Seattle-based MOD Systems, a digital-media delivery company, announced it has made deals to distribute videos from Warner Bros. and Paramount Digital Entertainment via downloads to SD (secure digital) cards in retail stores. MOD is demoing its video downloading technology at the Consumer Electronics Show in Las Vegas, together with Toshiba, which was one of the companies involved in a $35 million investment in MOD announced in September.

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[Addendum, 10/6/08: RealDVD has been offline as of this weekend---the result of a restraining order requested by the Hollywood studios and granted by a federal judge. The RealDVD site says, "Due to recent legal action taken by the Hollywood movie studios against us, RealDVD is temporarily unavailable. Rest assured, we will continue to work diligently to provide you with software that allows you to make a legal copy of your DVDs for your own use."]

Last week, we reported on the lawsuit filed by the big Hollywood studios against Seattle-based RealNetworks—and Real’s countersuit against Viacom and the DVD Copy Control Association. At issue is whether Real’s new DVD-copying software, RealDVD, violates digital copyright law, as the Motion Picture Association of America contends. The software, which has been on sale since last Tuesday, enables users to copy DVDs to their computer’s hard drive and a limited number of other computers.

For some informed local reaction, I reached Seattle-based Cozi’s chief technology officer, Bill Baxter. He knows a thing or two about digital rights management, having been the founder of Snaptune, which some described as “TiVo for the radio.” True to form, Baxter had some compelling thoughts on the impending court case, and on the interpretation of copyright laws for digital media.

“Real has a rich history of pushing ‘fair use’ to the limit,” Baxter writes in an e-mail. “Real Jukebox was the industry’s leading tool for enabling illegal file sharing to reach massive scale. Real Jukebox made ripping CDs very easy and, hence, accelerated the illegal file sharing revolution. But, were there substantial non-infringing uses of it? Yes. Hence, they could not get in trouble. Here, I think they have a similar opportunity. At least in this case, they do not allow ripping to non-DRM’d movie formats. Therefore, it is highly unlikely this could result in a legal way to power illegal file sharing networks.”

Here’s the problem: “I think there are two questionable features of RealDVD,” says Baxter. “First, and this has nothing to do with copyrights, per se, did they violate the DRM protections on DVDs meant to allow copyright holders to control their content? If so, they are in violation of the DMCA [Digital Millenium Copyright Act]. I think it is clear that they have. Second, they seem to be gaining monetary advantage by enabling multiple PCs to view these ripped DVDs, for which they have circumvented copy protections. I think the studios would rather set the rules for how many PCs and for how long can a user watch a DVD. You see this in legal alternatives like iTunes and now, more recently, TiVo. I think this may expose them to liability. Real is going to argue… ‘fair use.’ The MPAA is going to argue that it violates the DMCA. Fair use is not an argument you can use to defend against the DMCA. Real is in trouble.”

But the case strikes at the heart of an even deeper issue: what constitutes “fair use” of digital media? “In my mind the biggest problem is that U.S. copyright laws and the DMCA are so antiquated or are so inflexible in protecting legitimate technologies that the only recourse is to litigate,” says Baxter. “Ignoring the alleged DMCA violation for the moment, it is clearly the case that anyone who uses RealDVD is violating U.S. copyright laws. The question that must be asked is whether the copyright infringement constitutes a ‘fair use’ infringement. There are four tests that were established by the Supreme Court that must be applied in order to determine if the infringement is fair use. These tests are vague at best and require a court to address and, most likely unless there is a negotiated settlement, it will land in the Supreme Court. A company like RealNetworks has deep enough pockets to fight this battle. Because of this cost, small technology companies are squashed because they cannot afford it.”

