The internet has birthed a media revolution, blurring the line between technology and entertainment businesses. Alex Aldridge talks to lawyers on both sides striving to win control of the all-important content – and to build a model that makes money

Once, life was simple in the media business. Media companies produced content – though they didn't call it that – for the masses. Film studios, record companies, publishers and broadcasting groups either owned or had significant control over distribution channels for that content.

Life was also much simpler for media lawyers. Work was filled with low-level litigation, turning out fairly standard copyright agreements and, if you worked for one of the acquisitive media conglomerates, bringing in external counsel for intermittent bouts of empire building.

Of course, all it took was the rise of a single technology – the internet – to throw those old certainties into a decade of upheaval. Old hierarchies have been turned on their heads, presenting fundamental challenges to the media business model. Moreover, the boundaries between old and new media, which were so apparent during the dotcom boom of the late 1990s, are fast disappearing.

Twenty-seven percent of all recorded music industry revenues worldwide now come from digital sources, according to the International Federation of the Phonographic Industry (IFPI), while the numbers of people watching TV programmes and films via the internet has surged over the last three years in the wake of the 2007 launch of the BBC iPlayer and the growth in popularity of online video sites such as YouTube.

At the beginning of this year, the BBC announced that the iPlayer reached over 100 million streams per month – a figure which averages 10 requests per broadband user in the UK.

The ecology of the content business has been further complicated by the rise of social media and networking sites like Facebook, MySpace and LinkedIn, which blur the line between communications and content businesses, albeit content derived from users or third parties.

Such forces have been amplified by the smartphone market achieving critical mass over the last two years, a trend that has made mobile internet access a widespread reality. With Apple's much-vaunted iPad – which many believe will usher in a new dawn of mobile internet use and kickstart a market for e-books and magazines – currently being prepped for global launch, the reach and influence of the internet looks certain to grow considerably over the next five years.

"Convergence is evolving in a chaotic manner, but it is definitely starting to have a real impact across a range of industry sectors," says Olswang media, communications and technology partner Matthew Phillips.

A new order is fast emerging, with technology/distribution businesses like Apple and Google increasingly powerful in the content business. In 2002 Google's annual revenue was between $50m-$100m (£33m-£66m); last year it stood at around $24bn (£16bn). Meanwhile, traditional media players – in particular the music companies – are struggling to maintain their ground. According to the IFPI, the global revenues of the music industry have fallen from $36.9bn (£24bn) in 2000 to $15.8bn (£10.3bn) last year.

Unsurprisingly, what media companies want from their lawyers has changed. "We've become digital business lawyers," says Osborne Clarke interactive practice group head Paul Gardner. "That's the common denominator; that's increasingly where most of the demand is."

Law firm media teams that have made the jump to marry specialist sector knowledge with an understanding of the technological developments sweeping through the industry have adapted.

Those that haven't are struggling. Some have fallen by the wayside altogether. SJ Berwin's media group, which was disbanded last year, was felt to have become too reliant on work arising from traditional film and TV financing, which has been hit by digital piracy and the reduced availability of funds from the recession. "Traditional media market lawyers have been having a hard time during the recession as their clients suffer; digital media lawyers have been having an easier time, simple as that," argues Reed Smith media and technology partner Gregor Pryor (pictured).

The scorched earth years

The picture just 10 years ago was very different. While the buzzword of the day was convergence, in reality music, film, TV and the emerging niche of computer games law were distinct areas, with lawyers advising companies in these sectors rarely coming into contact. "At that point relatively little could be digitised for the mass market. In fact, it was essentially limited to basic things like some news and weather, stock market information, the first generation of search engines like AltaVista, online services such as CompuServe and early versions of travel booking sites like Expedia. So the legal work centred around giving advice to those kinds of players," says Richard Kemp, senior partner at technology boutique Kemp Little.

Advances in technology and the ensuing dotcom boom in the late 90s changed things, seeing the first meeting of old and new media, most notoriously with the ill-fated merger between AOL and Time Warner in 2000. In retrospect, it all occurred in a chaotic and unsophisticated manner. Back then, people were happy to simply put real world things online without really modifying their approach – a bit like a virtual shop front.

