With Grouper.com acquisition, what is Sony getting itself into?

Posted by Scott M. Fulton, III

Culver City (CA) - The press had expected yesterday to be the big day when a major media conglomerate hooked up with an Internet video sharing service provider - that turned out to be a false alarm. Today, however, Sony Pictures took up the challenge by announcing its acquisition of one of YouTube's up-and-coming competitors, Grouper Networks, proprietors of Grouper.com.

Like its larger rival, Grouper is a platform where individuals are capable of posting videos containing whatever comes to mind at the moment, and thousands of viewers marvel at how millions have evidently been spent to give such trivia a global platform. But facing the prospects of a softening worldwide cinema market, coupled with reduced growth in DVDs and other secondary markets, Sony, like others, is finding itself having to follow its audience to wherever it's going at the moment.

In an interview with Reuters published this morning, Sony Pictures chairman Michael Lynton described user-generated content sites such as Grouper and YouTube as "businesses or platforms unto themselves," on a par with television networks. Almost immediately, however, Lynton's company may face the problem of what to do with the vast amount of not-so-user-generated content appearing on Grouper that is actually recorded off-the-air or off-cable, and produced by other major firms. Several of the most viewed videos on Grouper today, for example, were actually clips from last weekend's Comedy Central roast of actor William Shatner, posted by unauthorized individuals. Comedy Central is a unit of MTV Networks, which is owned by Sony competitor Viacom.

Sony is one of the most aggressively active companies implementing digital rights management for digital video in all its current and proposed media. It may be difficult to conceive of Sony casting a blind eye to the activities of a copyright-free playground it now happens to own.

In 2004, Grouper was launched as a P2P platform for members to share short, streaming videos from their hard drives using Microsoft technology. Perhaps wisely foreseeing where those prospects might lead it, the company relaunched last December around a more centralized service. There, the updated site uses Web-streamed video to distribute clips, that can be shared between members through the P2P platform if they wish to retain the clips on their own hard drives.

The executive team of Grouper Networks is made up mainly of the founders of Spinner.com, one of the earliest streaming content sites on the Internet, which legally made available streams of pre-arranged music streams, to which Spinner had purchased rights. Those rights were acquired along with that company in 1999 by AOL, which merged that effort with the Winamp audio player project that AOL also acquired that same year, in its acquisition of Nullsoft.

Grouper co-presidents Dave Samuel and Josh Felser were Spinner.com's inventors, while two other senior executives were veterans of the AOL acquisitions, and their eventual fallout. The company's marketing VP, Jonathan Shambroom, according to its corporate Web site, touts having launched four other major Internet startups in his career, three of which successfully led to acquisitions, one by AOL. Acquisition - not longevity - is often the goal with modern startups.

So one could argue that Grouper Networks was developed perhaps with acquisition in mind. Given the executive team's respective résumés, Time Warner was probably an unlikely suitor.

On the other hand, senior executives from both companies struggled to define the requisite unique synergies that make them a perfect fit for one another, in their statements this morning. Sony's Lynton said, "Many people in the Grouper community use Sony cameras to create videos and Sony VAIO computers and mobile devices to store and view them. It makes sense to complete the circle by having Grouper be a part of Sony Pictures Entertainment, which itself creates so much content for people around the world."

If you're keeping score at home, the fact that so many individuals use Sony cameras to make home videos makes Grouper a perfect fit. Is the Grouper team buying into this? Apparently. "When you pair Grouper's innovative video sharing platform on the web and the desktop with Sony's connected devices and copyrighted media," Felser wrote this morning, "you create a dynamic and exciting environment for consumers...We have an opportunity, as part of the Sony family, to bring together user-generated and copyrighted content across platforms and devices for the first time."

It's that last statement that may prove to be the biggest hurdle the newly acquired company faces. If Sony wants to ensure that shared video is free from copyright infringement, it may want users to employ certain DRM schemes in its encoding - schemes which, at least for now, are not commonplace, and about which everyday home video producers have yet to get excited. By infusing its newly absorbed digital playground with legal technicalities, Sony could end up deflating the very trend it's trying to capitalize on. However, if Sony had left it alone, the bubble might have burst for that trend before too long anyway.