Movie Moguls Need to Face the Music

As the record labels learned too late, digital downloads are here to stay. Now it's the studios' turn to smarten up -- or be left behind

By Ronald Grover

To unveil the video iPod, Apple (AAPL ) CEO Steve Jobs rented out the stately California Theater in San Jose and sent invitations showing the opening of theaters curtains. The message was hardly subtle: The iPod is going Hollywood (see BW, 10/24/05, "Hollywood Holds Its Breath"). With Disney (DIS ) CEO Bob Iger on hand, the grand priest of all things digital announced that Apple's (AAPL ) iTunes Music Store, which has sold more than 200 million songs since it was launched in 2003, will begin offering TV shows such as ABC's Desperate Housewives.

Any movie mogul worth his private screening room knows that film downloads are next on Job's to-do list (see BW Online, 10/13/05, "The New Guns in Apple's Arsenal"). For months now, the Apple crew has been making the rounds trying to convince Hollywood execs to license their pictures. No luck yet, but the bearded visionary is nothing is not persistent.

So, wake up, Hollywood. What are you waiting for? Either let Jobs have your movies or -- and this is a novel idea for any entertainment mogul -- beat him to the punch with your own efficient, cost-effective way for consumers to get flicks off the Web.


 Make no mistake: Movie downloads are coming in a big way, be it this year or in three or four. And unless the movie industry finds a way to satisfy an increasingly tech-savvy consumer, it could be the music-download debacle all over again: an ineffective army in Armani allowing the tech industry to run away with a growing piece of its market (see BW Online, 10/13/05, "Apple's Baby Steps Toward Movies").

True, Hollywood does have an online-distribution operation. But fewer than 100,000 people a month log on for flicks from Movielink, which is owned by five studios, or from CinemaNow, whose owners include independent studio Lions Gate and Microsoft (MSFT ). The folks at Movielink and CinemaNow have tried valiantly to make their sites user-friendly. They've both put in hot new technology to cut movie downloading time from hours to minutes, and both charge roughly what it takes to rent a DVD from Blockbuster (BBI ).

The problem is, there just aren't enough flicks on the sites. And those that are there aren't too new, either. That's because of the Hollywood's increasingly outdated "windows" business model, in which studios first sell their flicks to theaters, then release them on DVD, and finally license them for TV. Movies are currently available for download somewhere between DVD and TV, so if you want to snag an online copy of, say, Warner Bros.' (TWX ) Batman Begins, you can't. It won't show up on MovieLink or CinemaNow until two months after its Oct. 18 release to Blockbuster and Wal-Mart (WMT ).


  Meanwhile, there are about 200 pirated copies of Batman Begins available on file-sharing service Morpheus. And while Morpheus has its flaws (two hours to download a movie, for instance), there are no restrictions. The industry-backed sites come with more roadblocks than an action-film chase scene: Movies can only be watched on your laptop or computer, unless you somehow figure out how to connect up to your TV.

Wanna own your favorite flick? Forget it. You get to keep it about a month, and it evaporates as soon as you watch it. And while the studios spend a fortune pitching their latest DVDs on TV and in theaters, they have so far spent zilch to tell the world about their movie sites.

Hollywood hasn't been all that interested in pushing downloadable movies for a variety of reasons. First of all, the DVD market is its most reliable cash cow -- $18 billion a year in the U.S. alone. And the legal download market is tiny.


  Plus, there are security concerns: The studios see online piracy as a huge threat to any downloadable business. So far studios haven't bought Jobs's security system, called FairPlay, but both studio-backed sites have signed on with Microsoft, which has its own security to safeguard downloaded DVDs. They've had few hackers, and when hacks have occurred, Microsoft has been quick to find "patches" to close the door.

"Digital delivery should be the same as physical delivery," says Microsoft Corporate Vice-President Blair Westlake, who heads the software giant's entertainment-convergence area. "It's better protected, and there are ways to make as much, or more, money."

The studios can't bet on the market staying small. As more folks get speedier broadband connections and computers with increased storage capacity, the market will grow. And as the moguls have started to realize, growth of the still-huge DVD market is starting to slow.


  More important, nearly two-thirds of males aged 13 to 24 -- the segment of the audience most coveted by the movie industry -- now surfs the Net and is less likely to hit theaters for their movies, according to entertainment consumer research firm Online Testing eXchange. And that's a big problem. "As painful as it may be, the movie industry has to reconsider whether its business model -- windows -- is still working well for them," says Shelley Zalis, OTX's co-founder and CEO.

Still, there are signs that change is coming. Movielink, which is owned by five large studios, is already experimenting with allowing folks to buy movies for $8.99. So far, they have offered only forgettable flicks like Killer Drag Queens on Dope (yes, a real film that spent a nanosecond in a theater somewhere) for sale. It may experiment as well with allowing folks to move films they buy from one device to another, like from an iPod to the TV.

And sources say that studios are contemplating whether to begin releasing some of their films "day-and-date," meaning they would be simultaneously available on DVD and for downloading. Movelink CEO Jim Ramo would not comment on any changes.


  Moving up the windows for downloads is crucial. "Without it, any service would be stillborn and marginal," says Warren Lieberfarb, the so-called father of the DVD and former Warner Bros. home-video chief who is now an industry consultant. Certainly, Steve Jobs knows that. And you can be that he'll be knocking on Hollywood's door again soon, maybe in weeks, after a million or so Desperate Housewives are downloaded for $1.99 off iTunes.

Why not go further? What about charging a higher fee -- maybe $5 to rent a downloaded film at the same time it hits the video stores or even for $25 when it hits the theaters? Would there be a lot of people willing to pay that price for the comfort of watching a new flick in their home? Probably not at first, but the market would grow. Better yet, you'll be giving consumers what they want.

Granted, changing the DVD business model could get messy. Wal-Mart (WMT ), the country's largest DVD retailer, will go bat-crazy. Theater owners have already lambasted Disney CEO Bob Iger for even mentioning that he might reconsider the windows approach.


  "Trying to get them to change windows is like walking into a lion's den," says CinemaNow CEO Curt Marvis of the reception Jobs will get if he wants to offer DVDs online when they hit retail stores. "It's a high-revenue business, and [studios] are going to think long and hard about changing it."

As moguls mull what to do, I hope there's someone saying, "Jobs is coming." That would mean at least one person had learned a lesson from the music industry's travails. It fiddled while million of iTunes users burned CDs. Now that Jobs has created a massive download market, the music guys are clamoring for a bigger piece of the download price. Not surprisingly, Jobs is refusing.

Hey movie moguls, you better act now, before you find yourselves singing the same iTune as the music business.

Grover is Los Angeles bureau chief for BusinessWeek

Edited by Patricia O'Connell

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