a $1 million guaranteed
annual fee plus 60% of the revenues.
"We built a business model, and they changed the business rules
on us," says Taplin. "By the end, we paid Universal and Warner $42
for every $3.99 we took in because of the huge guarantees."
The difficulties between Intertainer and the studios began in 1998
when Sony purchased nearly 400,000 shares of Intertainer, an investment
large enough to permit Sony Pictures Executive Vice President Elizabeth
Coppinger to sit on the Intertainer board of directors. The relationship
between the two companies was tight, with Sony gaining access to
information that, Intertainer's complaint claims, was protected
under a nondisclosure agreement. The relationship became strained
when Intertainer Senior Architect Nizar Allibhoy left in September
1999 to start a consulting company and, within a few months was
appointed VP of technology at Sony Pictures Interactive (now Sony
Intertainer's complaint against Sony alleges that Sony hired Allibhoy
in an effort to misappropriate confidential information. A few months
after hiring him, Sony told Intertainer that it was not going to
renew its license agreement with Intertainer, which expired in August
2000. When asked for a reason, according to the complaint, a Sony
executive said, "You will find out soon."
Soon turned out to be April 2001, when Sony announced that it was
going to start an IP-based VOD service called Movielink with other
studios. A year later, Intertainer still has no deal with Sony,
a studio that has equity in the company.
"Sony formed the VOD venture and then made a deal [under which]
the VOD venture would buy content from Sony and give Sony 60% of
the gross," says Taplin. "We told them that was not an arm's-length
transaction; it was just taking money out of one pocket and putting
it into another."
Taplin says Universal then did the same thing, gaining equity in
Movielink and then a sweetheart deal on the other side. That was
only three months after signing a three-year contract with Intertainer
for a 50/50 split.
Taplin says he is hoping for a settlement, one that will allow
Intertainer to go forward with its business. The company is not
in any immediate financial peril, but, he says, if the company needs
to spend $40 for every $3 it brings in, that isn't the type of return
that promises a long-term existence.
"Right now, I'm paying them $2.50 per transaction on a $3.99 film,
as opposed to $1.99, and that difference is the difference between
me having a margin or not," says Taplin. "That basically puts me
out of business. And then they can basically set whatever price
they want because there is no competition."
The challenge facing Intertainer is one that others could face
as well. After all, one of the promises of the Internet is that
it opens up the channels of distribution to anyone. If someone owns
content, why go to a third party?
Jonathan Klein, CEO of The FeedRoom, which distributes NBC TV and
Tribune news content via broadband, says, "Our thinking has been
that, if we provide high value to the NBCs and the Tribunes of the
world, they'll want to keep growing with us."
But Intertainer once found vested interest from the studios.
"Intertainer is just a small cog in a much bigger game being played
out, which is that there are a few companies that want to own everything
end to end," Taplin complains. "They make their programs, they sell
them to their distribution networks, and they screw anyone else
starting any media business in this country."