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UPDATE: Intertainer Claims Studios Conspired to Crush It

26 Sep, 2002 By: Holly J. Wagner

In a case that shows striking parallels to a lawsuit that independent video retailers are waging against several major studios, Internet protocol (IP) video-on-demand provider Intertainer has sued AOL Time Warner, Vivendi Universal and Sony, alleging they sought impossible terms for their product in an effort to kill an industry.

"The similarity isn't lost on me in the sense that the studios don't want independent retailers," said Intertainer CEO Jonathan Taplin. "This whole move is all about eliminating the retailer."

Taplin's federal lawsuit, to which studios and their VOD joint venture Movielink have made no response, alleges the studios bought or traded content for shares of Intertainer, then violated confidentiality agreements to copy its proprietary technology to develop Movielink. Some people who formerly held key positions at Intertainer now work for the studios or Movielink.

"We were incredibly encouraged by the studios to build the technology," Taplin said. "All three of the companies in the allegations took shares in Intertainer. Warner and Universal, as part of their compensation for content, took shares."

The complaint alleges studios summarily ended content contracts with Intertainer and, once Movielink was announced in August 2001, used contracts giving them a 60 percent revenue split from their own joint venture to set an "industry standard" 60 percent split.

"When we started we had a decent business model. It was a straight 50-50 split, and it was a workable model," Taplin said. "They create a business model that makes it impossible — large guarantees. a 60-40 split."

Not only did Intertainer try to negotiate acceptable new terms for months, Taplin said, but "we even went so far as to show them the lawsuit before we filed it."

Movielink and Sony declined comment on the case, citing policy against commenting on pending litigation. Warner and Universal did not return phone calls seeking comment.

The case differs from the rentailers' issues, though, not only because of the digital delivery system but because Intertainer had contracts with the studios that were, in Taplin's view, abruptly ended.

The suit accuses AOL Time Warner, Vivendi Universal and Sony of trying to control the VOD marketplace by withholding hot titles and new releases from companies that already have their VOD delivery systems in place, such as Intertainer. Intertainer contends the studios have deliberately dragged their feet on deals with smaller but established VOD providers until Movielink.com, the studio-backed VOD joint venture, is up and running and in a position to monopolize the Internet VOD market.

"Intertainer delivers video-on-demand to consumers in a manner that makes ordering and viewing film, television, and music simple and affordable," said Taplin said. "The actions taken by these leading studios will, in effect, eliminate consumer choice, produce higher prices, reduce output and lower quality services that would prevail in a competitive market."

The three defendant studios and VOD partners MGM and Paramount announced the launch of Movielink, then called Moviefly, in August 2001 and, although they promised to have it running early this year, the service so far is a Web page with a snazzy logo and an electronic newsletter. It does not deliver VOD content.

Movielink communications director Corey Weiss declined comment on the lawsuit, citing a venture policy against commenting on pending litigation.

A few weeks after the Moviefly announcement, 20th Century Fox and The Walt Disney Co. announced they would mount a similar joint venture, Movies.com. Months later Fox withdrew from the partnership, and the Movies.com site functions as little more than an online Disney store enhanced with trailers and an e-mail newsletter.

The studios promised from the beginning that they would offer their blockbusters to other services to avoid just such claims of impairing competition. Recently MGM began making deals for its films with other VOD providers, but most of the studios have remained aloof.

Shortly after the studios announced their parallel ventures, the federal Department of Justice announced it would review the ventures for antitrust concerns. That office has remained mum on the review ever since. The three companies control 56 percent of the motion picture market and 63 percent of the music market, the lawsuit contends.

The complaint, filed in federal District Court in Los Angeles, makes several allegations that would go to the heart of an antitrust investigation. It alleges:

-- the studios conspired to fix prices in the VOD business by making "less than arm's length" transactions with Movielink, a service that was launched to be competitive with Intertainer, but is owned in part by the defendants. The defendants moved the studio revenue share from 40 percent in the home video rental market up to 60 percent through this self-dealing transaction;

-- the studios engaged in a group boycott of intellectual property rights to Intertainer;

-- AOL Time Warner induced its subsidiaries, Warner Bros. and New Line, to terminate existing Intertainer agreements to impede delivery of a broadband VOD service through rival Microsoft Network (MSN);

-- Sony used its position as an investor and board observer with Intertainer to compile knowledge of Intertainer's business plans, architecture, and proprietary technology to build a business based on Intertainer's intellectual property;

-- Sony induced former employees of Intertainer to violate their confidential knowledge of Intertainer's proprietary technology in order to help build Movielink.

"One of the issues that will come out of this, from the point of view of the home video industry, is VOD is just an extension of that industry," Taplin said. "The one difference is that in the home video industry, the creative guilds all have a direct participation in the gross home video revenue."

For the entire Intertainer legal complaint, click here.

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