Online movies remain a tough sell

Hollywood is once again abuzz with thoughts of a transformed business as Wal-Mart, the world’s biggest retailer, has entered the movie download biz, while Amazon.com is partnering with TiVo in a bid to expand its presence.

But the history of such experiments is worth keeping in mind.

In 1998, Intertainer launched what its founders called “the world’s first interactive broadband service for on-demand delivery of high-quality, full-motion, video-based entertainment programming.” Four years later, it shut down operations and remains alive now only for the sake of patent litigation.

In 1999, TriMark launched CinemaNow with the goal of streaming arthouse and indie films. Site is still around, owned in part by Lionsgate and a host of investors. But while it offers a wide array of studio pics, its business is supported mainly by softcore adult films.

In 2002, MGM, Paramount, Sony, Universal and Warner Bros. joined together to launch Movielink, with its CEO pledging, “The market is now ready for the launch of a new Internet movie rental service.” By 2005, the studios were seeking to sell the Netco, an effort that has proved unsuccessful and left it alive but struggling to find a suitor or a way to survive independently.

In a nutshell, as one mogul recently put it, “Nobody is making any money at all on this yet.” Of course, movie downloading isn’t the only business that got ahead of itself during the first dot-com boom. And studios have plenty of reason to be optimistic this time around. The Internet is finally transforming the way all people, but especially teens and twentysomethings, find and consume media, as evidenced by the meteoric growth of companies like Google, MySpace and YouTube.

And Apple’s iTunes is now the main growth driver of the music biz along with a host of smaller competitors.

But despite nearly eight years of trying, the online movie biz still hasn’t overcome many of the problems that have long plagued and that iTunes overcame in music.

Online prices, for instance, are still on par and in some cases higher than those for DVDs, even though studios and e-tailers save the cost of manufacturing and shipping. A key differentiator for iTunes was its price points, 99¢ for singles and $9.99 for albums — representing a significant discount vs. CDs.

There’s also availability. ITunes and most of its competitors got all the major labels at launch and rapidly built up their libraries. Today, most boast more than 3 million songs.

But in the film world, Wal-Mart is the only retailer to offer pics from every major studio for sale, though it is missing many indies. And its library is a relatively paltry 3,000 movies and TV shows.

In addition, there still isn’t a reliable way for consumers to get downloaded movies onto the TV. Long-awaited technology to let users burn a download onto a DVD is just now being approved, with hopes that it will roll out by the end of this year. But even then, the discs will hold only half as much data as a regular DVD, making it harder to pack on the kind of extras to which people have become accustomed.

When it launched, on the other hand, the downloadable music biz gave users the ability to burn CDs.

Of course, the holy grail has always been to turn movies into a purely digital experience at home, just as many people hook speakers up to a computer and transfer songs to an iPod without ever touching a CD. But reliable technology to get downloaded movies onto the TV is still far in the future for all but the most tech-savvy.

Apple this month is launching its Apple TV device, which will stream iTunes content onto the TV, but it will cost $300 and work only with the small number of Disney and Paramount movies currently in its digital store.

Amazon.com’s new partnership with TiVo will be usable only for the fewer than 1.5 million people who have a stand-alone TiVo Series 2 or 3 DVR. Microsoft’s Xbox Live service, which goes directly through a vidgame console to the TV and is doing quite well on its own terms, also has just two studios on board and works only for the fewer than 4.5 million Americans with an Xbox 360 that’s online.

Most execs at digital moviestores recognize these challenges and aren’t making 1999-style claims that they’ll upend traditional Hollywood in the near future.

“This is about adding value to our existing experience in stores as a package,” Wal-Mart.com digital media topper Kevin Swint said of his company’s launch. “If it’s a more positive experience for consumers, that’s a win for now.”

But many studios can’t help but hype the potential of the digital future. Of course, with the DVD market stalling and high-def discs not yet showing much momentum, they need to point out that they’re investing in a market that will, inevitably, be a major distribution mechanism one day.

But amid the dealmaking, it’s easy to forget just how minuscule the business is today.

Exact figures on how much money e-tailers have been making since launching digital rentals five years ago aren’t available, though it’s believed to be in the low six figures per month.

But there’s more data on electronic sell-through, where buyers get a permanent download, since it launched early last year.

When Apple CEO Steve Jobs said in January that iTunes had sold more than 1.3 million Disney movies since October, one industry exec observed that figure is more than all other online moviestores, such as Movielink, CinemaNow and Amazon.com, have sold combined.

In other words, the total number of movies sold online is less than “Pirates of the Caribbean: Dead Man’s Chest” sold on its first day of DVD availability.

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