Is Hollywood Failing to See the Big Picture?

"The battle that the studios lost actually created the business mechanism that can help them deal with the Internet," says William Morris agent Marc Geiger, a cofounder of Artist Direct, an entertainment company that serves as a one-stop commerce outlet for music fans. "They have seven or eight different ways for a consumer to watch a movie, depending on their habits and the price they're willing to pay, from theaters and DVDs to HBO and pay-per-view. And it's all because movies are essentially already distributed digitally. I go home at night, call up a movie and store it in a hard drive -- it's called TiVo -- and I'm doing exactly what the music business is screaming about, except I'm doing it legally and paying for it."

The studios have other advantages besides flexible ways to sell and price their product. The same consumers who feel gouged by record company CD prices have fewer complaints about the value of movies and DVDs.

"The music business was charging their best customers higher prices for CDs, even though it was something that cost less to manufacture [than the vinyl LP that preceded it]," says Warner's Meyer. "There was also no way for a customer to get what they wanted -- one or two songs -- without paying full price for it. We've gone the other direction, putting more value into our DVDs while charging less for them."

Both Valenti and Chernin cite research findings that in the U.S. alone, anywhere from 350,000 to 750,000 copies of movies are illegally downloaded every day. Those numbers sound jaw-dropping, but it raises the question that if all that downloading is going on, how is it possible that DVD sales are rocketing through the roof? Put simply: If consumers are buying movies after seeing them on the Web for free, is that piracy or free promotion?

"It's not our imagination," says Fox's Gianopulos. "To ignore the illegal downloading because DVDs are so popular is like saying your store is doing good in the front showroom, but people are backing up the truck in the back and looting the warehouse."

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In the promotion-versus-piracy wars, it's the media giants trying to protect their blockbuster entertainment battling small media entrepreneurs eager to expose a promising band or low-budget art movie. While music conglomerates saw Internet downloading as a huge loss in revenue, independent record labels were happy to put their band's live tracks and outtakes on the Web, viewing it as great exposure.