“If the substantial application of RealDVD is deemed to not fall under the fair use doctrine, then RealNetworks could be found to be a contributory copyright infringer which makes it liable for all the infringements of its users,” Baxter continues. “I hope it goes to the Supreme Court. I hope consumers win by being given more control over their content. If I buy a DVD, I should be able to rip it and watch it anywhere, on any device and any time I want to. I should not be limited to watching that movie on a DVD, which the MPAA hopes will get scratched, lost, etc., which implies I will have to pay for again the content I’ve already purchased.”

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Digital rights management, here we go again. First, it was the music industry. Now Seattle-based RealNetworks and Hollywood’s big movie studios are suing one another in California federal court, after yesterday’s release of RealDVD on RealNetworks’ site. The software, which costs $30, allows DVD users to make copies of their videos on their computer and transfer the copies to no more than five other computers (paying an extra $20 for each). The studios, which include Disney, Paramount, Sony, Twentieth Century Fox, NBC Universal, and Warner Bros., assert in their complaint that RealDVD violates the Digital Millennium Copyright Act, and are asking for a restraining order on its sale.

RealNetworks saw this coming, but went ahead with its release anyway—and fired back with its own lawsuit. In a statement, the company said, “RealNetworks took this legal action to protect consumers’ ability to exercise their fair-use rights for their purchased DVDs…We are disappointed that the movie industry is following in the footsteps of the music industry and trying to shut down advances in technology rather than embracing changes that provide consumers with more value and flexibility for their purchases.”

The reaction in the media so far has been fairly non-committal. The New York Times and others point out that RealNetworks thought its software would be legal, in part because of a recent court case involving Kaleidescape, a maker of media servers, in which the ruling was favorable towards media duplication. The Los Angeles Times says the case may hinge on the exact wording of the license RealNetworks obtained from the DVD Copy Control Association; the article quotes Stanford law professor Mark Lemley as saying, “If Real has a legitimate license to do this under the contract, the circumvention claim goes away, because they’re not cracking the encryption system.”

Meanwhile, the Seattle P-I says the suit is about the money, not the copyright law. Which, of course, it is—movie studios and retailers stand to lose up to $16 billion in annual DVD sales (2007 figure from the Digital Entertainment Group) if people can just borrow or rent the discs and copy them instead of buying them. The impact on DVD rentals, a $7.5 billion market, is less clear.

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Over the past couple of weeks, I’ve been exploring the relationship between tech startups in Seattle and investors in the San Francisco Bay Area. We ran a story about what Seattle entrepreneurs can do to attract more attention from Bay Area VCs, and then a follow-up about whether there might be a brain drain of early-stage startups from Seattle heading south in search of funding. The pieces have generated some pretty spirited feedback.

One of the most provocative responses I got was from Shan Sinha, an MIT alum, former Microsoftie, and co-founder of DocVerse, a collaborative-document software firm originally based in the Seattle area. This summer, Sinha and fellow co-founder Alex DeNeui raised $1.3 million from Bay Area investors and relocated their company to San Francisco. Sinha has a very interesting take on Seattle versus San Francisco, for early-stage entrepreneurs. “After reading your article, most of the folks seemed to espouse a viewpoint that there is no advantage to being in the Bay Area and that starting a company and trying to raise money from Seattle is straightforward. There also seems to be a second thread through your anecdotes attempting to espouse that Seattle investors were plentiful and competitive,” he writes. “Our experience did not support either of those observations.”

For balance, I should point out that I recently spoke with data-visualization firm Tableau Software, which moved from the Bay Area to Seattle a few years ago because its founders wanted to live here. So it’s not like there’s an exodus of startups in one direction, or any big trend yet—these are just individual cases. (But I am curious to hear what others have to say, particularly those on the early-stage side of things.)

Sinha wrote, “We moved to the Bay Area for the same reason why people move to Hollywood to make movies. The Bay Area is for startups what Hollywood is for movies. Starting a company is hard enough, not being in the Bay Area is just introducing another hurdle in an already risky endeavor. Why not eliminate as much risk as possible? Any reasoning to justify not being in the Bay Area is a rationalization, in my opinion (often times valid… like “my family is rooted here”… but nonetheless a rationalization that must be overcome).”