"So, for example, many e-commerce sites were essentially digitised catalogues, without any additional content or functionality," recalls Kemp Little corporate technology partner Andy Moseby.

And there was very little thought about the commercial aspects of these arrangements. "It was all about ideas, with very little attention given to the practical aspects of making money from putting content online," recalls Bristows IT partner Mark Watts.

In contrast, these days monetisation is the big theme. Yahoo UK legal director Manu Kanwar comments: "Coming up with proactive suggestions and thinking of ways that Yahoo can do business with advertisers is crucial because it contributes to revenue streams."

The period was notorious for an almost complete lack of regard for the conventional rules of return on investment as huge valuations were put on businesses that had little record of generating revenue, let alone profits. This aspect was to go into dramatic reverse with the collapse of the technology and venture capital bubble in 2001, which saw the valuations on technology companies, even the larger, more cash-generative end focusing on telecoms and infrastructure, plummet. It remains in the history of investing a period of epic destruction of shareholder value, unrivalled until the credit crunch performed a similar feat for financial services companies six years later.

Unfortunately, the initial wave of internet companies proved a lot better at undermining the business model of the media industry than they were at building their own revenues.

A badly-shaken music industry, the first media sector to really suffer from the internet's rise, initially responded by trying to defend its patch much as it always had: through aggressive litigation. This scorched earth approach to litigation was targeted at the first serious threat to emerge from this loss of control of distribution: file sharing websites.

In the defining early skirmish of this conflict in 2000, A&M Records and several other recording companies acting through the Recording Industry Association of America sued file sharing service Napster for contributory and vicarious copyright infringement under the US Digital Millennium Copyright Act. The outcome, after various appeals, was a finding that Napster was capable of commercially significant non-infringing uses but ordered that it monitor the activities of its network and block access to infringing material when notified of that material's location. Unable to do this, Napster shut down its service in July 2001.

It proved to be a pyrrhic victory that set the tone for the challenges the music business would face. While they could often win the battle in court, other peer-to-peer file sharing networks followed, including Gnutella, eDonkey2000 and Kazaa, offering not only music, but free access to films, TV programmes and computer games. With the internet proving virtually impossible to police and public opinion turning against heavy-handed attempts to pursue copyright infringers, further litigation followed, which saw several more sites shut down. But the media companies were fighting a losing battle – and their profits were continuing to fall.

Any hope that the music business could put this genie back into the bottle ended with the 2001 launch of the iPod by Apple, a product that helped dramatically turn around the fortunes of the Californian computer manufacturer. Its huge success and the rise of Apple iTunes Music Store would both transform Apple into a powerful media player and establish the precedent that the producers of content would have to give ground, power and revenues to the technology-driven companies that were resting control of distribution from old media. The impact of these forces was wrenching.

The new accord

To a considerable extent, the experience of the Napster litigation and growth of the digital music market called time on the attempts at heavy-handed litigation to solve content owners' problems. Content businesses would increasingly attempt to engage with the internet as best they could, turning more to tactical litigation and nuanced lobbying to attempt to defend their ground and more often trying to cut deals.

Rather than concentrate on sales of CDs and DVDs, media companies' focus has now changed to getting content out across as wide a variety of legitimate platforms as possible, while, on the other front, maintaining anti-piracy efforts against platforms that breach copyright laws.

The big four record companies, Universal, Warner Music, EMI and Sony BMG, have made strenuous attempts to take their business online. With Apple boasting an 80% market share in legal downloads though iTunes, record companies have been forced to accept tougher terms. At between 79p and 99p a track, the profit margins are much lower than the CD market in its late 90s heyday, but the arrangement at least means that the companies are making money from the internet.

There is also some evidence that in recent years the music business has slowly begun to turn the tide against what once seemed to be an unstoppable rise of illegal downloading (though illegal file sharing is still reckoned to account for 95% of all music downloads).

