Quotes of the Day

Jack Valenti, the firebrand longtime head of the Motion Picture Association of America (MPAA), was never one to mince words. As the movie industry's chief lobbyist, he knew how to portray his business's challenges in dramatic terms. Back in the 1980s, faced with new technology that supposedly threatened the studios' bottom line, Valenti once famously compared the VCR to the Boston Strangler.

Rhetoric like that took the battle against Betamax all the way to the Supreme Court, which ruled against the movie industry and helped establish the right of fair-use copying. We all know what happened to the VCR: not long after that defeat, the studios discovered that tape rentals were even more of a cash cow than movie tickets.

Fast-forward a generation. This time the supposedly disruptive technology facing the film industry is peer-to-peer networking. Whereas the original Napster offered free music only and was easy to shut down, its successors — Kazaa, Grokster, Morpheus et al.--trade movies too and have proved more resilient. The music labels fought all instances of unfettered file sharing until Apple CEO Steve Jobs helped broker a cease-fire in the form of the iTunes Music Store, which won praise from consumers and a route to profits for the labels. The film industry, however, is still in the trenches, trying to stall what it sees as an onslaught of movie theft. Already as many as half a million movies are swapped online every day, according to the MPAA. But a diverse chorus of critics says that Hollywood is on the wrong track and that file sharing may well hold as much potential profit as the VCR did.

The industry's efforts to block the new technology in the courts aren't going well. Last month a Federal Court of Appeals declared Grokster and Morpheus as legal as a VCR or a Xerox copy machine, whose legitimate copying uses outweigh illegitimate ones. The movie industry is furious. "These are folks who hide behind a curtain of plausible deniability, like they don't know what's being traded on their networks," says Dan Glickman, a Clinton Cabinet member and former Democratic Congressman who took over the helm of the MPAA after Valenti retired.

Now Hollywood is pinning its hopes on a new tactic: federal legislation that would essentially target file-sharing technology. If passed, the so-called Induce Act, backed by such powerful legislators as Senate majority leader Bill Frist and Senator Hillary Clinton, would close the legitimate-copying loophole and empower the MPAA to sue peer-to-peer file-sharing services like Grokster after all. Opponents of the bill include usual suspects like the Electronic Freedom Foundation — the A.C.L.U. of the digital world — but also a surprising number of big businesses.

Internet service providers like Verizon and gadget stores like Radio Shack say the act's wording is too draconian and makes them liable if customers use their wares to break copyright law. "It will be hard for us to introduce any digital product or service that delivers entertainment content," argues Sarah Deutsch, general counsel for Verizon.

At the same time, the studios can't exactly argue that file sharing is about to put them out of business. DVD sales, which grew 33% last year, and box-office receipts have never been stronger. So if technological breakthroughs were a boon for the movie industry in the past, why is the industry acting as if the sharing of movies online, as Valenti said a year ago, heralds the "undoing of society"?

The answer has to do with the film industry's business model, which is founded on a tightly controlled schedule of when and where the public sees movies. That schedule is broken up into windows. The box-office window is followed by the pay-per-view window, and then the DVD window opens, followed by the premium-cable window. The studios maximize their profit by selling licenses for each phase. If peer-to-peer networks can offer movies while the films are still in theaters, the whole revenue stream could be undermined. "We have less issues with technology overall than the lack of the ability to enact business rules around that technology," says Darcy Antonellis, a senior vice president at Warner Bros. Entertainment (a sister company of TIME) responsible for its worldwide antipiracy operations.

Not everyone in Silicon Valley is unsympathetic — even those promoting downloading technology. "Studios will not support downloading of new releases for the same reason book publishers don't go direct to paperback," says Reed Hastings, CEO of Netflix, the hugely successful online movie-rental company. Hastings has his own version of an iTunes-like solution to the movie-download problem. Right now his 2 million customers rent DVDs online and receive them through the mail, but he says he has always intended to make the transition to movie downloads. Nothing is likely to be launched in the next year, but Hastings has been brainstorming the idea with Michael Ramsay, a Netflix board member and the CEO of TiVo, whose time-shifting digital video recorder has spooked Hollywood. Recently Ramsay, who has been struggling to expand the TiVo business, won FCC approval for TiVoToGo, a service that would allow people to share TV shows, movies and other TiVo recordings with as many as nine other TiVo boxes and computers via the Internet. (Not surprisingly, the MPAA bitterly opposed TiVoToGo.) "Downloading any movie ever made — that's possible on a TiVo box today," says Ramsay. "The problem is in the copyright management, not the technology." Hastings, meanwhile, takes pains to stress that any future downloading business would work out a profit-sharing framework with movie studios.

