By Matt Hicks

July 21, 2005

PALO ALTO, Calif.—Though 350 miles away, Hollywood was in the air as Silicon Valley entrepreneurs, executives and venture capitalists predicted the direction of digital media.

But the two industry centers appeared half a world away in the discussions at the AlwaysOn Summit being held here this week.

To a panel of multimedia leaders, the major entertainment and media companies are continuing to miss the fundamental shifts that are giving consumers more power and dismantling traditional approaches to creating, distributing and marketing everything from music and movies to radio programs.

``[The entertainment industry] lost when the Internet was created, because the Internet was created to resist control, and as more people are on broadband you`re just not going to have that control and you need to adapt your business model to that reality,`` said Michael Weiss, the CEO of StreamCast Networks Inc., which makes the Morpheus P2P file-sharing application.

While panelists shared skepticism about traditional media and entertainment companies, they disagreed on whether technology and Internet companies should go so far as to tackle the creative side of creating content themselves.

Apple appears prepared to start selling video in iTunes. Click here to read more.

Internet and technology companies already have focused widely on distribution of digital media through software and services ranging from peer-to-peer networks and online music stores. New online marketing and mobile approaches also are emerging.

To Mike Homer, chairman and co-founder of Kontiki Inc., focusing more on the creation of content should be the next step.

``If you have all these new distribution opportunities and marketing opportunities and mobile opportunities, then why not think of new digital content to sell [consumers]?`` said Homer, whose company makes software for distributing digital media and has created a site called Open Media Network for user-generated digital content. He added that content has to be ``targeted to a narrow audience.``

The emergence of Weblogs and podcasting, among other trends, has led to more user-generated content.

But Mark Cuban, the co-founder and chairman of high-definition television network HDNet, warned against focusing exclusively on the Internet and digitally distributed content.

While a certain amount of specialized content might make sense for Internet-only distribution, companies wanting to reach a broad, mainstream audience must deliver content the way consumers want it.

For a movie, such as the first release out of Cuban`s HDNet Movies offshoot, that means movie theaters and DVDs along with video on demand and the Internet, Cuban said.

``The problem is where digital and the Internet meets brick and mortar,`` Cuban said. ``Where the two connect is where things are falling down, and where we`re all looking for a holy grail.``

For example, Cuban said, a consumer can`t go into a store today and burn a DVD on demand because the economics don`t match the demand.

Other executives were dismissive of the idea of moving into content creation, noting that Silicon Valley`s specialty is technology innovation and not the creative side of content.

``To get involved in the creation of content is a good way to lose money fast,`` said Jordan Greenhall, founder and CEO of DivX Inc., the company behind the DivX video compression format and video software.

One area where Hollywood is making its presence felt is on the legal side, the panelists said. In particular, the U.S. Supreme Court`s recent decision in the case between MGM and Grokster is drawing more attention to the potential liability software makers could face if users infringe on a copyright.

When asked how much time they spend on legal issues related to copyrights, all the panelists said they spend at least one-third, if not a half or more, of their time on legal issues.

David Goldberg, Yahoo Inc.`s vice president and general manager of Yahoo Music, said that ultimately the legal battle is futile in ending digital-media piracy, even if the movie studios and recording companies win court cases.

``There`s no way to stop people from getting digital content illegally,`` Goldberg said. ``People will always be able to get this stuff illegally. If you want to do a legal service, then you have to add value to it.``

The AlwaysOn panel drew criticism from one audience member, a former attorney for a traditional entertainment company, who said that a representative of Hollywood should have been included on the panel.