He then fleshed out four concrete observations from his experience. The most interesting part to me is his discussion of meeting logistics—trying to build relationships and do deals from afar—as well as the idea that Bay Area VCs move faster and may be more willing to take risks. But I’ll let Sinha speak for himself:

— “Bay Area investors are made of a different ilk than anywhere else. In our experience Bay Area investors just moved at a different velocity. There were some exceptions…we did meet some amazing folks in Seattle …Next Page »

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U.S. residents have access to a growing number of online video portals, such as Movielink, Cinemanow, and Apple’s iTunes store, where they can buy or rent movies for download on the same day they’re available in retail stores on DVD. Thanks to the complexities of international licensing, however, most of these services aren’t accessible to people outside the United States. But yesterday Bell Canada, with help from Newton, MA-based video software company ExtendMedia, launched the Bell Video Store—the first site in Canada to offer same-day movie downloads, and the first telecommunications company anywhere to do so.

“Bell is farther ahead than a lot of telcos down here,” says Keith Kocho, president and founder of ExtendMedia, whose “OpenCase” software runs the video store’s back end—pulling in content, presenting an online catalog, handling customer transactions, encoding the content for download, and then playing it on customers’ computers. “But I think you’ll see more of them down here [offering Internet video-on-demand] too.”

In fact, ExtendMedia’s whole business is to provide hosted or turnkey video delivery systems to companies that want to get into the Internet video market, and Kocho says the company expects to announce more partnerships similar to the Bell Canada deal soon. Unlike many competing platforms—including software from local competitors like Maven and Brightcove—OpenCase is agnostic when it comes to business models and delivery methods, according to Kocho. It can handle download-to-own movies, time-limited rentals, and free ad-supported downloads (it’s been handling the latter for NBC Direct since this winter). It can send movies to almost any type of computer or media player—including video iPods, Archos media players, and the Xbox 360. “We’re a little different from most other folks,” says Kocho. “Our service was purpose-built to let customers choose the business model they want.”

The Bell Canada deal isn’t surprising, given that ExtendMedia has production facilities in Toronto and previously assisted the company with its video-on-demand coverage of World Cup soccer matches. Moreover, Kocho himself is Canadian, and admits to subscribing to cable sports channels “mainly so I can watch the Maple Leafs fall on their swords every year.”

But “it’s an interesting time,” in Kocho’s words, and video-download options are only going to multiply over the coming months. “We have long maintained that the large service providers will have to start to give into the pressure created by services like iTunes and launch direct entertainment services over the Internet,” he says. “But a lot of the companies that wanted to follow that lead earlier found there were a lot of barriers: incompatible devices, low-quality viewing experiences, people’s unwillingness to pay for a service that was going to be bound to a particular computer. Slowly but surely, those things are breaking down. Bell is one of many companies that we expect to see come into the mainstream.”

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First there was fantasy baseball: competitions where participants buy rosters of athletes at the beginning of the season and watch their imaginary teams rise and fall in the “standings” based on the real players’ statistics. Then came fantasy football, fantasy basketball, fantasy name-your-sport, fantasy investing (e.g. The UpDown) and even Fantasy Congress—in short, a fantasy league for almost every public activity that generates a continuous stream of data. Perhaps it was inevitable, then, that someone would figure out how to score the shenanigans of our beloved celebrities, from Britney to Brangelina, and make them fodder for a fantasy celebrity league.

The honor for achieving that feat goes to Fafarazzi, a creation of Somerville, MA-based Web startup Eastland Media. The name is a combination of “fantasy” and “paparazzi,” and the site itself is a gloriously wicked combination of celebrity gossip and serious mathematics.

