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Movielink On the Block

It's become the hottest thing to do in Hollywood, right after getting a choice table at the upscale Chinese eatery Mr. Chow. Make a deal to download your movie or TV show. Onto iPods, the Internet -- it doesn't seem to matter. Just in the last week, in fact, Disney (DIS) said it would provide its movies to download site CinemaNow, while NBC (GE) said it would add some of its news programs to iTunes.

Despite Hollywood's deepening love affair with everything digital, one of the biggest deals on the back-burner involves five of the industry's largest studios getting out of the download business.

For months, in fact, the studio-owned download site Movielink has been on the block, several sources tell BusinessWeek Online. Movielink -- jointly owned by Paramount, Sony (SNE), Universal, Warner Bros. (TWX) and MGM -- is a lightly used download site that has been offering movies since late 2002.

CLOSE, BUT NO CIGAR.But last year, Movielink came within a single vote of selling a majority stake to video retail chain Blockbuster (BBI) for around $70 million, these sources say. Cable giant Comcast (CMCSA) took a pass after what one knowledgeable insider said were preliminary talks late last year. And for months AT&T (T) has been circling Movielink, with no deal "currently on the table," another source says. Movielink and the companies mentioned above have declined to comment.

Studio executives with knowledge of Movielink say the studios always intended to sell the site once it was up and running. The notion was that Hollywood needed an honest broker third party, free from the competing strategies that have sometimes paralyzed Movielink, to push the site with the kind of aggressive marketing that would be needed to make it catch hold.

The model, say some sources, was the move by music companies to sell off music download sites they owned and instead ally with Apple (AAPL) Chief Executive Steve Jobs, whose iTunes service licensed music from the labels. The result has been an explosion in digital music sales.

Of course, wanting to sell and doing so are two different things. Last year, Movielink brought in Salem Partners LLC, a Santa Monica-based investment banking firm to find buyers. It was Salem Partners that brought Blockbuster to the table, according to a source close to Movielink, although the deal was vetoed by one of the five Movielink studio board members. Salem Partners would not comment.

BURNED ON COPYING.Another potential buyer early on was former Warner Bros. (TWX) home video chief Warren Lieberfarb, who put together a group of investors but couldn't get the studio's approval. The key roadblock: The studios' refusal to change the terms of existing agreements to offer films for download, including an insistence that the films not be "burned" onto discs that could be played in DVD players.

Studios have long since resisted allowing burning, for fear that large DVD retailers like Wal-Mart Stores (WM

T) and Blockbuster would rebel, threatening the huge sums studios now get from them. And for those movies that the studios would allow Movielink to sell, Hollywood would only offer a short-term, one-year deal to Movielink's buyer. That frustrated buyers who worried that the studios would change their mind down the road.

The Blockbuster deal was thought to be an ideal exit strategy for Movielink's partners. The video chain at the time was eager to strike a deal to show frustrated shareholders that it had a digital strategy as its mainstream video rental business was under attack from large retail outlets like Wal-Mart. And because Blockbuster was a longtime Hollywood partner, the video chain shared Hollywood's anxiety about jeopardizing video sales by offering Net downloads for rental too close to when the movies were offered as DVDs.

REWRITING THE RULES.Losing the Blockbuster deal sent reverberations through the Movielink boardroom, say those with knowledge of how the site works. To insure that Movielink could push ahead with new services -- and a potential sale -- the board agreed to scrap the rule requiring unanimous agreement for all decisions. That has since enabled the site to press on with a deal in January to provide its movies to Akimbo and Thomson, which are partnering to offer a new service to deliver movies via the Net to TV sets. In April, Movielink also began selling -- rather than renting -- movie downloads that could be stored on PCs and viewed via home networks. In addition, for the first time the studios allowed the downloaded movies to be purchased at the same time that titles were available on DVD.

Movielink CEO James Ramo also took over from Salem Partners, and began to beat the bushes for potential buyers. Comcast, which offers movie trailers, hockey games, and other video clips on its service, was an early potential buyer. But the cable giant bolted when it was told that the studios still wouldn't give the cable operator greater access to the films. And AT&T, which recently agreed with Akimbo to offer Internet-delivered TV shows and movies to subscribers of its Homezone high-speed service, has as yet been unable to win a change in those terms either, say those with knowledge of the discussions. Those talks have been dragging on for weeks, the sources say, with no certainty that agreement will ever be reached.

FLOUNDERING.Things aren't yet desperate for Movielink, but the picture isn't terribly bright either. The service has blasted through much of the $150 million that its founding studios invested back in 2001 to launch the service. It has enough money for one more year, say sources with knowledge of the site. And Movielink still hasn't gotten much traction with users at home. It currently gets only a little more than 75,000 downloads a month and, according to a recent report by the industry newspaper Video Business News, its market share has declined in the last year as competitors like iTunes and Google (GOOG) Video have gained ground.

Clearly, Movielink needs a partner that can give it a little marketing muscle. Otherwise, the studios so eager of late to get on the digital highway may find that the biggest pothole is one that they helped to dig themselves.

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