And other ventures by the music companies, such as their purchase of major stakes in Swedish music streaming application Spotify, indicate the industry is attempting to loosen itself from Apple's grip. Profits remain low for the fledgling service, which allows consumers to listen to unlimited music tracks online via subscription or, with adverts, for free – to the extent that last year it was claimed that over a five-month period, one million plays of Lady Gaga's hit Poker Face, one of the most popular songs on the site, earned the artist just $167 (£108). But record companies' growing engagement in this area is improving their bargaining position. Last year Apple announced that it would, for the first time, allow record labels to begin implementing variable pricing on the iTunes store, after several years of refusing to budge on the matter, enabling the companies to charge higher amounts for hit songs.

So far, the TV, film and computer games industries have not been affected by the internet to the same extent as the music business. Although DVD sales and rental have declined slightly in the last few years, they remain strong, with spending between 1999 and 2006 exploding in the US alone from $1bn (£65m) per year to around $24bn (£16bn).

And recent blockbusters like Avatar and New Moon have broken cinema box office records, while 'event' TV programmes like The X Factor have grown in ratings. Computer games have also continued to perform strongly, with Call of Duty: Modern Warfare 2 selling over 14 million copies worldwide, making it the second best-selling game of all time in the UK, and third best-selling game of all time in the US. This can be explained partially by the fact that TV programmes, files and computer games take a lot longer to download from file sharing sites. In the US it takes on average 30 to 40 minutes to download a film. However, broadband speeds are increasing all the time. In Japan it now only takes 5-10 minutes to download a film.

Entertainment businesses' heavy investment in technology platforms like 3D and high-definition television and DVD players is also strongly linked to the desire to support content that is harder to pirate. As such, Avatar, the groundbreaking 3D film from director James Cameron, is seen by many as a defining movement for a film industry increasingly focused on new technology and chasing blockbusters.

Mindful of this, TV and film companies have done a flurry of deals with websites. In 2008 entertainment giants MGM, Lions Gate Entertainment, CBS and Time Warner all struck agreements with YouTube allowing it to show versions of their content – including, in MGM's case, several full-length films. There has been similar action on these shores, with Channel 4 last year signing a deal to make its 4oD video-on-demand service of new programmes available via YouTube – marking the first time any broadcaster in the world has made its full catch-up schedule available on the video sharing site. Under the terms of the deal, Channel 4 will sell advertising around its own content and around some other content on YouTube.

Alongside these tie-ups there have been a number of examples of traditional media companies developing their own new media platforms. In 2007, NBC, Fox and ABC joined forces to develop Hulu, an alternative to YouTube. The site, which shows a variety of programmes and films produced by the various companies, went live in 2008, with Disney announcing that it would join the venture with a 27% stake a year later.

The Competition Commission blocked a similar project in the UK between BBC Worldwide, ITV.com and 4oD, known as Kangaroo. Instead, individual networks in this country have gone it alone, with the most high-profile example being the BBC iPlayer. Since launching in 2007, the BBC has struck deals with companies, including Virgin Media, Nintendo and Apple, that has seen the license fee-funded iPlayer made available across TV, video game and mobile phone platforms. Channel 4 and ITV have followed suit with similar offerings.

Such trends have also led many media observers to view shifts in the media business as evidence of The Long Tail, the influential book by Chris Anderson published in 2006. Anderson's theory, which has attracted much support in recent years, claims that the fragmentation of modern media and internet benefits two categories of content: large blockbusters, be they film, books or TV; and niche content, which becomes easier to distribute and produce thanks to modern technology. What gets squeezed is the middle, meaning media and entertainment products that are populist without becoming binding, common cultural touchstones but that also fail to reach a dedicated niche audience. This has substantially changed the shape of content production, pushing resources towards set-piece content that commands a following and seeing efforts by media companies to control intellectual property (IP) rights across different platforms like DVD and digital media.

The digital business lawyer

In the main, the legal work generated by tie-ups between old and new media companies has been handled by in-house lawyers at technology and media companies.

Apple's arrangement with the media companies dates back to the early part of the decade when chief executive Steve Jobs is said to have approached iTunes head of legal Kevin Saul and, without prior warning, instructed him to arrange licensing deals with record companies in a range of jurisdictions. With Apple notoriously protective of sensitive business information, the iTunes deal was only ever going to be handled out of the company's base in Cupertino, California, say private practice lawyers who have worked with Apple. YouTube, serviced by a dedicated team of lawyers from its parent company Google, operates similarly, as do many media companies.

