November 4, 2002 4:00 AM PST

Net movies: Ready for prime time?

The major Hollywood movie studios are finally getting serious about delivering movies over the Internet, but their performances still could end up on the cutting-room floor.
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Movielink--a joint venture among MGM, Paramount Pictures, Sony Pictures Entertainment, Universal and Warner Bros.--last week announced technology partnerships with Microsoft and RealNetworks to help power its movie-rental service on the Net, set to launch by December. The deals represent crucial final edits to a venture long overdue, and they lend credence to promises that the movie studios will open film vaults to widespread Internet distribution.

By offering a legal service, Movielink could also thwart online piracy of movies and help Hollywood evade "Napsterization"--that is, tumult like that which file-swapping site Napster let loose in the music business.

But despite Movielink's access to premium Hollywood content, industry executives and analysts say the imminent service will face the same challenges that darkened similar sites: limited demand, technology limitations and legal questions.

It's the promise and the peril that have alternately attracted and repelled the movie industry. The Web offers a new channel of distribution for filmmakers that cuts out middlemen like movie theaters and cable companies. But it also is a free-for-all marketplace that can just as easily cut the studios out of the equation, spawning file-trading communities like Napster or illegal distribution on rogue overseas Web sites.

"The motion picture industry is being proactive before we get to the point where video files are traded as readily as audio files," said Michael Gartenberg, research director at Jupiter Research. "Even though there might not be huge demand, they're trying to filter that future demand into something legal. It's a wise investment."

Still, Hollywood has taken a cautious approach to the Web. Some major studios have built online services only to pull the plug after learning that the hurdles were too great. Earlier this year, 20th Century Fox left a video-on-demand venture, Movies.com, in partnership with Walt Disney, citing potential regulatory issues with Net distribution.

Legal experts have warned that antitrust scrutiny could scuttle a studio-backed Web venture. The Justice Department has intervened numerous times to prevent movie studios from controlling distribution in other areas such as cable. Although studio cooperation may be desirable, it could require a careful balancing act to avoid running up against antitrust concerns that have hounded the industry for decades.

Movielink's CEO, Jim Ramos, said that the playing field is level for potential competitors: The film licenses are nonexclusive, and each movie studio's relationship with Movielink is publicly undisclosed.

On the technical front, Movielink's announcement last week addressed key questions about security. The company will use digital rights management technology from both RealNetworks and Microsoft, hedging its bets in case one solution fails, said Ramos. By choosing to support both companies' media players, the service is also hoping to appeal to a wider audience on the Net that may prefer one player over another.

Who'll do the viewing?
Even if the legal and technical barriers are overcome, however, the market for online pay-per-view movies may be tiny.

Robert Moskovits, owner of film site MovieFlix.com, said that while the launch of Movielink indicates rising momentum for such services, the venture will likely lose money, at least initially. MovieFlix itself serves only 6,500 monthly subscribers, an audience size that Moskovits says keeps the bandwidth costs down.


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"They can publicize themselves all they want, but if there isn't the market out there or people who know how to watch videos online, this isn't going to be a real revenue stream," he said.

Moskovitz pointed to Intertainer as the perfect example of too much, too soon.

In October, Intertainer, with nearly 150,000 broadband subscribers, closed its service, citing litigation with the movie studios. A month earlier, it had filed a federal antitrust suit against AOL Time Warner, Sony, Universal and Movielink, charging the studios with engaging in a conspiracy to inhibit its business by withholding licensing deals. Intertainer does not plan to reopen until the litigation is resolved.

Intertainer did not attribute its closure to a lack of funds. But Moskovits speculates that it's the end of the story for the company, which he said spent a large chunk of its $120 million in investments to secure licensing deals with the movie studios but failed to draw enough subscribers to make money on the material.

Josh Bernoff, an analyst with Forrester Research, argues that there is a market for video on demand, but not over the Internet.

"It's on cable boxes," Bernoff said. "The desire to deliver movies down to the computer is targeting a niche market, and it's the just the wrong place to watch TV."

By introducing an Internet service of their own, he said, the major movie studios are aiming to circumvent third-party distributors such as cable companies and go directly to consumers to get a larger cut of the profits. But because the cable companies have a lock on consumers, the studios have also signed at least one video-on-demand deal with a cable company to hedge their bets, Bernoff said. For example, Fox reached an agreement with In Demand, a top provider of cable pay-per-view entertainment, to license current releases for video-on-demand distribution.

Others contend that on-demand entertainment on the Internet has a bright future--once consumers can download films and beam them to a television set through home-networking gear.

Movielink's Ramos said that the company is helping to prime that pump.

"One of Movielink's roles is to be an application that helps grow broadband in general, and the 'entertainment on broadband' category in particular, to get more users," he said in an e-mail.

"There is a minimum critical mass of homes to launch, but there has to be the development of consumer behavior to view paid-for (downloadable) movies over (Internet Protocol) and that takes infrastructure and marketing investment, (as well as) a large penetration of the existing broadband market."

It could also help to keep people's expectations low.

According to Scott Sander, CEO of digital distribution company Sightsound, the major movie studios have generally placed Internet video distributors in the same marketing window as cable television pay-per-view offerings. As a result, he said, such services face powerful and entrenched competition that will keep Internet video on demand a niche offering for the foreseeable future.

"MovieLink is going to be a yawn," said Sander. "Internet-based video distribution can't compete with cable in the pay-per-view window."

 

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