Media Wonk

Skinning Schrödinger’s cat - July 11, 2007

Microsoft kicked off the revamped E3 video game conference Wednesday with an announcement that it has struck a deal with Disney Pay-TV to offer downloads of the studio’s movies via Xbox Live, the online entertainment network available to users of Xbox 360, Microsoft’s game platform.

The deal is a milestone for Xbox Live, which has been lagging behind Apple’s iTunes in the Disney department and gives Microsoft another chit in its battle with Sony, which is yet to launch an online service comparable to XBL for its PlayStation 3 consoles.

It’s a bit of a surprise to see The Mouse do the deal, though. The studio is already facing litigation over its download deals with iTunes and Walmart.com, so you might have expected Disney’s lawyers to be a bit circumspect in reaching other deals.

Apparently not, however.

“We’re always looking for more ways to let people experience our films,” Disney exec-VP for pay television Dan Cohen said. “With the millions of Xbox 360 consoles in living rooms today with a direct, high-speed Internet connection, Xbox Live really has become a terrific device for the delivery of digital entertainment content.”

Trouble is, Disney’s exclusive pay-TV distributor, Starz Entertainment, believes it also has exclusive rights to distribute Disney’s films over the Internet, dating to the pair’s original 1999 contract. In March, after the iTunes deal was announced, Starz sued for breach of contract, as well as (somewhat novel-ly) copyright infringement, on the grounds that the Disney deal devalued the exclusive rights under copyright the studio had licensed to Starz.

A hearing in the case was held Monday in federal district court in California, on a motion by Disney to dismiss the copyright claim for lack of standing.

As for the breach claim, Disney maintains that Starz “misreads” its pay-TV contract, and that the studio “retained and has the right to sell its motion pictures in a wide range of mediums.”

A Starz spokesman declined to comment on the Xbox Live deal.

However the case comes out, it’s not the first time—and it won’t be the last—that old exclusives come back to haunt the studios as they try to develop new distribution models.

Starz founder and then-CEO John Sie had the prescience in 1999 to ask for exclusive Internet rights before most people at the studios had focused on what those rights might someday be worth.

But the pay-TV deals have long been exclusive, an arrangement that is increasingly problematic for the studios’s digital distribution plans even where the contracts don’t also grant exclusive Internet rights.

In another announcement this week, Amazon and TiVo said they have upgraded their Unbox on TiVo download service to allow users to select and order downloads directly through their TV instead of having to use a PC to order films from the Unbox web site.

Part of the service also includes online storage of content purchased from Unbox so users are not limited by the on-board storage capacity of their TiVo players (something Microsoft is also eager to offer with Xbox Live).

Movies purchased from Unbox during the pay-per-view window and stored online, however, become inaccessible to the buyer during the pay-TV window because HBO, Showtime and Starz have exclusive TV distribution rights for that period.

Once the movies pass through the pay-TV window they again become accessible, in an oscillation no doubt as mysterious to the average Unbox users as the fate of Schrödinger’s Cat.

Amazon and TiVo are also effectively barred from offering their direct-to-TV download service on a subscription basis—a more attractive model to many consumers than pay-per-view—because the studios’ exclusive pay-TV deals also typically include subscription video-on-demand rights (another John Sie innovation).

Once upon a time, exclusives helped the studios maximize licensing fees. Increasingly, however, they have the effect of minimizing strategic options.

The longer content owners wait to buy their way out of those deals, the bigger the check they’ll have to write.

LEAVE A COMMENT