Making money from file-sharing

One of the sticking points in the contractdispute between Hollywood studios andwriters has been how much the latter should be paid whentheir work is redistributed online. The negotiations have been complicatedby the fact that the mostvibrant video outlets online have been file-sharing networks, whichgenerate little or no revenue for anyone in the entertainment industry. Even popular paidoutlets such as Apple’s iTunes Store have produced comparativelylittle money for studios, leaving producers and writers with few clues asto which business models will work and how significant the revenue will be.

A handful of start-ups, however, are developing potentially lucrative videodistribution systems that put file-sharing networks to work for content ownersand consumers alike. These include Hiro Media and YuMe (pronounced”you-me”), whose advertising networks can feedcommercials into video files wherever they go online, and Brand AssetDigital, which applies Google-style advertising techniques to file-sharingprograms. Their shared goal is to convert the rampant online copying of videofiles that has plagued Hollywood into revenue-generating commerce that still feels free to consumers.

These companies start from the assumption that people don’t want to have topay for video online. They then try to find a way to incorporate advertisingwithout driving viewers away.

Hiro, an Israeli start-up, and YuMe, a venture-backed firm in Silicon Valley, insert targeted, interactiveadvertisements into video files after they’ve been downloaded. Here’s howHiro’s technology would work for an episode of a TV show. The company wouldfeed authorized copies of the episode onto the major file-sharing networks,using the same format as many bootlegged files. People searching for thatepisode would find and download the authorized copies, but when they startedplaying them, they would see a message scrolling across the bottom of the screenprompting them to download Hiro’s software in order to watch the entireepisode. As they install the software, they’re asked a few questions aboutthemselves and their interests. The software then downloads a customized set ofadvertisements to run during the episode. Unlike the rest of the video, the adscannot be fast-forwarded or removed because they’re protected by digital locks.After the ads play, the software reports back to Hiro so advertisers will know whenand where they played, as well as some demographic information about theviewers. If the episode is played again on the same computer, Hiro will downloadnew ads. And as the episode spreads online through file-sharing, each successive viewer receives anew, customized set of ads.

Hiro and YuMe are developing multiple ways to personalize ads, varyingpitches according to the viewer’s location, demographics and, eventually, thevideos they’re previously downloaded. Their approach offers severaladvantages over traditional broadcast or embedded advertising techniques, whichblast the same pitches to every viewer. The most important is thatads delivered dynamically by Hiro and YuMe are less likely to be ignored orresented, for the simple reason that they’re more timely and relevant to theviewer. “The reality is, if an ad is relevant, you will watch it,”said Thom Kozik, president of the U.S. division of Wazap, a search engine for video games. Thattranslates into higher rates paid by advertisers.

The ability to customize ads by time and place is critical to unleashing thecommercial potential of file-sharing networks, which can distribute video filesglobally at very low cost but with little control. The tools provided by Hiroand YuMe restore the control demanded by advertisers, letting them dictatewhere their messages are seen and by what demographic group. The revenuegenerated may not be enough to fulfill Hollywood studios’ expectations for new movies, said Ronny Golan, Hiro’s co-founder. Butthe model works well for full-length TV shows, which have long relied onadvertisers to pay the freight.

Advertiser-supported distribution online is winning fans among the studios-- witness what allthe major TV networks are doing this season -- but those are based onstreaming, not downloading. One well-publicized example is Hulu,the joint venture by News Corp. and NBC Universal. Hulu supplies clips, TVshows and movies with embedded advertising to a handful of major Web sites forstreaming, while allowing users to post links to those videos on their ownblogs and social network pages. One drawback there is that streamingfull-length episodes can be costly, especially when they’re in high definition.Letting users download and redistribute files is much less expensive, which iswhy Hiro and YuMe’s have developed ways to insert ads into media after it’sbeen downloaded.

The firms’ strategy is a 180-degree shift for major entertainment companies,which have been playing defense on file-sharing networks. Today, studios andrecord labels are flooding those networks with bogus files in an attempt toblock real copies of their content from spreading online. “Imagine,instead of flooding them with fake files, flooding them with legal ones,” Golan said.

Brand Asset Digital -- the company created by the recent merger between INTENTMediaWorks and BeyondMedia, two firms that used file-sharing techniques to distribute mediacommercially -- also tries to load file-sharing networks with legitimate copiesof videos and songs. Instead of dynamically inserting ads, though, Brand AssetDigital treats the content itself as the promotional material. Its slogan – “content is the new store front” – reflectsis efforts to intertwine creators and advertisers within digital files.

One technique is to insert advertisers’ promotional messagesinto music or video files in such a way that the messages appear whenever userssearch for that content. For example, a search for songs by rapper 50 Centmight return a page or more of results that include the phrase, “free download broughtto you by Glaceau’s Vitamin Water,” a beverage that the artist is backing. Searchresults on file-sharing networks are a rich and largely untapped resource foradvertisers; according to Joey Patuleia, vice president of business developmentfor Brand Asset Digital, more searches are done on those networks than onGoogle and other major Web search engines.

Brand Asset Digital recently announced a strategic partnership with a talentagency representing 50 Cent and several other top hip hop artists. Hiro’stechnology is being used by anIsraeli TV network and NBC’s soon-to-be-defunctDotComedy.com. (Tellingly,perhaps, when I downloaded one of DotComedy’s offerings, Hiro fed me ads for beef jerky.) YuMe is supportingonline video efforts by Microsoft, DAVE Networks,BitTorrent, Vuze and Pando.

You don’t see these companies distributing hit TV shows through file-sharingnetworks yet, but studios and advertisers are much more receptive to the idea nowthan they used to be. Jayant Kadambi, co-founder and CEO of YuMe, said he foundvirtually no interest among content owners in advertiser-supported file-sharingthree years ago. So his company bought the international rights to a number ofBollywood films and distributed those to theaters and the Net simultaneously.As YouTube rocketed in popularity, a number of smaller content owners,such as San Francisco’sMondo Media, started looking to spreadtheir content as far as possible online -- with YuMe’s help on the advertisingside. Today, Kadambi said, even the largest content owners and advertisers aredipping their toes in. “We’re more than past the halfway mark,” hesaid. “Everyone’s pretty clear that the broadband networks and theInternet, if managed correctly, can be an additional source of revenue fortheir content.”

Besides, it’s hard to argue with the numbers put up by the file-sharingnetworks. Just look at the stats recently reported by a single BitTorrent indexsite, Mininova:3 million users and 3 million downloads daily. [Not 3 billion downloads daily, as I originally wrote -- that’s the cumulative total.] In plain English, that meanspeople who go to Mininova to search for digital goods (most likely, abootlegged video, game, album or piece of software) start downloading files 2thousand times per minute on average. (Click on these links to see Mininova’s search and download stats.) It’s safe to say that television programs makeup a sizable portion of those downloads; as BayTSP, an anti-piracyfirm, points out, one of the fastest growing phenomena in the file-sharingworld is index sites dedicated to TV shows.

Just as the demand is enormous, so is the opportunity. And the emergence ofcompanies such as Hiro, YuMe and Brand Asset Digital is a sign that theInternet may soon give producers and writers a pot of cash worth fighting over.

Jon Healey is a member of The Times’ editorial board and author of the BitPlayer blog; click here to read more of his Opinion Daily columns. Send us your thoughts at [email protected].