BROADBAND SPAT
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 Digital).

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.