by , 1:15 PM EST, February 9th, 2004

Microsoft Corp. and the Walt Disney Co. have announced a multiyear deal to work on better protecting media content, and for Disney to license the Windows Media Digital Rights Management (DRM) software. The deal is seen by some industry watchers as a wake-up call to Apple that a format war is under way, and that it must seriously consider licensing its DRM technology to stay competitive with Microsoft.

While detailing few specifics, the deal brings together last year's top-earning Hollywood studio with a software giant to work closely together to create and secure delivery of digital media in better-than-DVD quality, the flow of digital media to the public, and the distribution of media from computers to portable devices and home entertainment systems. Disney may also use Microsoft's high-definition media format, which creates video content with considerably higher resolution than ordinary DVDs. The companies did not say exactly where Disney might use the technology, or how soon any such use might develop.

Industry analysts see the partnership as a big win for Microsoft. "The problem with Microsoft's media technologies has been lack of content, so this deal with Disney potentially opens up a fair chunk of family-oriented content that can be re-distributed in Windows Media format either on DVDs or downloadable online," Joe Wilcox, an analyst with Jupiter Research, told The Mac Observer.

"This is just as much a win for Disney, " said Matt Rosoff, an analyst with Directions on Microsoft in Kirkland, Wash. "But the more partners Microsoft gets, the closer they get to being the industry leader for the future."

Microsoft is trying to push use of its Windows Media technology as it envisions a role for the personal computer as the hub of the average home's living room entertainment center. At the Consumer Electronics Show (CES) in Las Vegas, Nevada last month, CEO Bill Gates showcased Windows Media High Definition Video and demonstrated Windows Portable Media Centers, a version of the Windows operating system built as a home theater hub, to let people store music and movies and play content on home audio components and televisions.

Building the technology is only half the story, however; companies like Microsoft must also forms alliances with content makers like Disney to insure its technology is being used and seen by the public. A similar deal to the Disney agreement was forged between Microsoft and Time Warner last May. Under that arrangement, which was part of a US$750 million settlement between Microsoft and Time Warner's America Online business, Time Warner agreed to work with Microsoft to promote the creation and distribution of digital content from its Warner Brothers film studio. In another example, five films were shown at the 2004 Sundance Film Festival in January using Microsoft's Windows Media 9 Series technology.

Until now, Disney has been reluctant to distribute content in digital form until new technologies were developed to guarantee that it would not be copied and distributed online. An original backer of unsuccessful legislation to build copy-blocking technology directly into PCs and other digital devices, the partnership with Microsoft is a sign Disney feels it is on the verge of finding answers to protect its property and will ultimately distribute Disney content to the masses.

More recently, Disney created a video-on-demand service called MovieBeam to deliver videos to a set-top TV box. It also has allowed some of its films to be distributed through the Internet-based CinemaNow and Movielink services.

Just Good Timing?

News of the alliance comes 11 days after Pixar Chief and Apple Executive Officer Steve Jobs, openly broke with Disney after months of contract negations. Pixar will produce two remaining animated films that will distributed by Disney. Mr. Jobs said that Pixar would seek a new distribution partner for its animated films, declaring on a conference call with investors that "Not even Disney's marketing and brand could turn Disney's last two animated films into successes. Both bombed at the box office."

Apple Computer - one of Microsoft's biggest rivals in media technology - has been the recipient of the Disney/Pixar partnership until now by being the first to release movie trailers and other promotional material from Disney films. That relationship will come to an end, at least with Disney, in two years. It is not known if Disney will cease to release future content in Apple's QuickTime format, but industry watchers believe it is a safe bet Windows Media will be the exclusive format of future Disney releases.

When asked if the end of relationships between Pixar And Disney had anything to do with the Microsoft/Disney alliance announcement, Disney executives said talks had been in the works for several months and the timing was a coincidence. "It is my understanding that this announcement is in no way a response to Disney and Pixar severing their relationship," Mr. Wilcox told The Mac Observer.

The Apple Equation - License Your DRM

For Apple, the alliance between Disney and Microsoft is not good news. Analysts believe the Disney/Microsoft pact as a clear signal that a format war in both the audio and video arenas is under way. The key, analysts believe, is that Apple must now form similar relationships with other content makers and also reconsider licensing its DRM technology, know as FairPlay, for use in both audio and video.

"I think this should be a wake up call for Apple," said Mr. Wilcox. "Microsoft is out there licensing its DRM. It's ending up in some 600 music devices and being used as the format in a lot of music being sold today. They lead in distribution. But Apple has a lead in consumption in the music space and has a great presence among Hollywood filmmakers. But what Apple really needs to ultimately do is license the DRM. That would help to proliferate its Advanced Audio Codec (FairPlay) and then extend Apple's lead on the music side further and maybe even leverage that into the video market."

Apple has refused to license FairPlay to other manufacturers for use in players and online content. Instead, it has allowed others - like its recent Hewlett-Packard alliance - to sell its own branded iPod and use its online music store. That pact was widely considered a blow to Microsoft's efforts in the field. The Disney alliance now shows Microsoft is very much a factor to be reckoned with.

"This (announcement) helps Microsoft become the de facto standard for content that's in a digital format," Michael Gartenberg, an analyst with Jupiter Media, told The Mac Observer. "This alliance means the war has begun and three companies - Microsoft, Apple and RealNetworks, with its Real audio and video technology, will now be franticly trying to close content deals. Apple needs to step it up."

"There's going to be a lot of jockeying now," said Mr. Rosoff. "Apple needs to win over some big providers. I believe Microsoft is in the drivers seat because of their size, money and PC market dominance. They need to 'one-up' Microsoft in a big way."

One possible advantage for Apple: It's unclear whether Microsoft will be able to sign other big Hollywood studios to similar deals, analysts believe. For example, Time Warner's America Online competes with Microsoft's MSN Internet portal and Sony is also a major competitor with Microsoft in digital media and video games. "Those two big fish could be targets for Apple," said Gartenberg.