Video-on-Demand, Hollywood Style

In a bid to thwart Napster-style upstarts, five of Tinseltown's top players have struck a deal to standardize distribution over the Web

It's not often that Hollywood studios come out of a room with an agreement to work together. But on Aug. 16, five of the seven largest studios announced an unusual joint plan to offer digitized movies over the Internet. MGM, Paramount Pictures, Sony Pictures, Universal Studios, and Warner Bros. will create a service -- called Moviefly, for now -- where consumers can download films instead of renting them at the video store. Time to break out the microwave popcorn? Not so fast.

The studios claim their digitized movies will be available 45 days after they hit video stores, about the same time that you can get them as pay-per-view offerings from your local cable- or satellite-TV provider. The price is expected to be in the $3.99-a-movie range, about what it now costs to order them from cable and satellite companies.

So why all the noise about this service, if all they're doing is rolling out movies at about the same time as your cable outlet -- and a full two months after the neighborhood video store begins renting the same flicks? And why all the fuss about a service that won't start until yearend, at the earliest?

The answer, according to studio executives who worked on the deal, is that the movie industry wants to be the one that sets technical quality standards for movie downloads. It also wants to dictate the security measures needed to stop the films being ripped off by pirates.


  Hollywood truly believes that in the not-so-distant future, the TV and computer will have their long-anticipated convergence. When that happens, folks will have a nearly endless supply of movies that they can order over the Net and watch on TV. Plenty of people will be eager to offer you that opportunity, but they'll have to do it by Hollywood's rules. That means using the studios' encryption technology, as well as giving consumers a taste of what a superfast, secure download means. No half-movies, unlike the music fragments resulting from clogged data pipes that all too often were offered up by Napster, the audio file-sharing upstart that infuriated -- and embarrassed -- the music industry by setting up shop before the incumbent record companies knew what hit them.

Even more important, however, is that Hollywood doesn't intend to launch this service in any way that will jeopardize its longstanding -- and very profitable -- relationship with video-store chains and cable operators.

Why rock that boat? Last year, consumers paid $17.8 billion to buy or rent movies on videocassette, according to a recent report by industry bankers Veronis Suhler. Meanwhile, they spent $665 million accessing movies from cable and satellite operators, while $7.3 billion went to HBO and other premium cable channels featuring Hollywood product -- the latter also happens to be just about the amount consumers ponied up at their local multiplexes in 2000. No studio wants to bite the well-manicured hands of the video chains and the cable operators.

Still, Hollywood does love digitizing its films, the process that's fast giving the studios' libraries of older movies a new lease on life. DVD is all the rage, expected to account for $7.2 billion in revenue this year, closing in on video sales. Hollywood is already fighting a battle with video-rental chains, which want a bigger slice of the DVD sales and rentals than the studios want them to have. To keep from actually competing with DVDs, Moviefly will allow you to hang onto your downloaded movie for only a day or so and will encrypt it so that you can't burn your own DVD.


  While the studios profess downright giddiness about the prospects of putting literally thousands of movies online, some bugs need to be worked out. For starters, at the outset the movies will likely be available only on computer screens, since few homes have superfast connections to their TVs and the hard-disk space needed to store (albeit temporarily) the movies. That will come in time. And speaking of time, initially at least, it will take the better part of an hour to download your favorite Jackie Chan flick.

The studios' deal is "nonexclusive," meaning they'll license their product to anyone wanting to offer a similar movie-download service -- as long as they stick to the industry's rules. No doubt, that approach is partly to keep antitrust regulators from taking too keen an interest in the new venture. (Industry insiders say the studios asked for, and got, clearance from at least one federal agency before their announcement, and the group plans to allow each studio to control distribution and pricing of their own movies.)

That means the likes of Blockbuster, which tried and failed to develop a similar idea earlier this year with Enron, could offer its own download service. Viacom, which owns Paramount, has a clear interest in seeing more of its films released in whatever way possible. The same holds true for AOL Time Warner, which would be thrilled to have Warner Bros. movies distributed over the Internet by its Time Warner cable service -- or, for that matter, by AOL.


  Actually, this may turn out to be one of the least exclusive deals Hollywood has ever signed, as just about every major company has an outlet it may want to use to distribute its own movies over the Internet. Sony is working with set-top boxes for TVs to send movies and other programming to coach potatoes. MGM has been buying up movie channels throughout the world. And Universal's parent company, Vivendi Universal, is hot to roll out its wireless Internet service for music, films, and TV shows.

Still, two major studios didn't sign on -- Disney and Fox. They're expected to announce a similar video-on-demand collaboration in the next few days. The service may use the Disney-owned ticketing and film-news Web site as its main delivery vehicle.

The bottom line: Hollywood clearly wants a role in whatever new video-on-demand technology takes hold, and it wants to set the standards for the service. The moguls also still want the world to come to Tinseltown for movies, no matter in what format. So if you're in the market for an older film that has already been through the video store, Moviefly may be a good place to browse. But if you want the latest Julia Roberts flick, you'll probably stick with the local video store.

By Ron Grover in Los Angeles

Edited by Patricia O'Connell

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