Electronic sell-through clashing with retail biz

Wal-Mart knew it was coming.

Before studios began allowing the first digital movie purchases this month on Movielink and CinemaNow, they made sure to give the DVD biz’s 800-pound gorilla — and all the major sell-through players — a heads-up.

Studios like Lionsgate, joined at the hip to sister division CinemaNow, had been talking with the Wal-Marts of the world about digital movie purchases, also called electronic sell-through, for two years.

The last thing any studio wanted to do was piss off the retailer or endanger the vital DVD biz, which accounts for more than half of studio revenue.

Yet at the same time, many were eager to dive into digital distribution to forestall piracy and maintain the higher margins associated with DVD purchases, as opposed to previous video-on-demand services that were essentially rental transactions.

Everything about the launch was carefully orchestrated, in stark contrast to Disney’s bold download deal with iTunes, which caused consternation among TV affiliates, the guilds and DVD retailers.

Ironically, Disney is the major holdout on download movie purchases, although made-fors like “High School Musical” are available on iTunes. The studio also waited before releasing its pics on DVD.

Movielink, a joint venture of Warner, Sony, Paramount, Universal and MGM, offers those studios’ movies as well as Fox offerings, while CinemaNow serves up Lionsgate and Sony product.

“We were very careful to share with all big physical retailers what our plans were so they weren’t blindsided,” says Sean Carey, Sony’s exec VP of digital distribution and product acquisitions. He acknowledges the digital download biz is very small at this point.

“You don’t want to lose sight of what’s driving your primary revenue stream,” adds homevid exec-turned-consultant Jeff Fink, who had stints at Miramax and Artisan homevid. “You have to straddle that line where you’re not impacting your primary revenue stream, especially when you’re talking about billions of dollars.”

At this point, studios aren’t even sure where the nascent digital biz fits in their corporate hierarchies, let alone how much it will overlap the DVD biz.

Some of this will become clearer when retailers begin to compete with the studio-backed Movielink and CinemaNow — Amazon is expected to be the next one in the pool.

“We still have to figure out how we operate in this new world together,” Lionsgate prexy Steve Beeks says. “We have to figure out how to protect our retail partners and continue to march forward.”

In the meantime, Warner, Par and Sony have reorganized their home entertainment divisions, with New Line mulling the same. Sony even alluded to the need to manage relationships with retailers such as Wal-Mart as one of the driving reasons for the reorg.

In yet another shift to non-DVD delivery, the studio recently unveiled a VOD service on Comcast designed to tap into its horror library.

Beeks described download activity as slow so far, while Carey reported small but fairly steady activity on new releases and catalog fare on both services.

At this point, movies being offered for download purchase are available without extras at comparable costs to discs packed with them. Movielink does offer minimal extras on its download rentals, which are offered in the slightly later VOD window.

The bigger issue is technological barriers that restrict downloaders to watching movies on PCs, not TVs. Vivid Video is about to begin offering adult movies that can be viewed on TVs, but studios say they need to work through piracy issues before that can happen.

Says Carey: “We all knew this was a baby step to hopefully a much bigger business down the road.”

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