Co-founder Todd Galloway, who gave a brief presentation about the site at Monday night’s Web Innovators Group event in Cambridge, says the site grew out of the dual realizations that existing fantasy-sports fans might enjoy applying the fantasy-league model to realms outside sports and that celebrity hounds can be just as intense about their obsession as fantasy-league addicts. “All of my guy friends were playing in five or six different fantasy football leagues, and as far as I could tell that was the only thing they did at work all day,” says Galloway. “At the same time, my sister Megan had just started a new job, and she said it seemed like the only thing her friends did all day was read the gossip blogs. Some friends and I had been talking about why there isn’t a fantasy league for real-world stuff, and so we started talking about scoring celebrity gossip.”

Great idea—but how it would it work? Celebrities don’t score home runs and touchdowns, after all. The answer, it turned out, was blowing in the blogosphere. For the first six months after the site was born in mid-2006, Galloway and his sister would monitor a set of celebrity gossip blogs manually, alotting points for every event in a celebrity’s life. “In fantasy football, a touchdown earns a certain number of points. In celebrity gossip, a dating rumor might be worth a point or two, but if you get married or have a baby it would be like eight points,” Galloway recounts.

The original scoring method was “fun,” but it was also both highly subjective and time-consuming, Galloway says. “So we started an experiment where we monitored the blogs automatically and based the scores on the number of mentions per celebrity. It turned out that it pretty much jived with the manual scoring we were doing.” So Todd and Megan (who run the site together) turned the work over to their software, which continuously analyzes the RSS feeds of about 40 celebrity blogs and news sites such as CNN Entertainment, E! Online, Star Pulse, and TMZ, and PerezHilton.com, tracking about 500 celebrities and awarding one point to a celebrity for each mention of his or her full name.

The pair now devote their time to business development and cultivating the community features of the site, which has “tens of thousands” of registered users, according to Galloway. Banner ads generate revenue for the company (although Galloway isn’t saying how much), along with the fees paid by the “commissioners” of invitation-only “VIP leagues.”

Players earn “trophy points” if they finish a season in first, second, or third place in their league. Members of VIP leagues can convert trophy points into Amazon gift cards, but everyone else plays simply for bragging rights and a position atop the site’s leaderboard.

Among the site’s other attractions are graphical tools that allow users to compare celebrities’ blog scores over time. I will admit to making a graph pitting “Grey’s Anatomy” star Isaiah Washington, now infamous for his allegedly homophobic remarks about fellow star T.R. Knight, against Patrick “McDreamy” Dempsey, who allegedly came to Knight’s defense in a near-fistfight. (Washington’s numbers have sadly overshadowed Dempsey’s for more than six months.)

In August, Eastland Media launched a companion site for Fafarazzi called Dirtlocker, managed by Marc Hedegore from the company’s Cleveland office. The new site completes the fantasy-league circle by giving users the chance to trade on gossip about sports celebrities.

“It’s exactly the same model as Fafarazzi, except that our database is a lot bigger, with about 7,500 athletes tracked on 46 blogs,” says Hedegore, who also tends bar at an undisclosed location near Browns Stadium. “Fantasy sports has a pretty fanatical following—people spend a lot of time researching and analyzing their teams. For the people who are really into that, it’s easy for them to join one of our leagues, because they’ve already got all this sports information at the top of their heads.”

Eastland Media is a highly distributed company, with Todd and Megan Galloway and co-founder Chris Keller in Somerville, Hedegore in Cleveland, and Dirtlocker community manager Jon Sistowicz in Philadelphia. It’s useful to have the company’s center of gravity in a sports-crazy region like Greater Boston, says Galloway. “We’ve met a ton of people, and it’s very beneficial for us to be here.”

So, how long before Eastland launches a fantasy business league, with users bidding against each other for draft picks like Steve Jobs and robots scoring blog mentions on TechCrunch and Xconomy? For now, Galloway is staying coy. “Believe me,” he says, “we’ve thought about all the different ways we could apply this.”

