With DVD growth flatlining, Hollywood is finally making the jump into digital distribution.
Paramount, Universal, Sony, MGM, Warner Bros. and Fox this week start selling permanent copies of their movies online day-and-date with homevideo release via Movielink, the Internet video-on-demand company that the first five jointly own.
Lionsgate and Sony also will sell movies via Movielink’s main competitor, CinemaNow, in which the former has a minority stake.
“I really do view this as a transformative step for our business,” said Thomas Lesinski, head of digital media for Paramount. “People will look back and see this was as significant as the launch of the DVD.”
Only major absent from the launch of digital downloads is Disney, although the studio is examining the business. Absence of the Mouse House from the rollout is a surprise, since CEO Bob Iger has been a public advocate of digital distribution and his company was the first to sell TV episodes online.
While movies have been available for online rental since Movielink launched three years ago, this is the first time permanent digital copies of studio pics will be sold online (legally, at least).
This market likely will become crowded quickly. Studio sources say Apple, Amazon.com and major retailers like Best Buy and Wal-Mart are negotiating to start selling Hollywood films online in the near future. Several similar services launch in Europe over the next few weeks.
Studios will sell digital movies at the same wholesale price as a DVD. E-tailers then can set whatever retail price they want, even taking a loss on popular pics to get customers in the virtual door, as real-world vidtailers sometimes do.
If the concept takes off, online movie sales could prove a substantial new revenue opportunity for studios. Margins promise to be significantly greater than for homevid, as there are no manufacturing costs and no returns to handle. One exec said the studio profit on a digital sale could be $5-$8 better than on a DVD.
While technology has improved, studios could have launched digital downloads years ago if they wanted. But with online sales of TV episodes proving successful, albeit on a small scale, via Apple’s iTunes, execs said they felt more comfortable taking a similar step with movies.
The primary reason online sales are starting now comes down to one word: growth. For the past decade, studios have relied on the booming DVD biz to fuel increases in their businesses. Now that most homes have a DVD player, that growth curve has become a plateau.
Studios had hoped high-definition DVDs would jumpstart the biz, but two competing formats are encountering delays and questions about consumer interest.
But there’s no question that viewers, especially younger ones, like to get movies online. The only issue is whether they are willing to pay for them.
“The piracy numbers have continued to climb in the U.S. and abroad,” said Warner Bros. home entertainment group prexy Kevin Tsujihara. “We have to create legitimate alternatives for consumers that want to download these movies.”
Studios’ decision to launch digital downloads indicates a willingness to risk affecting not only DVD sales but their relationships with vidtailers.
“The desire for growth has finally become significant enough to overcome concerns about cannibalization,” Movielink CEO Jim Ramo said.
But execs said they hope DVD retailers will see online sales as a way to grow their own businesses, rather than as a threat.
“We have briefed retailers and also encouraged them to get into this space,” said Universal Pictures prexy-chief operating officer Rick Finkelstein. “We’d like it if all the retailers would have a digital offering.”
Internet downloads will be viewable only on PCs or TVs connected to a home network, although transfers to portable devices will be available soon. Only devices that utilize Microsoft’s Windows Media technology are compatible, however. Video iPod owners will have to wait until Apple starts selling movies on iTunes.
But in a technical snafu insiders admit is likely to be the one major impediment to consumer adoption of digital downloads, buyers won’t be able to burn files onto a disc that works on a DVD player.
For now, the antipiracy technology utilized doesn’t work with DVD players. Insiders hope that will change, but it could take several years.
“DVD burning is the holy grail of this business,” observed CinemaNow CEO Curt Marvis. “Everybody knows we need to get there. It’s only a question of when.”
But with younger fans more likely to watch movies on PCs and an increasing number of homes setting up networks that allow them to play content from the Internet on a TV, industryites are hopeful the market is ripe for consumers to start building digital libraries.
“As time goes on, having digital files on a media server is going to be the most flexible way to watch a movie where and when you want,” predicted Ramo. “And when you travel, you can put 50 movies on a laptop so you always have a choice.”
Movielink and CinemaNow have been operating in the relatively small Internet video-on-demand space for the past few years, in large part waiting for the availability of digital downloads. Former company has been renting around 100,000 movies per month for a few dollars each on a revenue-sharing basis with studios.
Both Netcos last year started selling permanent copies of a handful of indie pics.
Studios will make most of their new DVD releases available for digital download and slowly roll out their libraries. Among the titles available at launch will be “King Kong,” “Breakfast at Tiffany’s,” “Easy Rider” and “Walk the Line.” First movie released day and date with DVD will be “Brokeback Mountain” on Movielink Tuesday, followed by “Fun with Dick and Jane” on both services next week.
Consumer prices are expected to be similar to DVDs, ranging from $10 to $20-plus. Movielink will start an aggressive marketing campaign at launch, while CinemaNow is planning one for later this year, most likely when it has more studios aboard.