"It comes down to two things: the first is that these deals, at their heart, are pretty standard commercial contracts, albeit often touching on some tricky legal issues, and second, to do them you need really detailed knowledge of how the company works, which the private practice guys don't have," says one media partner at a leading law firm.

Outside counsel tend only to be brought in when there is significant doubt over the law or for major projects. For example, Nintendo instructed Osborne Clarke for various aspects of its project to introduce a version of the iPlayer on the Nintendo Wii, with Bristows acting for the BBC.

"Getting the iPlayer to work on the Wii required a fair degree of innovation from the lawyers and threw up a range of tricky issues, such as understanding the complex technology involved and ensuring the legal framework we used was both adequate for that technology and reflected the unique requirements of the BBC as a public service broadcaster – hence our use of a law firm," says Nintendo Europe general counsel Matthew Hill.

An ability to be creative with the law is a prerequisite for all lawyers in this area, says Yahoo Europe, Middle East and Africa head of legal Pierre Landy. "Everything we create as a business hasn't been codified yet," he explains. "So while I'm not saying we make law, we have to be very creative in applying existing law to situations – and constantly trying to come up with the most logical solution. That requires superior creative minds and an ability to think outside the box in a way you don't see in traditional media."

BBC IP lawyer Diane Hamer adds: "Underlying the ability to offer the iPlayer were a series of contracts between rights holders, with some very complex legal issues behind them – all of which we handled internally."

The iPlayer team, which is supported by a dedicated legal technology team of around six BBC in-house lawyers, headed up by Kate Leece, is currently working on the third version of the on-demand service, which will be known as iPlayer 3.0. It will include integration with various social networking sites, including Facebook, Twitter and Bebo, enabling users of the sites to link their accounts with the iPlayer.

Of course, there is a history of lawyers working creatively when assisting media clients. Harbottle & Lewis head of broadcasting Tony Ballard draws parallels with previous upheavals in the communications sector that have affected the media industry. "In some ways it's all rather like the situation we had when the Government liberated the telecoms industry 20 years ago," he reflects. "Suddenly law firms all over London were inundated with work responding to clients' questions about what licenses they needed and what they were permitted to do. We had to go back to the old law and work out how it would apply to these developments."

Being such a flexible, multi-dimensional medium, the internet gives rise to many more questions, adds Ballard. "But," he continues, "it all comes back to this rather disorganised cluster of legislation on copyright, telecoms, e-commerce, interception, data protection and computer misuse, which has suddenly gotten a new lease of life."

What is new is lawyers' involvement in the great puzzle that has come to define the debate over web 2.0 – how to make money from it. "Dotcom was very scattergun. Anyone with a ponytail and half an idea could make money from it. Now people are thinking very carefully about their business models," says Bristows' Brown.

The question of monetisation is one that is inextricably linked to the still uncertain legal and regulatory regime governing the internet. "What these companies are essentially doing is betting on new technologies," says Myles Jelf, head of the computer games and media group at Bristows. "Part of that bet is what the risk is in the context of an uncertain legal market. And that's where lawyers come in." He adds that in the older, days new ventures tended to be run past lawyers at the end of a project. "Now, though, lawyers are involved at a much earlier stage."

For Disney European general counsel Peter Wiley, this means "constantly trying to predict the future and produce documentation that covers all eventualities in an area changing so quickly".

For the Spotify legal team, the overriding aim of developing a new form of business in a rapidly changing market often renders the distinction between the legal team and the business irrelevant.

"At the heart of what we're doing are some complex licensing issues with record labels and collecting societies, the latter varying from country to country," says general counsel Petra Hansson. "This creates a challenge finding the right balance between offering rights holders comfort while still making sure there is sufficient room to develop a new market."

London-based Spotify legal counsel James Duffet-Smith adds: "The result is that we work incredibly closely with the business. Indeed, it's hard to separate business and legal at times."

A reflection of lawyers' status in this area is the fact that Reed Smith technology partner Gregor Pryor was recently listed in Wired Magazine's list of 100 most influential people in the digital economy. He comments: "Typically when there is something new, such as some new technology to deliver content, a client will come to us for advice on legal issues that inevitably blur into strategy."

