Digital movies -- anytime, anywhere -- are finally ready to challenge DVD

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It’s barely two years since Blu-ray claimed victory over HD-DVD in the battle over next-generation disc formats, but Hollywood and its partners are already digging trenches for the next skirmish.

A new generation of movie consumers — reared on the Internet, iPods, iPhones and PlayStations — is far less interested in building physical libraries of movies than digital ones they can access anywhere, anytime. And as traditional disc sales continue to decline, the major studios are working overtime to turn that shift in buying behavior into a lucrative new revenue stream.

As a result, Hollywood is brokering as many deals as possible with companies that can digitally sell or rent its releases, and in the last month alone studios have been winding down ugly distribution disputes with services like Netflix, a shift that will result in more movies being streamed online nearly a month after they bow on DVD and Blu-ray.

The major studios have already embraced other online movie services like Apple’s iTunes, Amazon’s Video on Demand, CinemaNow, Sony’s PlayStation Network, Vudu, Hulu and YouTube, whose online rental or download-to-own services have caught on with consumers.

Just last week, PlayStation said it will now offer HD movies from the six major studios to buy for around $20 and rent for $5. It offers standard-definition movie rentals starting at $3 and purchases for $10.

The use of such services is also expected to increase now that retail giants are backing various ventures. Walmart, already the world’s biggest seller of DVDs, plans to buy Vudu (Walmart’s first attempt to launch an online video service in 2007 was a flop, shutting down after less than a year), and Best Buy is already paired with CinemaNow. Blockbuster also is expected to expand into digital rentals, while Redbox will soon add streaming to its kiosk biz.

The digital streaming push should get a significant boost now that movie services are also embedded within major videogame consoles like Nintendo’s Wii, Microsoft’s Xbox 360, Sony’s PlayStation 3, Blu-ray players, TiVos and other set-top boxes, as well as new HD TV sets. IPhones and iPads could be next.

The companies all have the same goal, says a Netflix spokesman: “being ubiquitous on whatever device you want to watch movies and TV episodes on.”

Netflix’s Watch Instantly service, for instance, is offered on 100 different devices. During the company’s fourth quarter, 48% of its 12 million subscribers streamed a movie, double the number that did so during the same year-ago period.

And that’s only expected to grow as Netflix and its competitors find homes on new TV sets in the form of onscreen widgets or apps (like those found on an iPhone) that can instantly order up a movie and have it start playing within seconds using a remote control.

Homevid executives say increased ease of use will help attract more users to the act of digitally renting or buying movies, but so will innovative marketing, brand awareness and the availability of more content.

“The studios have always sought to maximize the value of our product by distributing it as broadly as possible,” says John Calkins, exec VP of global digital and commercial innovation at Sony Pictures Home Entertainment, which has made 1,200 of its films available for digital download. The studio has roughly 3,500 films on DVD.

“As an industry, Hollywood has generally benefited from new technologies and the introduction of new platforms, and we firmly believe engaging early with new opportunities is preferable to waiting,” Calkins adds.

Of course, that’s true only as long as the films being distributed on the service are protected from piracy and illegal downloads, significant hurdles that kept studios from initially embracing the videocassette and Napster, for example.

While the amount of money being collected from digital still doesn’t come close to what DVDs and Blu-rays earn for studios — $18 billion last year from DVD and Blu-ray sales and rentals vs. $711 million from Web-based video transactions, according to Futuresource, it could reach $2.7 billion by 2013. When you add video-on-demand revenue collected from cable and satellite, digital distribution of movies earned $2.1 billion last year, according to the Digital Entertainment Group.

“Everyone thinks this is supposed to happen overnight,” says one studio exec. “But that’s not the way it works. There is always build-up. We have a title right now, and over 5% of its purchases are digital downloads. Is that a big number? No, but everything is relative.”

Indeed, the evolution of technological advances that reshape film delivery is ever-more compressed. While the experience of watching a movie at the multiplex hasn’t changed much in years, apart from the reinvention and resurgence of 3D, the shifts in homevideo have been dramatic. The industry took off 30 years ago, and VHS dominated for two decades. DVD took over in the ’90s and lasted 10 years. And Blu-ray looks as if it’s going to have an even shorter shelf life.

