Settlement reached before case went to federal district court

VARIETY – By Paul Sweeting

WASHINGTON — In an accord with wide-reaching implications for the music and movie download biz, Bertelsmann Music subsids CDNow and N2K have agreed not to contest a series of patents held by SightSound Technologies covering the commercial downloading of music over the Internet.

Agreement, part of an out-of-court settlement reached over the weekend in SightSound’s patent infringement case against the online music retailers, paves the way for Mt. Lebanon, Pa.-based SightSound to challenge other online merchants offering paid downloads of movies and music, including such studio-backed initiatives as Movielink and Apple’s iTunes service.

“Resolution of this dispute, after six years of vigorous litigation, is momentous,” said SightSound attorney William Wells. “SightSound can now look forward with renewed strength to licensing those in the music and movie industry who seek to employ SightSound’s patented technology in downloading music and movies over the Internet.”

Patents upheld

As part of the agreement, CDNow and N2K accepted a consent order issued by the court under which the SightSound patents are deemed “valid and enforceable.”

The retailers did not acknowledge any prior infringing activity related to their sale of music downloads, but agreed to pay SightSound $3.3 million.

Settlement was reached one week before the case was scheduled to go before a jury in federal district court in Pittsburgh.

“This matter does not affect our core business, which is the sale of CDs through traditional and online sales channels,” said a CDNow spokeswoman. “This settlement does, however, position us well for the future if we wish to engage in the sale of downloaded music.”

Case dates to 1998, when SightSound sued N2K for patent infringement after N2K began offering paid downloads as part of a deal with Liquid Audio. N2K was later acquired by CDNow, which in turn was bought by Bertelsmann and merged into BMG Online.

Earlier rulings followed

In a series of earlier rulings, the court upheld the patents’ application to Internet downloads and denied CDNow’s motions for dismissal of the case.

SightSound prexy and co-founder Scott Sander said Monday that the company has already been approached by several parties interested in acquiring the patent portfolio.

“We realize that someone bigger than us might have to have these patents for the industry to really move ahead,” Sander said. “We hope that with our success today the industry has entered a new era of respect for intellectual property, both copyrights and patent rights.”


VARIETY – By Paul Sweeting

WASHINGTON — In a twist that could put a kink in studio and record company online plans, a federal magistrate in Pennsylvania has ruled that patents held by SightSound Technologies for distributing audio and video files over telecommunications networks covers Internet distribution.

The ruling, in a suit brought by SightSound against CDNow, means that the online music distributors MusicNet and Pressplay are now vulnerable to patent infringement suits from SightSound for offering paid downloads over the Internet.

Online video-on-demand providers Movielink and could also be vulnerable.

“This is an important step forward in the aggressive enforcement of our patent rights,” SightSound president and CEO Scott Sander said.

The suit dates to 1998, when SightSound charged CDNow with infringing SightSound’s patents on selling digital audio and video files over telecommunications networks.

CDNow (now owned by Bertelsmann Entertainment) argued that the “telecommunications networks” referred to in the patents did not cover the Internet and, therefore, it could not be sued for infringement.

Chief Magistrate Judge Kenneth Benson of the U.S. District Court for western Pennsylvania disagreed with that interpretation, finding that SightSound’s patents cover the Internet.

Ruling opens the way for the case to go to trial and leaves Bertelsmann open to potential damages if the trial court finds that the patents were infringed.

A Bertelsmann spokeswoman said the company does not comment on pending litigation.

The patents at issue were originally filed in 1988 by SightSound chairman and co-founder Arthur Hair and were issued in 1993.

Pre-Web origin

In those pre-Web days, the patents described a method for transferring digital audio and video files from the memory of one computer to the memory of a second, remote computer over “telecommunications networks” and collecting an electronic payment in return.

In patent cases, a separate proceeding is often held before the trial to determine the scope of the patents and whether the language in the patent is applicable to the challenged activity. In arguing that the language in the 1988 patents did not apply to paid downloads over the Internet, Bertelsmann was hoping to head the case off before going to trial and facing possible liability.

In its ruling, however, the court wrote that “the terms ‘telecommunications line’ … should not be interpreted as excluding the Internet.”

Although the case was brought against CDNow, SightSound officials believe the patents, as interpreted by the court, would cover the online plans of all record companies, as well as the studios.

Company has sent letters to both MusicNet and Pressplay, informing them of SightSound’s patent claims.

