As there is rapid revolution in digital multimedia which is in compressed encrypted format, the ability for creating similar and unauthorized data, that can be easily copied, manipulated and distributed has been increased. Hence for copyright management protection, ownership identification, tamper detection and for other security issues watermarking has to be carried out for tamper proofing, quality assessment and copy control for those media content. Thus there is a need for an encryption scheme which could provide security as well as allow us to watermarking these compressed encrypted data. For encryption we propose a stream cipher called Modified Rivest Cipher 4 that overcome several weaknesses of the RC4. The embedding capacity, robustness, perceptual quality and security of the proposed algorithm, using the watermarking schemes: spread spectrum, scalar costa scheme quantization index modulation has been proposed and the comparison based on PSNR, MSE and BER values has been done between various encryption algorithms.