H’wood seeking the missing link

Studios embrace yet fear day-and-date pic downloads

In a caged room at the sleek Santa Monica offices of Movielink are a set of servers that recently started housing digital, downloadable versions of most movies Hollywood will release in 2006.

It’s a secure environment befitting bank records or secret government files — an irony given that by the time films come to Movielink, illegal versions are widely available on P2P networks and street corners.

But it’s that irony that perhaps defines the conundrum Movielink represents: Are studios ready to try and pump life into their sluggish ancillary markets by capitalizing on the broadband medium that has enabled mass piracy?

On April 3, six studios agreed for the first time to allow Movielink to sell permanent downloads of movies day-and-date with the DVD release. Until last week, Movielink users were only able to rent movies in the pay-per-view window — 45 days after homevideo — and watch for 24 hours until the files self-destructed. (Sole competitor CinemaNow has a full rental selection, but only Sony and Lionsgate movies for sale.)

Studio efforts to make their films available for download have long been hampered by two concerns: that it’s an open invitation to pirates and a threat to existing ancillary markets.

But with the launch of video on Apple Computer’s iTunes musicstore, through which Disney alone has sold 4 million TV shows for $1.99 each, it’s clear there’s money to be made selling long-form content online.

“Everybody is all about finding new ways of getting their product to consumers without killing off the old ways,” says Jeff Blake, Columbia chairman of marketing and distribution.

“Every studio wants to put its product in places where consumers are willing to buy it. The only controversy is when, not where.”

Movielink has about 1,400 pics available for on-demand rental and is now building a library of films for sale, starting with pics like “Brokeback Mountain,” “The Dukes of Hazzard” and “Breakfast at Tiffany’s” for prices ranging from $9.99 to $27.99. Netco pays the same wholesale rate for download-to-own pics as DVD retailers. But since movies are its only business, it can’t sell at cost as big stores like Wal-Mart and Best Buy sometimes do.

In the long run, Movielink’s goal is to compete with DVDs by making them obsolete. Companies like Intel and Microsoft are pushing consumers to network their homes so that content downloaded from the Net can be viewed on a TV, with no need for physical media.

As industryites wait for that day, it remains to be seen whether the opportunity to buy digital copies of movies will have a big impact on Movielink’s business, or be a small blip on a slow growth curve. But in an age when most other areas of the film business are flattening or declining, Hollywood is clearly ready to open its gate a bit to Movielink.

“Whenever there’s a new opportunity, some people see the glass as half full and others half empty,” muses Movielink CEO Jim Ramo, who previously helped launch DirecTV.

“We finally reached the tipping point where the half-full analysis won out.”

The glass half-empty crowd includes DVD retailers — particularly Wal-Mart, which controls close to a third of the DVD sales market — along with the studio departments that service them.

Though DVD growth has slowed, it’s still the biggest single source of revenue for the studios, which typically get margins of $10 or more for each DVD sold. Industryites are understandably wary of a new technology that could, in the worst-case scenario, cannibalize their business without generating overall growth for the industry.

In an interesting twist, those same industryites own Movielink, which is a joint venture set up by MGM, Paramount, Sony Pictures, Universal and Warner Bros. in 2001 to sell movies online and, in the process, combat piracy.

According to a 2004 SEC filing by MGM, the five studios are committed to pour $150 million into Movielink through August, with more subsidies likely to follow.

In their role as owners, those studios want to see a return on their investment. But in their role as Movielink’s primary content providers, they have been extremely cautious, imposing security and business model constraints that have made it tough for the Netco to become more than a niche product.

“If you had had asked me when I started, I would have guessed we would have day-and-date download-to-own a year or two earlier,” admits Ramo.

But while the April 3 agreement is a big step forward for Movielink, consumers, particularly young ones who use the PC as their main source of entertainment, likely see it more as simple catch-up.

Virtually all computers play DVDs now, and high quality pirated versions are almost always available online before the homevideo window.

But Movielink’s just one of many digital ventures that promise significant new revenue streams, if only they can find a business model that pleases cautious studios and demanding consumers.

A private study late last year by Nielsen Entertainment of the current economics of on-demand delivery found that the revenues generated by current video-on-demand services, such as those offered by cablers Comcast and Time Warner, are tiny.

Exact numbers on individual films are nearly impossible to come by. But Nielsen developed a model from anecdotal data showing that a pic that grossed $200 million at the domestic box office — say, “Batman Returns” — could be expected to return to its studio less than $3 million from VOD rentals — slightly more than the $2 million pay-per-view can generate for the same film.

Movielink rents around 1 million movies per year, generating a few million dollars in revenue.

But small numbers also mean a big growth opportunity. While DVD, box office and television rights — the three biggest sources of movie income — are stagnant, studios think video-on-demand and digital downloads have significant upside.

Movielink, like many on-demand businesses, still faces numerous challenges that give it a disadvantage compared to DVDs. Factoring out taxes and shipping costs (or the inconvenience of going to a store), prices are a little higher.

Users can’t transfer files to portable devices as they can with downloadable songs and TV shows, though that feature will be added shortly.

Most significantly, downloaded movies can’t be watched on a DVD player. Movielink is waiting to get approval from the DVD Forum to let its users burn DVDs, a process that could take several months or several years.

That’s hugely important because despite years of hype, mass adoption of the “digital home” that would make broadband the logical way to access movies is still years away.

Some say it’s because consumers aren’t in a big rush to upend their lives with new technologies.

But others say the push consumers need is the Hollywood content to make such an investment worthwhile. After years of talk, studios may finally be ready to test that proposition.