Despite the lawsuit, SightSound says it’s not an enemy of Hollywood.

“We’ve been extending an olive branch to Hollywood for years now, trying to persuade them that we can do it for them faster, better and cheaper than they can do it themselves,” Sander said. “We stand ready to work with all copyright owners, not against them.”

SightSound operates its own paid movie and music download service through its Web site


Variety – Justin Oppelaar

SightSound retools for move from content to tech

NEW YORK — In an apparent move to distance itself from the perilous world of online entertainment distribution, is expanding and reorienting its corporate structure toward technology rather than content, as well as taking on a new name.

The Pennsylvania-based Web entertainment infrastructure company, henceforth to be known as SightSound Technologies, is dividing its businesses into three distinct units: SightSound Innovations, SightSound Systems and

The Innovations division will function as a research and development lab, fostering new content delivery technologies and licensing the fruits of its labor to entertainment companies that want to put their content online. The company currently has four patents issued and roughly 30 under review by the U.S. Patent & Trademark Office.

SightSound Systems will design and build the backend infrastructure for film and music companies that want a turnkey system to get their wares into cyberspace, said SightSound prexy and CEO Scott Sander.

“We were approached by companies around the world and major studios in this country that asked if we would build them a similar system,” Sander told Daily Variety. “We wanted to capitalize on that demand.” will operate the company’s online entertainment portal, which offers music and video content for download. The site’s offerings include full episodes of Comedy Central’s “South Park” and “Dr. Katz: Professional Therapist” animated series, as well as the original direct-to-Net sci-fi film “Quantum Project.”

Sander said the move reps a continuation of SightSound’s ongoing strategy to capitalize on its inhouse engineers, investing in new technologies rather than branding.

“While other people were spending their money on sock puppets, we were continuing to develop new products,” he said. “This is an expansion to recognize the interest in those innovations.”


eVariety – Justin Oppelaar

With all the crowding by online media pundits lately about the impending broadband Internet revolution, you’d think everyone is now hooked up to the fat data pipe, enjoying all sorts of multimedia content at lightning speed. Hardly.

While ‘Net monitor Jupiter Communications predicts that over 15 million U.S. homes will have broadband access by 2003, that’s still only a small fraction of all homes wired to the Web. And currently, so few users (only a couple of million) enjoy a fast connection that major media companies are still sorting out how to make broadband content commercially viable. But don’t tell that to the throngs of online entertainment sites that have sprung up over the past year. Much of their content demands levels of bandwidth that most Web surfers won’t have for nearly a decade. But the desire to be a mover in what will eventually be a giant market is so strong, they’re diving in anyway.

Offering up everything, including short films, animation on demand, interactive multimedia and live radio Webcasts, these sites have inundated surfers with new content, but have spawned only a few breakout hits.

Among them are’s “George Lucas In Love,” a spoof that, when released on VHS, topped’s bestseller list for several weeks.’s “405,” about a commercial jet landing on that famous Los Angeles freeway, has also garnered substantial buzz and recently won its creators, Bruce Branit and Jeremy Hunt, a deal with Creative Artists Agency.


SONGS AND SHORTS ARE ONE THING, but one online entertainment firm, Pennsylvania-based, has decided to take it to the next level, even as some critics wonder whether there is a next level.

SightSound’s 32-minute “Quantum Project,” starring Stephen Dorff and John Cleese, cost $3 million, and is available solely via the Web. Customers shell out $3.95 per copy, or slightly more than the average rental fee at a video store.

For their money, users get the file, which weighs in at 165 megabytes for the high- resolution version, as well as a decryption key needed to make the file viewable.

Pic was produced by indie house Metafilmics, best known for the expansive (and expensive) 1998 Robin Williams film “What Dreams May Come.” Barnet Bain, who co-produced “Quantum” along with Stephen Simon, says he jumped at the chance to leapfrog the Hollywood establishment and pioneer features on the Web.

“We realized that there was a very brief window of opportunity in which a small independent could be a leader,” Bain says. “We have a chance to do the equivalent of making ‘The Jazz Singer’.”

To many Hollywood veterans, it may smack of heresy to put the release of “Quantum Project” on par with the first talkie, but “Quantum’s” creators and backers believe the effects on the industry could be equally dramatic.

Scott Sander,’s CEO, says the film’s biggest impact could be on the realm of traditional movie distribution, especially in light of recent concerns over online piracy via file-sharing utilities like Gnutella and Freenet.