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Quick, which local company’s name is more recognizable in Hollywood than it is here in Massachusetts? A gold star for you if you answered “Avid Technology.” Among filmmakers and TV producers, the Tewksbury firm’s Avid Media Composer brand is virtually synonymous with nonlinear film and video editing, the digital-age version of the cut-and-glue techniques used for decades to arrange film clips on celluloid.

But the company isn’t winning any stars for its recent performance. Its stock (AVID) hit a 52-week low on the NASDAQ yesterday, capping a difficult month marked by the resignation of embattled CEO David Krall and a quarterly earnings report on July 26 that detailed slow revenue growth and an overall operating loss.

For the three months ending June 30, Avid reported a net loss of $6 million on revenue of $225.3 million, compared to net income of $2.7 million on $222.2 million in revenue for the same period in 2006. Krall called the numbers “solid” and “in line with expectations,” but at the same time the company announced a restructuring that will eliminate 150 jobs in the company’s video division.

After breakneck expansion and a string of Oscar-winning technical achievements in the 1990s, Avid now faces increased competition from consumer-oriented rivals in both of its core markets—professional and consumer film and video editing—as well as computer graphics, an area it entered with the acquisition of former Microsoft subsidiary Softimage in 1998. If the company can’t find new leadership and innovate its way out of its current stagnation, some observers say, its falling stock value could leave it vulnerable to takeover.

In the world of professional video post-production, Avid’s Media Composer is still dominant, with more than 90 percent of members of the American Cinema Editors saying they still use the system in a late-2006 survey. But Apple’s Final Cut Pro is creeping up on Avid’s product, especially among independent film and video producers outside of Los Angeles and New York. Even some Hollywood movies, including director David Fincher’s 2007 film Zodiac, have been edited using Apple’s system.

“For a long time, [Avid] has been dismissing Apple’s product as not customizable enough or not sophisticated enough, but it certainly seems that professional video producers and moviemakers are embracing it,” says Irina Logovinsky, an analyst who follows Avid for Morningstar. Logovinsky notes that NBC, CNN, the BBC, and MTV have also begun to supplement their traditional Avid editing suites with Apple software. “Users actually think Apple’s products are easier to use than Avid’s, and on top of everything else, Apple’s products are cheaper.”

It’s possible, as the broadcasting industry goes entirely digital, that demand for professional digital video editing solutions will increase fast enough to keep Avid afloat, Logovinsky says. But the company also faces a challenges on the consumer side. Avid’s Pinnacle Studio—added to its product line after the August 2005 acquisition of Pinnacle Systems—competes directly with popular Apple offerings, including iMovie HD and iDVD, which come pre-loaded on new Macintosh computers.

Avid is also working to stay competitive in professional computer graphics. A new advanced version of Softimage’s 3D animation software package, Softimage XSI 6.5, will be cheaper than previous versions and will have more features for rendering crowds and character behavior, the company announced yesterday at the SIGGRAPH 2007 computer-graphics conference in San Diego.

But that news didn’t seem to budge Avid’s stock, which hovered between $30 and $31 yesterday, its lowest level since mid-2003. The stock has taken a severe tumble since reaching a high of almost $60 in January 2006. Analysts blame part of the decline on Krall’s handling of the Pinnacle acquisition. The company paid $462 million for the 800-employee company, representing a 30 percent premium over Pinnacle’s stock price at the time; a year later, in the fourth quarter of 2006, Avid was forced to take a $53 million write-down to reflect the difference between the “goodwill” value Avid had assigned to Pinnacle and the division’s actual fair value. “It’s basically another way of saying, ‘We paid too much for Pinnacle,’” says Logovinsky.

Krall’s resignation took effect July 31. He is succeeded by interim CEO Nancy Hawthorne. Logovinsky says Morningstar won’t revise its estimate of Avid’s fair stock value downward or upward until the company has found a permanent replacement. “We think they have lost some of their competitive strength, and we don’t know if they’ll be able to regain it or not,” she says.

Avid wasn’t able to immediately accommodate Xconomy’s request for comment.

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