And it is not just the work that has changed, but the personalities of the lawyers operating in this area, too. Once known for their flamboyant manner, the new breed of media lawyers are a much more cautious, corporate bunch, as illustrated by the transformation of Olswang from hip media outfit to relatively staid corporate player.

What comes through most when talking to media lawyers at many firms is an intense wariness of offending major industry players, a reflection of the increasingly secretive and publicity-shy nature of the business. Indeed, the public relations strategy of the likes of Google and Apple is more tightly controlled than most major investment banks – ironic given their self-cultivated image of community builders. One leading private practice lawyer sums up the situation: "Apple is super-secretive about publicity to a level you could almost describe as paranoid. You certainly don't talk about them to the press."

Google, which increasingly finds itself on the receiving end of litigation from companies unhappy over its monopolistic clout, most notoriously in recent years with the protracted battle over its scheme to create a digital library of books, to some now represents the kind of corporate monolith it was supposed to replace.

Fighting piracy – a different approach

While lawyers may offer an informed flight plan for the future of internet law, what will shape it to a considerable extent are judicial decisions in the raft of anti-piracy cases around the globe – the fact that there are so many of them is a reminder that deals between old and new media companies remain only one part of the story.

But the character of litigation has changed from several years ago, say lawyers. "It has become less good guys and bad guys and more blurred; rights owners and internet service providers (ISPs) are trying to work out where the liability lies in a legal environment that is far from clear. In a sense, the law is catching up," says DLA Piper co-global head of IP and technology Simon Levine (pictured).

The ongoing $1bn (£655m) piracy lawsuit brought by Viacom against YouTube three years ago is a prime example of this breed of dispute, with the media conglomerate arguing that the video sharing website bears responsibility for the actions of its users who illegally upload copyrighted videos onto the site. The result should provide some much-needed clarification to the situation regarding the liability of websites and ISPs over illegal content.

Other recent cases addressing this topic have produced mixed results. The recently concluded High Court dispute between the Motion Picture Association and Newzbin – a UK-based company that provides links to files that enable its customers to easily download copyrighted content – found the latter liable for breach of copyright. However, earlier this year the Australian Federal Court found in favour of iiNet, an ISP, in a case filed by various major film and TV companies and the Australian Federation Against Copyright Theft over alleged breach of copyright on a number of popular film and television shows illegally downloaded by iiNet customers.

Accordingly, lawyers are awaiting with interest the result of SABAM v Tiscali (Scarlet) – currently before the European Court of Justice following a reference from the Belgian court to determine guidance on the extent to which ISPs can be required to take steps to prevent copyright infringements taking place.

The key development in this respect in the UK is the passing this month of controversial legislation that will provide greater certainty for rightholder companies in this area.

The Digital Economy Bill was passed into law in April using a legislative wash-up procedure that preceded the dissolution of the Government ahead of next month's general election. The legislation will impose a host of new obligations on ISPs to police piracy and impose measures to curb activities among serious abusers.

ISPs will be obliged to react to reports from rightholders about copyright infringement and will then have to pass on written warnings to their subscribers encouraging them to access material legally. In extreme cases ISPs are expected to impose restrictions on bandwidth or suspend user service.

ISPs that fail to comply can be fined up to £250,000. Most controversial are powers in the Act to allow blocking injunctions that could see ISPs block access to websites used to pirate material. The Act also raises the penalties for copyright infringement under the Copyright, Designs and Patents Acts from a maximum of £5,000 to £50,000.

The legislation is being closely watched, with a number of other countries considering similar measures as steps are taken to curb the power of ISPs. However, it will not come into force until 2012, when the media regulator Ofcom is expected to have drawn up and implemented a code that will flesh out how the ISPs will apply the Act.

Former AOL Europe general counsel Tony Wales, a visiting associate at Oxford University, recently completed a report into the socio-legal and regulatory issues arising from the Digital Britain Report, the Government report that led directly to the Act. He describes the Act as a "hugely complex piece of legislation that has the potential for creating difficult law that is not properly understood by the public or the industry".