In fact, the company’s model of distributing the “Quantum” download for free and then selling a digital key to unlock the file is well suited for thwarting piracy on those networks, he contends.

“ ‘Quantum’ acts just like a vaccine” in file sharing networks, Sander says. “We are able to take it and (safely) pump it into Gnutella’s file sharing network.”

Since people who swap and download the file still need the key to open it, the piracy element is effectively defused, he said. That means has already solved a problem to which the film industry is only beginning to awaken, he added.

“I’m not saying they need to change their business practices overnight, but one thing the Internet has taught us is that there are brutal repercussions for waiting,” Sander says. “Just ask the music industry.”


One thing the film does keep a keen eye on –the gross- is still a well-kept secret for “Quantum Project.” Sander, again citing the IPO quiet period, would only reveal that it has been downloaded in 60 different countries. However, Sightsound recently inked a deal to bundle a free copy of Quantum Project with downloads of Microsoft’s Windows Media Player 7, implying that outright sales may not be as robust as had been hoped.

But Sander insists that his focus is on a different number. “The traditional Hollywood way to look at “Quantum” is to say ‘what did you do on opening weekend?” he said. “Here’s the key number: everybody bought it; nobody stole it.”

Adds Metafilmics’ Stephen Simon, “Quantum’s” co-creator: “I really don’t think this $3 million was extended by with the idea that they’ll get 750,000 people and break even,” he said. “This was (more) an effort to be a pioneer in a new realm.”

But that’s a substantial price to pay for the privilege of being first in a very unproven market –especially when longer-format entertainment isn’t necessarily the best thing to watch online, according to Matt Hulett, chief marketing and online officer at Atom Films.

“The short is going to be the preferred medium in an online environment, even after broadband access is widespread,” he says. “Watching movies on a PC, you’re pretty much set up to be distracted.”

“We like to use the ‘sitting forward versus sitting back’ analogy,” says Gene Klein, content VP for Gotham-based indie film site “If you’re watching a half-hour movie on a PC at your desk, that’s a long time to be sitting forward.”

David Beal, CEO of Gotham-based entertainment portal, is impressed by the initiative taken by in producing “Quantum,” especially since it takes steps toward upending the traditional Hollywood model for distribution.

“The film business’s distribution channels haven’t really evolved,” he said. “They’ve been pretty much controlled exclusively by Hollywood.” “Quantum” could have a hand in changing that, he added, but the real test will be whether it becomes popular enough to warrant release on several different distribution channels –the Web included.

Even as “Quantum Project” is being debated in ‘Net circles, another filmmaker is laboring to break into the longer-form Web film market on a markedly different path. Los Angeles-based former programing designer Helmut Kobler is fashioning a 23-minute science-fiction film in the California desert on a shooting budget of $80,000.

Production of the pic, called “Radius,” is being painstakingly documented on Kobler’s Web site,, for both marketing and interactive education purposes. “We thought of it as a way to create awareness even before a frame is shot, a la ‘Blair Witch,’” he said.

Kobler, like Metafilmics’ Simon, is not banking on the possibility that his film will be profitable. Compared to “Quantum,” however, “Radius” is a relatively minuscule financial risk, and the upside in terms of exposure and experience is considerable, he said.

The director has not yet gotten a distribution partner for “Radius,” but he said he has talked to several Netcasters, including MediaTrip, about a possible deal. The film would be distributed free, perhaps in multiple episodes, with an eye toward a DVD release and potentially a licensing deal thereafter. “I want to be seen in as many places as possible,” he said.

Despite the divergence between his strategy and that of, Kobler gives credit to “Quantum Project” for its ambition and pioneering spirit. But he maintains that pay-per-download still needs time for fine tuning and market acceptance before it can become a viable commercial model.

The original concept of “Quantum” was definitely interesting to me, and it still is,” he said. “But whenever there’s new territory being explored, there are always going to be some mistakes.”


MSNBC – MSNBC Staff and Wire Reports

NEW YORK, Sept. 25 — Almost every week a high- profile dot-com entertainment venture seems to shut down or lay off much of its staff. But it’s not all doom and gloom in the world of Webcasting. will become the online home for past episodes of “South Park,” Tim Burton’s “Stainboy” is set to debut on, Atom Films is in a content deal with Volkswagen, and the most famous of failures- -may live again.