So far, copyright management has hamstrung the movie industry's attempts to make a business out of file-sharing technology. Two years ago, major studios launched a service called Movielink, which offers movies for downloading to your computer at about the same time they hit the pay-per-view window. Not only do the movies take hours to download, but they also disappear from Movielink's catalog altogether 90 days later, when they enter the premium-cable window. Because channels like HBO and Starz! offer lucrative licensing deals, Movielink has not been able to compete in the latter window. "We'll see this business become a true mass market," says Jim Ramo, CEO of Movielink. "It's just a matter of time."

How much time is open to debate. Ramsay says the industry has five years to figure out how to work file sharing into its business; Hastings thinks it's more like 10. (Both caution that contrary to some reports, we're not likely to see a full-fledged Netflix-TiVo deal in the immediate future.) The delay in incorporating file sharing has a lot to do with the slow speed of most Americans' Internet access. Even with cable and DSL connections that average 2 megabits per second, it can take 16 hours to download a movie with just a third of the quality of a DVD. Not to mention that most of us prefer watching a movie on our TV to watching it on a computer screen. "This isn't going to be a tidal wave of change," says Hastings. "More like global warming."

Download speed is just one reason file sharing may not be as immediate a threat to the movie business as it may seem. "There were very beautiful copies of Shrek 2 available on the Internet when it was released," says Ted Sarandos, chief content officer for Netflix. "That didn't seem to hurt [Shrek's] ticket sales any." When DVDs are packed with special features and available to rent for $2 or to buy for $15, who wants to waste a day downloading a movie? "I've frequently suggested they give up on all this copy protection because it doesn't make a bit of difference," says Fred von Lohmann, a lawyer for the Electronic Freedom Foundation who defended Grokster against the movie industry's lawsuit. "It's not all the fancy locks that protect the industry. It's a great product at a great price."

In today's fast-paced websphere, any attempt to restrict content is probably doomed to failure anyway. Exhibit A: The MPAA sued the company 321 Studios into bankruptcy last year for producing a piece of DVD-copying software called DVD X Copy. So what happened? DVD Shrink, a free product that does the same job, started popping up on the Internet. Exhibit B: Even before the launch of TiVoToGo, the online cognoscenti have latched on to BitTorrent software for swapping TV shows. Privately, some movie bosses admit the industry is on the wrong track. "Studios can only bitch so much before they provide a viable, competitive alternative," says one Walt Disney executive.

Intellectual-property experts are trying to come up with new models that will allow the film industry to survive downloading. UCLA law professor Neil Netanel has proposed more product placement in movies (since advertisers care only about how many people see their products) and allowing unrestricted file sharing in return for a "noncommercial-use levy" of 4%, regulated by the Copyright Office and imposed on the price of new computers and other copying devices. Netanel's estimate of the resulting profit for the studios: $2 billion a year.

For the moment, though, the movie industry's main thrust is the Induce Act (which is unlikely to get a full hearing before Congress this session, although Senate Judiciary chairman Orrin Hatch will probably bring it back next year). A public relations campaign to try to sway people from downloading movies illegally is also under way. Theatrical trailers show stuntmen, set builders and special-effects experts claiming they are the ones hurt by illegal downloads. And the industry has raised concerns over security dangers and privacy issues endemic to file sharing.

But time and technology are not on the studios' side. Just as the Napster phenomenon appeared to come out of nowhere, the next generation of file-sharing software is already in utero. Last month computer scientists at Caltech set a new data-transmission record: they achieved the equivalent of downloading a full-length feature film in 4 sec. It's a bumpy road to acceptance for any disruptive entertainment technology, from piano rolls to the VCR. "One thing you can count on in Hollywood is fear of change," says Warren Lieberfarb, the man who launched the DVD. But as Lieberfarb's profit-rich baby continues to prove, consumers are still hungry for faster, easier entertainment — and there's always another fortune waiting to be discovered.

• CHRIS TAYLOR/ SAN FRANCISCO