Others, however, are more optimistic – acknowledging the Act's limitations, but viewing the debate it is producing as useful. Wiggin technology litigation partner Simon Baggs (who represented the Motion Picture Association in the Newzbin case) describes the Act as a "major step forward," adding: "The fact that ISPs will be communicating directly with their customers over infringement will be a big help. Plus the consultation process, with a focus on enlisting the ability of ISPs to block infringing websites, is likely to be constructive."

For real progress to be made on curtailing piracy, though, there is a consensus that the battle will have to be waged on several fronts, of which the law is just one. Baggs continues: "There needs to be greater emphasis on the action that can be taken directly against infringing websites and upon the blocking of those websites by ISPs, but on its own this won't be enough."

The debate over the Act is an illustration of how the dynamics have radically changed since the tech bubble. In many ways the technology and media companies have been increasingly dominant players in the media sectors, even if only a very select group of companies like Google, Apple, Facebook and LinkedIn have had much success at turning their huge audiences into revenue.

It seems inevitable that such technology business will be increasingly the target of regulators, governments and litigation as concerns grow regarding their influence and potential for monopoly powers.

But apart from Google and Apple, the bigger concern for media business and their online counterparts will be basic: the need to find a business model that generates revenue. In this sense the new accord between traditional media looks certain to continue, albeit underpinned by tactical bouts of litigation, lobbying and legislation.

As Reed Smith's Pryor says: "We now have a generation that is used to getting content for free, which creates huge pressure on producers, broadcasters and rights owners to innovate. Innovation means changes in law and practice, so it's an exciting time for media lawyers."

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Media and internet – major recent deals

• Government launches £200m technology
  innovation fund

March 2010 – Creation of a £200m investment fund aimed at boosting the innovation technology sector in the UK, with the Government and the European Investment Fund each putting in £100m. SJ Berwin advised the Government's delivery agency, Capital For Enterprise, while Macfarlanes acted for the European Investment Fund.

• eBay unloads $1.9bn stake in Skype

September 2009 – eBay's $1.9bn (£1.15bn) deal to unload a controlling interest in Skype to a consortium
of investors, led by private equity firm Silver Lake Partners. eBay instructed Dewey & LeBoeuf and Sidley Austin while Sullivan & Cromwell acted for the consortium.

• Disney secures $4bn deal to take over iconic comic group Marvel

September 2009 – Walt Disney's $4bn (£2.4bn) cash and stock acquisition of Marvel Entertainment. Disney instructed Dewey & LeBoeuf while Paul Hastings Janofsky & Walker advised Marvel.

• ITV announces sell-off of pioneering networking site Friends Reunited

August 2009 – ITV's sell-off of social networking site Friends Reunited to online technology and publishing business brightsolid for £25m. Macfarlanes acted for brightsolid while ITV instructed Lovells.

• Bertelsmann agrees music joint venture with private equity giant KKR

July 2009 – Music joint venture between media giant Bertelsmann and US private equity house Kohlberg Kravis Roberts & Co (KKR). Slaughter and May acted for Bertelsmann while KKR instructed Simpson Thacher & Bartlett.

• Time Warner's $9.25bn divestment of cable division

May 2008 – Time Warner's divestment of its cable division in a $9.25bn (£6.1bn) deal, as the US media giant moved to refocus on its core television network, film and publishing operations. Cravath Swaine & Moore acted for Time Warner while Time Warner Cable instructed Paul Weiss Rifkind Wharton & Garrison and Skadden Arps Slate Meagher & Flom

• AOL acquires much-touted networking site

March 2008 – AOL's $850m (£420m) acquisition of social networking website Bebo. Herbert Smith and Simpson Thacher & Bartlett acted for AOL. Reed Smith and Weil Gotshal & Manges advised Bebo.

• Last.fm secures music download deal with leading record companies

January 2008 – CBS-owned Last.fm agrees a tie-up with Universal, EMI, Warner and Sony-BMG allowing the website's listeners access to the catalogues of the music giants. CBS instructed Reed Smith. Universal, EMI, Warner and Sony-BMG used in-house counsel and Clintons.

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Key briefings from Legal Week Law

• Digital Economy Act 2010 is now law, but anti-piracy measures are only halfway there