ONLINE CONTENT distribution site has signed a deal with Comedy Central to sell all of the back episodes of “South Park” as well as the cable channel’s recently canceled “Dr. Katz: Professional Therapist” on the Web. The Pennsylvania- based site, which recently gained notoriety for commissioning the $3 million mini-movie “Quantum Project” for a direct-to-Web release, will offer six early episodes of each show starting Monday.

The company expects to offer six more “South Park” episodes within the next four months. All the shows will be available simultaneously on and

Sightsound chief executive Scott Sander says the downloads offer a cheaper and faster alternative to buying VHS or DVD copies of the episodes. And for “Dr. Katz,” video copies are not available.

Downloads will cost $2.50 for a two-day rental license and $4.95 for a full purchase. The files will take about five minutes to download with a high-speed Internet connection vs. more than an hour with dial-up access.


Wired – Debra Kaufman

While the studios dither over Web strategies, a relatively small production house called Metafilmics rolled tape, clapped states, and produced Quantum Project – a 35-minute drama now playing exclusively at “We’re hoping,” says its coproducer Barnet Bain, “that Quantum Project will help instigate a quantum leap.”

Countless movies have been made for the Net, but this is the first Web feature to be made with Hollywood-scale ambitions, by Hollywood players: Its producers, Bain and Stephen Simon, were the team behind ‘What Dreams May Come’.

According to Scott Sander, CEO and cofounder of – the online music-retail and video-rental startup that funded the $3 million picture – signing up the big-name talent was the greatest challenge of the entire project. “People wondered if it was really a movie or just a dot-com stunt,” he says.

Eventually, some combination of Internet buzz, big-enough budget, and old-school net-working lured Stephen Dorff, Fay Masterson, and John Cleese to star in this Rashomon-like nonlinear tale of a quantum physicist obsessed with the subatomic, whose chance encounter with a former girlfriend changes his life. Eugenio Zanetti, who won an Oscar for designing the sets of the wildly expressionistic ‘What Dreams May Come,’ signed on to direct the production, which includes complex car crashes, elaborate flying scenes, and extensive digital effects.

Cinematographer Bob Primes laughs at the idea that signing the talent was more problematic than the technology was. A member of the illustrious American Society of Cinematographers and a man “too snobbish to acknowledge VHS,” Primes took on the challenge of capturing Zanetti’s big-screen vision in a Net-worthy format. “The quality of downloads is so bad that I tried to put it out of my mind. If I’d really thought of the jerky motion and poor resolution, it would have broken my spirit,” admits Primes. The subtleties of film would have been lost on the Net, he explains, “so, visually, it was, ‘Damn the torpedoes, full speed ahead!’ We have a lot of visual horse-power with strong, golden backlight, kinetic graphics, and extreme wide-angle lenses – we had to be as dramatic as possible.”

Not wanting to see that hard work squandered on a computer monitor, Primes once suggested that the movie be distributed on DVD as well. But, as he recalls, “The SightSound guys just said, ‘No trucks.'”

There are considerable challenges to delivering an online movie, Scott Sander admits, but he insists that SightSound worked through those problems when it distributed ‘Pi’ last year. “We have servers in New York, Los Angeles, Seattle, Chicago, DC, Boston, and Santa Clara,” he says. “We’re ready to deliver more than a quarter of a million copies of ‘Quantum’ a day.” At under 100 megs, the movie will download in 8 to 13 minutes over a broadband connection, or in 4 to 8 hours over a dialup, depending on modem speed.

Once you pay the $3.95 admission, you can watch the movie as many times as you like, though you can’t view it on a friend’s machine without paying again, says Sander, touching on the hot-button issue of security.

“The big studios are trying to understand all the implications of Net distribution,” he says. “It’s a scary place for traditional media companies.” But ‘Quantum Project’ proves the Net truism that the startups and indies always lead the way.


Microsoft (MSFT: news. msgs) said Monday its final version of Windows Media Player 7, to be released at midnight, Pacific time, will include software from Adaptec (ADPT: news, msgs) to support creating custom CDs. The software also offers a built-in media guide. CD copying, a radio tuner, and support for play on portable devices. Users of Windows 98 and 2000 can use the software, downloading it at Content providers such as Capitol Records and are offering new digital music, movies and videos optimized for the player. Microsoft is also paying to deliver copies of its 32-minute feature movie, “Quantum Project,” starring John Cleese. Scott Sander, president and CEO of said, “Offering ‘Quantum Project’ with the release of Windows Media Player 7, shows off the incredible sound and picture quality of Windows Media and the convenience of Internet movie distribution.”


