September 22, 2004 4:00 AM PDT

Netflix, Warner Bros. in video-on-demand test

Warner Bros. has agreed to license some films to Netflix as part of a test run of the Internet company's upcoming movie-download service, according to sources familiar with the plan.

The agreement lends strength to speculation that Netflix and TiVo plan to jointly introduce a video-on-demand (VOD) service in the coming year.

The service would allow people to rent and download films via Netflix, whose Internet site now only delivers DVDs via the U.S. Postal Service. The downloaded film would then be accessible on TiVo's personal video recorders for viewing on a TV set.

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What's new:
Warner Bros. has agreed to license some films to Netflix as part of a test run of the Internet company's upcoming movie-download service.

Bottom line:
The pact lends strength to speculation that Netflix and TiVo plan to jointly introduce a video-on-demand service in the coming year.

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Sources said the agreement does not yet constitute a deal from Warner Bros. to participate in a commercial video-on-demand service from Netflix, which is still in the planning phases.

Netflix spokeswoman Catherine England said Netflix has no deal with Warner Bros. to participate in a VOD service. She didn't comment on whether Warner Bros. has agreed to allow Netflix to use some of its content for a test. "We work closely with all of the major studios and are in continuous discussions with all of them," she said.

Warner Bros. spokeswoman Barbara Bargliatti confirmed that the studio was having discussions with Netflix, but said "there's no deal at this time."

A TiVo representative said the DVR (digital video recorder) maker has not announced a video-on-demand service.

Netflix has said previously that it plans to launch an Internet download service next year. TiVo has announced features that would support such a service, although it has not specified a time frame. Representatives from TiVo and Netflix in the past have said they didn't expect an Internet service to be material to their revenue plans.

Hollywood's support is crucial for any video-on-demand product, because movie studios hold the keys to all-important film-distribution licenses. Warner Bros., for one, owns rights to the popular "Harry Potter" film franchise. The studio is currently a partner in Internet movie-download service Movielink along with four other studios, and it has licensed films to competing Web service CinemaNow.

Hollywood tough on security
Even if the studios are receptive to a Netflix deal, widespread cooperation won't be forthcoming until the DVD rental service can offer a viable content security system to protect the downloadable films in transit from being pirated--an area where TiVo has clashed with Hollywood in the past.

Aiming to tackle that problem, TiVo said recently that it will support a new version of anticopying software from Macrovision that would make recordings of pay-per-view or on-demand movies inaccessible after a set time period. Macrovision's technology also would disallow attempts to copy digital films to analog devices so that they could then be recopied into digital form for wide distribution, a workaround known as the "analog hole."

According to an industry source, Warner Bros. will test Macrovision's technology in its deal with Netflix.

In order to launch a commercial VOD service, Netflix would also likely license video delivery and digital rights management technology from the likes of Microsoft, RealNetworks or another provider of digital video technology.

TiVo has developed an internal security technology called TiVoGuard, which it plans to build into software and set-top boxes for release in 2005. Those devices would allow subscribers to record TV programming and then send it to up to nine other TiVo boxes they own, which could be in remote locations.

Earlier this year, the Motion Picture Association of America lobbied federal regulators against approving the use of TiVo's content protection technology with digital television. The Federal Communications Commission ultimately gave TiVo a thumbs-up for its sharing system. But movie studios remain skeptical.

The problem, according to Hollywood, is that TiVo's system permits file sharing without ensuring enough control over who is allowed access to copyrighted works.

Building new services is crucial for both TiVo and Netflix as they confront growing competition from deep-pocket rivals. Netflix's business is being threatened by larger rivals, including Blockbuster and Wal-Mart Stores, while TiVo, which provides both DVR hardware and service, faces similar challenges from cable companies and a potential loosening of its partnership with DirecTV.

 

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