September 1, 2004 5:50 PM PDT

Disney delays MovieBeam expansion

Walt Disney's MovieBeam will delay expansion into new markets until 2005 and is exploring new strategic partnerships, in a left turn nearly a year after launching the on-demand film service, CNET News.com has learned.

MovieBeam uses TV broadcast signals to deliver digital video files to a set-top box in a process known as datacasting. The set-top box can store up to 100 movies, which customers can view at their leisure for between $1.99 and $3.99 per film, plus a monthly equipment rental fee and a one-time activation fee.

Salil Mehta, executive vice president of Disney's corporate business development, said that after introducing MovieBeam successfully in three markets in October 2003, it has drawn favorable attention from consumers and potential new partners. As a result, Disney is in discussions with several technology and consumer electronics companies about partnerships for phase two of a national release.

"We're postponing the launch of the MovieBeam service (into new markets) for the moment until we finalize the specific device strategy for a more national launch in 2005," Mehta said in an interview. He declined to specify timing for the launch. "We're having conversations to embed or include the MovieBeam technology in (third-party) devices," which could include set-top boxes or technology industry PCs.

The delay throws off a road map for MovieBeam expansion laid out by Disney Chief Executive Michael Eisner in May, when he said the digital video service would enter three new markets by fall. Though MovieBeam is only one iron in the fire for Disney in an aggressive plan to develop new digital distribution platforms for its film library, the upstart MovieBeam has commanded great attention and investment from Disney. A postponement could signal speed bumps on the road or a new direction for the venture.

According to Disney's quarterly report filed Aug. 10 with the Securities and Exchange Commission, its costs were up 6 percent, or $135 million, to $2.3 billion in the second quarter ended June, based in part on MovieBeam expenses. As of June 30, Disney had invested $68 million in the venture, including license fees to Dotcast, provider of the underlying technology. Disney is also obligated to pay an additional $55 million through 2008 in license fees, "if the company continues to pursue this business over that time frame," according to the filing.

"We are evaluating the rollout plans based principally upon the success of the venture in the initial markets and expect to expand into additional markets later in fiscal year 2005 or early fiscal year 2006," Disney disclosed in its filing.

However, Disney is recommitting to current users of MovieBeam--residents of Spokane, Wash., Jacksonville, Fla., and Salt Lake City--by improving their software. It also will continue to accept new subscribers in those areas.

Upgrade in the works
In October, the company plans to upgrade MovieBeam systems through a remote software installation. Among the changes, it will simplify the MovieBeam user interface and add free content such as short films. In addition to the 100 free movie trailers offered on the set-top box, it will also give subscribers access to trailers of films currently in theaters, Mehta said.

MovieBeam is one of several experiments from Disney aimed at creating new distribution channels for its content. In the past year, the company has signed deals with online video-on-demand ventures CinemaNow and Movielink, allowing people to download and stream rental movies over the Internet. It also tried selling self-destructing DVDs that become unreadable a few days after they are exposed to the air.

Despite the delay, Disney seems to have a flexible attitude about the business model and how the technology architecture can evolve. To date, Disney and researchers have reported high customer satisfaction in the areas where MovieBeam is being tested, in a sign that further growth would be welcome.

The MovieBeam setup includes a receiver, or a front-end antenna, that receives video bits from the analog spectrum and pushes them onto a hard disk drive used for storing 100 films and additional content. A chip or processor then encodes the video for playback on the device, which allows people to rewind, fast-forward and pause films like a DVD.

Mehta said that much of that system overlaps with different devices on the market today, opening up opportunities for partnerships. "For a small, incremental cost we can add in the front-end antenna to a number of different devices so that they can act as a MovieBeam receiver," he said.

Exploring new content delivery channels
Analysts say MovieBeam is experimenting in an area that other major technology and consumer electronics companies are developing and testing products for, and Disney holds valuable cards in the game. It holds licenses for distributing films with nine Hollywood studios, including Metro-Goldwyn-Mayer Studios, Universal Studios and Warner Bros. That could be a key bargaining chip for any new partner.

Gerry Kaufhold, converging markets analyst for In-Stat MDR, a Scottsdale, Ariz.-based research firm, indicated that MovieBeam could go in many directions, given that any digital delivery system could push its content to TV sets. "In theory a MovieBeam-like service could be delivered over digital satellite, digital cable or broadband to the home," he said.

Rupert Murdoch's News Corp., which acquired DirecTV in December 2003, recently put in action half a million set-top boxes with hard drives in the United Kingdom through its subsidiary BSkyB. The boxes deliver movies using a push method like that of MovieBeam's. It could also be considering a similar service for the U.S. markets via DirectTV, which is already shipping set-top boxes with personal video recording features and that could fairly easily be changed to run MovieBeam.

MovieBeam could also have a promising market opportunity overseas with similar partners. Countries such as India, for example, where residents don't have access to cable, could benefit from the digital-data delivery of movies inexpensively. Still, licensing films for distribution abroad could be sticky for Disney.

Microsoft and Intel, too, are working on technologies that push content over a broadband connection to a personal computer. Later this year, Microsoft will introduce its media center extender, which lets people play back content from the PC on the TV. Disney already has a licensing contract with Microsoft for digital rights management technology to protect content.

"These guys are all hovering about the same space--they're thinking, 'How do we push content to a disk drive and get it onto your TV set?'" said Kaufhold, who expects Disney to announce a new partner later this year.

 

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