The digital landscape is too volatile for even execs in the biz to comfortably predict ultimate winners and losers.

How big a digital player Walmart will become is still to be determined. And it’s still too early to tell whether or not Apple’s iPad will take off and significantly expand the consumption of digital entertainment.

“It’s a good, growing business, and people need to be pragmatic on their expectations,” says Steve Nickerson, prexy of home entertainment at Summit Entertainment, adding that digital won’t do away with packaged media anytime soon. “This will be a shared world.”

Even Netflix, whose streaming biz grew 127% in 2009, still expects its traditional DVD rental shipments to remain popular, increasing 18% this year as subscriptions grow.

Still the profit potential of digital could soon surpass disc sales, as standardization of processes and formats cuts costs.

With digital, studios instantly eliminate production costs required to stamp out each disc and its packaging. And whereas multiple formats had to be created in the past, a single digital file can be distributed to multiple platforms.

Because of that flexibility, studios aren’t lining up behind any one particular service. They’re looking, instead, to stay away from exclusive deals and to collect as much coin as they can per film from as many services as possible — the same as they do with DVDs at traditional retail stores.

“Our catalog on digital has grown dramatically in the past two years with over 500 films available on several digital platforms,” says Jamie McCabe, senior VP of worldwide pay per view and video-on-demand at 20th Century Fox. “This is triple where we were two years ago.”

To be sure, there are still hurdles and unknowns along the path to a digital future for homevideo:

n Just how much the form will grow depends on how many people, currently reeling amid the recession, can afford to pay for monthly subscriptions or buy new hardware that boasts digital video services.

n An industrywide price for digital movie rentals and downloads is still being pursued, something that’s proved an issue when it comes to digital music sales on services like iTunes. Execs doubt that uniform pricing can be agreed upon, though, as that’s one aspect that will help digital rental and sales services distinguish themselves from one another and build their brands.

Netflix charges a subscription fee for its users to rent movies through the mail or stream movies using various devices. On the other hand, other services like Vudu currently sell movies for download at $20 per title the same day they become available in brick-and-mortar stores. That’s often more than a physical DVD costs. And if you want to rent them, you pay $4 each day; Redbox charges $1 for a day.

n There’s the issue of just how cluttered all of those screens filled with movie listings will become. As more studios offer their films digitally, it’s only a matter of time before they have to increase each film’s marketing budget to help distinguish those films from the pack.

n Just how and where consumers will store their digital movies is also still being worked out. Hard drives will fill up quickly with HD films, so a consortium of studios, retailers and electronics manufacturers that are members of the Digital Entertainment Content Ecosystem have agreed on a “Buy Once, Play Anywhere” strategy that will utilize “cloud computing” to store movies in a digital locker and let them be accessed using any device. Disney has its own similar system in development, called Keychest.

n And services still have to figure out how to get more studio films they can stream.

Because Netflix operates as a subscription model — if you subscribe to the DVD rental service, you can instantly stream films — it must abide by pay-TV rights deals. HBO, Showtime and others have already locked up many films for subscription viewing for the next several years.

“(Early on) most people said that we wouldn’t be able to get any content because these (pay TV) content deals are locked in forever,” says Ted Sarandos, Netflix’s chief content officer. “But we can work with these deals. We are growing by hundreds of titles a week.”

Netflix currently offers 100,000 DVDs, but just 20,000 of them are available for streaming, though more are being added as Netflix’s digital popularity increases. The service has a deal with Starz to offer all of that channel’s content that is being shown through cable-satellite systems.

And in January, Warner Bros. granted Netflix streaming access to the studio’s more recent films. Sarandos says Netflix is in discussions with every studio to expand its digital terms and land pacts similar to the one it brokered with Warner Bros.

“You could characterize digital delivery as approaching mainstream,” Sarandos says. “There are enough people with broadband, you have the devices and there are people who are Net-savvy.

“People have one or more of these parts. If we can get all three, then this can be a powerful thing.”

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