Fate of Silicon Valley Movie Streaming Startup Illustrates Obama Admin’s Innovation Policy Balancing Act

Photo courtesy of Uwe Hermann

Potential investors in internet movie-streaming startup Zediva initially worried about how net neutrality rules could affect its future as a business, but ultimately it’s copyright law that might do it in and doom it as a business model.

Not only did the Motion Picture Association of America sue the five-man Silicon Valley firm and its founder personally in California federal district court on Monday, but unauthorized streaming online might soon become a crime if President Obama’s administration gets its way.

A day before Zediva launched, the Obama administration’s copyright czar Victoria Espinel urged Congress on the White House blog to amend the law so that under “the appropriate circumstances infringement by streaming, or by means of other similar new technology, is a felony.”

Congress seems inclined to heed Espinel’s advice. A group of lawmakers from both the House and Senate Judiciary committees on Monday publicized the impact of “online infringement” on the U.S. economy, lumping together the online sales of counterfeit goods with digital piracy.

They said that online infringement and counterfeit goods cost the U.S. a staggering $100 billion a year. The lawmakers did not explain how they calculated the statistic in their press statement, and an e-mail to a Senate Judiciary Committee staffer was not returned at the time of the publication of this story.

A spokesman for Zediva said that the company couldn’t comment Monday afternoon.

“We have just been made aware of the lawsuit in the same way as you, through an online press release,” said Kenn Durrence in an e-mail. “Given that we just found out about it, we are currently reviewing it and don’t have a further response at this time.”

But Zediva has publicly justified its business model by saying that the service is just like a physical rental service the same way Netflix’s movie mailing service is.

In a December 2010 letter petitioning the FCC to safeguard net neutrality, Silicon Valley engineers and Co-Founders Vivek Gupta and Venky Srinivasan also compared their company to place-shifting company company Sling Media.

The company, a subsidiary of EchoStar, allows cable subscribers to access their television packages remotely from any device.

But the big Hollywood studios don’t see it that way, and they don’t buy the “really long cable” argument either.

Monday’s complaint says that Zediva’s online streaming service violates six major studios’ copyrights by streaming movies over the internet without authorization.

“Unlike Netflix and other licensed online services, Defendants’ business is based on infringing Plaintiffs’ rights,” reads the studios’ complaint, filed by the MPAA’s lawyers. “Defendants transmit performances of Plaintiffs’ copyrighted works to members of he public without Plaintiffs’ authorization.”

Under U.S. law, copyright owners have the exclusive rights to distribute their works in specific ways.

Zediva’s service offers movie buffs the ability to stream DVDs from a remote facility over the internet. The DVDs are physically located in a data center packed with DVD players, and thus offer viewers all the extra features that come with physical discs, unlike the digitally-stored streaming or downloadable movies on offer at other licensed services such as from cable companies, Netflix or Apple’s iTunes.

Moreover, since Zediva didn’t consult with the studios, the movies are not subject to the terms and conditions applied to all the other licensed movie services, such as windowing and 24-hour time limits on rentals.

The Sunnyvale-based startup is offering consumers $1.99 rentals, and packages of 10 movies for $10 — a rate that the MPAA says is less than half of the prices that the licensed services charge.

Ironically, the engineers wrote to the FCC because potential investors worried about the impact of cable and telecom companies’ network management practices, and how they might discriminate against Zediva’s packets.

There was no mention of copyright infringement lawsuits.

The company launched mid-March with cheeky brio and a lot of positive press coverage — as well as raised eyebrows at the legality of its service.

Founder and CEO Srinivasan lists himself as a former NASA rocket scientist. Both he and Co-Founder and Chief Technology Officer Gupta are graduates of India’s ultra-prestigious Indian Institute of Technology.

The MPAA has sued both Srinivasan’s company and Srinivasan personally, accusing him and the company of willful infringement.

The studios pointed to blog postings, statements in media interviews and a patent owned by Srinivasan as evidence of a deliberate business model based on infringement.

If the court finds in favor of the MPAA, the company and Srinivasan could be on the hook for hundreds of thousands of dollars.

Ivi, Inc., another online media streaming startup in Seattle, last year tried to argue that copyright law allows compulsory licensing, but a federal district court for the Southern District of New York disagreed in February, and ordered the service to stop rebroadcasting television channels.

The ultimate twist of drama in this story came at the end of Monday when the Obama administration threatened to veto a House resolution to roll back the FCC’s new rules on net neutrality.

It turns out that even though one of the administration’s policy decisions should ultimately protect Zediva, another set of decisions might end up killing it.

Editor’s Note: The Intellectual Property Breakfast Club will host a panel discussion on the cost of intellectual property infringement, and how it can be properly quantified on April 12 in Washington, D.C .  Join us!