The Wall Street Journal – Thomas Petzinger Jr.

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SCOTT SANDER and Arthur Hair don’t come off as entertainment moguls. Their office is next to a suburban high school. Between them they have nearly as many children-eight-as they have employees. They ooze sincerity. They live in Pittsburgh, for Pete’s sake.

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But during a lunch in a neighborhood pizza place, Mr. Sander keeps a cell phone pasted to his ear. Hollywood is on the line. After giving him the cold shoulder for years, the entertainment companies are now calling.

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He and Mr. Hair, both 38 years old, have as much claim as anyone to the next Internet entertainment gusher. How they staked it shows the value of vision and persistence-and how to profit from the billion-dollar errors of others.

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Growing up here, they rock-climbed as a team, inspiring a lifetime of trust. Though separating after their 1978 graduation- Mr. Sander to the University of Denver and then to Silicon Valley to work in commercial real estate, Mr. Hair to Purdue and then to Texas Instruments in Dallas-they never fell out of touch.

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Then, at a party in the mid-l980s, Mr. Hair saw a gleaming new object called a compact disk. “This is stupid!” he said. Digital music-movies, too-should be sold through phone lines and computer networks, not on hunks of plastic!

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Intent on commercializing the concept, he moved back to Pittsburgh, where his father, a Westinghouse engineer and an inventor himself, provided some stern advice: “Get a patent.” Indeed, though it seems an obvious business model today, the idea of downloading and paying for entertainment by phone line was new technology in the mid-’80s. For five years, while working in property management, Mr. Hair awaited his patent. Finally, in 1993, it came, quaintly titled Method for Transmitting a Desired Digital Video or Audio Signal.

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Alot of inventors simply hire a lawyer, sue interlopers and wait for the royalty checks to roll in. Others try to commercialize their inventions themselves, only to discover that business demands different skills than innovating does. In contrast, Mr. Hair recruited his rock-climbing buddy, with his years of California real estate experience. They launched a company, now called, on the patent.

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They focused first on music, working with unsigned artists to build a market from the bottom up. In 1995 a local band, the Gathering Field, became the first (to their knowledge) to sell songs as file downloads. But just as the grass-roots strategy was showing promise, a prominent venture capitalist pronounced the business plan “all wrong.” Only by partnering with the major record labels, they were told, would Sightsound create a major Internet market.

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The labels were incredulous. “It was like saying you have a patent on oxygen,” recalls Eric Kronfeld, then at Polygram. But he could see the entrepreneurs were not to be taken lightly: “They were very grounded, serious, calm, hard-working young men.” Polygram paid them $55,000 (the amount they owed their lawyer) to speak to no one else while the label’s parent did some research. Eventually word came back: The patent might be defensible, but the stakes were so huge, no one would say for sure. Polygram declined to get involved.

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It was downhill from there. Record executives were terrified that people would make unauthorized digital copies. (Duh, as if they don’t do that anyway.) Even legitimate downloads would devalue all those disk-minting factories. “We grossly underestimated the labels’ fear of the Internet,” says Mr. Sander. “They thought it was the bubonic plague.” This resistance to selling music directly to computers was ultimately catastrophic for the labels themselves, as fans now illegally download from one another what the industry refuses to sell.

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But now, the music industry’s disaster gives Sightsound credibility in dealing with the film studios. Just last month, Microsoft introduced free software that makes video playback possible at 30 frames a second, equivalent to a video played on a TV set. The next day Sightsound purchased the back cover of Variety magazine, warning studio chiefs that they had better begin selling their product over the Net before people began stealing it-adding the claim that only Sightsound, because of its patent, could lawfully handle the transactions.

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Though seldom silent on its own, copyright issues, the Motion Picture Association of America refuses to comment on the patents. But several independent studios, taking no chances, are already casting their lot with Sightsound. Last month, “Pi,” an acclaimed low-budget thriller about chaos theory on Wall Street, became the first film sold by download. (The distributor, Artisan Entertainment, also acquired a stake in Sightsound.) In a few weeks, Sightsound will release additional films in conjunction with the Cannes festival.

If it’s to become the Blockbuster of the Internet, Sightsound will probably have to prove its patent in court. It’s also up against transmission methods besides downloading, such as the “streaming” technology of RealNetworks, over which Sightsound appears to have no claim.

But when I visited last week, Sightsound looked like a company positioned to win. It has raised $3 million. It’s hiring like mad. Computers in Pittsburgh and six other cities are ready to sell 375,000 feature films a day to Web users.

Best of all for the studios, an elaborate accounting system will send the bulk of all revenue back to Hollywood. Says Mr. Sander, “We’re a company that believes in intellectual property, because we own some.”

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