Microsoft’s a Hollywood Player No Matter What

Ever since cable giant Comcast Corp. launched its unsolicited takeover bid for entertainment conglomerate Walt Disney Co., those watching from the sidelines have been wondering whether another corporate behemoth might enter the fray: Microsoft Corp.

After all, Microsoft has a $3-billion, or 7.3%, ownership stake in Comcast. And the software company’s deep pockets could sure come in handy if Comcast decides to raise its offer.

Still, the betting here is that Microsoft won’t get involved, preferring instead to play the role of Switzerland in this war of big money and even bigger egos. “Would Microsoft intervene on one side or the other? No,” says Jason Reindorp, group manager of the Redmond, Wash., company’s Windows Digital Media division.

Yet in some ways, this misses the larger point: With or without a role in the Disney-Comcast struggle, Microsoft already is a rising force in Hollywood.

The reason: Films, television shows and recorded music are now routinely reduced to digital form -- the ones and zeroes of computer language -- so that they can easily be beamed over the Internet to an expanding variety of devices: PCs, TVs, Play- Stations, even cellular phones.

It’s Microsoft’s aim to keep all that content safe from pirates.

The record business, of course, already has been pummeled because millions of songs have been downloaded, duplicated and distributed endlessly without a cent of payment to the musicians or their labels. The movie industry likewise is seeing films appear on the Internet even before they reach theaters.

“Content may be king,” says telecommunications consultant Peter Bernstein, “but billing -- the ability to get paid -- is surely queen.”

Entertainment moguls and technologists have long eyed each other skeptically.

In high-tech circles, the conventional wisdom is that those running the record labels are dinosaurs, if not fools, who should have embraced new Internet-based technologies rather than run from them. For their part, content providers have felt frustrated that technology companies can’t seem to create safeguards that are truly pirate- proof; as quickly as a newfangled digital lock is put on a system distributing music or films, some geek in a dorm room figures out how to pick it.

Slowly but surely, though, Microsoft seems to be overcoming these mutual misgivings. The company created its division devoted to media and entertainment only two years ago. It now brings in $2.8 billion in annual revenue, about 9% of the corporate total. The unit last year posted an operating loss of $924 million, but Microsoft is counting on increasing acceptance of its digital rights management, or DRM, software to expand the business -- and turn a profit.

It’s hardly a fanciful goal. Last year Time Warner Inc. agreed to license Microsoft’s piracy-fighting DRM software for seven years and to work with the company to develop digital distribution methods.

Just a couple of weeks ago, Disney itself signed a similar pact. Peter Murphy, the company’s senior vice president and head of strategic planning, said the agreement would “bring about a vibrant market for legitimate, high-quality entertainment delivered to new categories of end-user devices, such as personal media players.”

Although the Microsoft- Disney deal certainly didn’t get nearly the attention that Comcast’s takeover play has, its significance shouldn’t be lost. The agreement with Disney, following the accord with Time Warner, indicates “that Hollywood is understanding digital instead of fearing and denying it,” Microsoft’s Reindorp says.

It is a trend that surely will gather speed, promising rich rewards for the king of software. Microsoft could “have a presence in every entertainment transaction,” predicts Jeffrey Logsdon, analyst and managing director of investment firm Harris Nesbitt Gerard.

Obviously, Microsoft is not alone in the burgeoning field of security software. Sony Corp., for one, is determined to be a major player, and another rival has dragged Microsoft into an all-too-familiar place to duke it out: the courthouse. Intertrust Technologies Inc., a Santa Clara, Calif., software firm, brought a patent lawsuit against Microsoft in 2001 after “we saw some of our technologies show up in their products,” says Talal Shamoon, chief executive of Intertrust. The case, in which Microsoft has denied wrongdoing, is pending. Intertrust is now owned by a partnership that includes Sony as well as Royal Philips Electronics of the Netherlands.

As it happens, one of the most enthusiastic supporters of the shift to digital is Comcast, whose own relationship with Microsoft goes back seven years. Stephen B. Burke, a former Disney executive who now heads Comcast’s cable division, has emphasized that Disney’s films and TV programs “could be tremendously valuable” when distributed digitally.

In making his bid for Disney, Comcast President Brian L. Roberts put it this way: “The bottom line is to accelerate the digital future.”

Clearly, this future is coming with or without Comcast swallowing Disney. Both companies -- along with all others on both the content and distribution sides of the media landscape -- are facing a profound transformation because of “innovations in technology,” as investor Gordon Crawford of Capital Group told broadcasters in a speech in October.

Such moments hold great promise, Crawford noted: “At every inflection point, the market for consumption of intellectual and artistic output has been expanded. But the balance of power in the business has often been reordered.”

To the list of big names in Hollywood, it is time to add another: Microsoft.

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James Flanigan can be reached at jim.flanigan@latimes.com. Previous columns are available at latimes.com/flanigan.