Information World – Geneva Sapp

THE EMERGENCE OF broadband technology, with its promise to reach an even greater number of Internet users, is forcing many digital-media companies to rethink their business strategies. Specifically, companies such as Miramax, Sony, Time Warner, and Universal try to take advantage of a channel that unites sales and delivery.

Scott Sander, president and CEO of online movie and music distributor SightSound, in Mt. Lebanon, Pa., approached companies in the music and movie industries as early as 1993 with the idea of selling downloadable music and movies.

“They looked at us like we were from another planet,” Sander said. “We told them if they don’t do this, every kid on the face of the earth with a computer will be able to steal every piece of music ever made at will.”

Sander’s proposal to media companies in 1993 may now appear as prophesy. With college kids accessing the Internet via T1 lines installed in their dorm rooms, the way in which music, movies, and video games are bought and sold is being redefined. As broadband reaches an even wider audience, many companies are betting that the demand for digital content will grow as well.

The music industry in particular has been hit hard by the download dilemma. According to Sander, piracy has become commonplace because music companies did not immediately embrace the new technology.

“One of the best ways to deter piracy is to make things available at a good price,” Sander observes. “We have absolute rampant wide-scale piracy of music.”

Media companies may be late to the party, but they are coming in droves, as evidenced by a number of media maneuverings in place or under way. Virgin Entertainment Group already sells digital music through, a joint venture between Virgin and Wavo. Universal Music Group, BMG Entertainment, and Time Warner all have plans to offer downloadable music.

The movie industry may have learned from the music industry’s mistakes, Sander says. Miramax is testing the waters via a partnership with SightSound in April to enable digital downloads of 12 of its movies.

“Perhaps the motion picture industry benefited from 20/20 hindsight,” Sander says. “They’ve seen that the music industry tried to fight technology instead of channeling its power.”

Gaming companies also are feeling the broadband lure. Sega of America will launch its own ISP this fall, called SegaNet, for downloading Sega online gaming and content. Also, Sony Corp. of America’s recent investment in wireless broadband company Arraycomm is driven by Sony’s gaming interest, says Herschel Shosteck, president and CEO at Shosteck Associates, an analyst firm in Washington.

But Sony’s broadband interests may not be limited to gaming. The media giant recently declared its future is broadband, according to Kei Sakaguchi, director of corporate communication at Sony, in New York.

All of these companies face challenges in reinventing their sales and distribution systems to take advantage of broadband technology, says Shawn Willett, an analyst at Current Analysis, in Sterling, Va. These challenges include channel conflicts occurring both within the company and with external suppliers; pricing pressure, which essentially forces the company to compete with itself; and the loss of control over marketing and promotion.

“I think the big issue is pricing pressure, which is related to channel conflict,” Willett says. “When you put out your product as something that’s also downloadable, that creates tremendous pricing issues for that company.”

Sony may be a prime example or channel conflict occurring within a company. Sony Electronics launched Musiclub to enable digital-music downloads, much to the dismay of Sony Music, according to industry observers.

Willett says these kind of channel conflicts are indicative of the reinvention problems experienced by any company that wants to do business on the Internet, but those problems become exaggerated when the Internet becomes both the sales and delivery channel.

Sony addressed its channel conflict problem in April by creating Broadband Services Company to manage its broadband and cable-related interests. Similarly, Time Warner last year created Time Warner Digital Media to manage its diverse digital-media businesses, which the company expects to be an important element of future growth. The division will create a companywide e-commerce infrastructure to explore digital content aggregation, Time Warner sources say.

In addition to channel conflict strains, loss of marketing control may pose a challenge to these companies, Willett says.

“When you have your own Web site, you do have some control over things,” Willett says. “But when it’s even one step removed from that, when it’s being put into a third-party site or an e-marketplace… now you’ve really lost control.”

SightSound’s Sander says the biggest challenge will be in overcoming the reluctance to embrace new paradigms.

“I think the biggest obstacle to all of these companies is that they have a very successful current business model,” Sander observes. “That’s not a bad thing, but it’s often a hard thing to change.”

Sander believes that any company uncertain about making the transition to digital download should simply go to a university and knock on any dorm room door.

“People always talk about convergence,” Sander says. “You just walk into any dorm room and you’ll see convergence. We have millions of broadband users on campuses that are using a personal computer for everything.”