Where's the iTunes for movies?

Hollywood's love affair with the DVD has helped slow the growth of video-on-demand services. But changes are in the works.

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Jonathan Marlow has spent much of the last two years trying to persuade filmmakers to put their most valuable products on the Net. On some days, the task feels a little like pulling teeth.

Marlow, a cinematographer and Amazon.com alumnus, is director of content acquisition at Greencine, a small San Francisco-based Netflix rival that is increasingly offering online access to films alongside its rent-by-mail business.

Unlike most video-on-demand providers, he's all but ignored Hollywood. Greencine launched the on-demand service in September 2003 with a small independent documentary called "Mau Mau Sex Sex," about a pair of exploitation filmmakers from the 1950s, and he's continued to focus on indie productions since.

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What's new:
Video-on-demand services have been hampered by lack of content and Hollywood's fear of undermining DVD sales. But new technology could change their business models.

Bottom line:
Consumers still have to be shown that movies online can rival the experience of a DVD. Until customer demand develops, Hollywood will put its emphasis on selling, rather than renting, movies over the Net, a strategy that offers pricing advantages over VOD.

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For now, Marlow says it just isn't worth working closely with the big studios. Hollywood is too in love with its own soaring DVD revenues to risk supporting an attractive Internet alternative, and it needs to be shown that video-on-demand services can make money, he said.

"DVD revenues are so out of proportion to every other aspect of this business," Marlow said. "There has to be some proven revenue in the space before the big studios will even think about dismantling a model that has proven so lucrative for them."

Despite continued pessimism throughout the sector, signs of change are in the air. Perhaps most telling is a new online movie venture unveiled Wednesday by actor Morgan Freeman's production company, Revelations Entertainment, and backed substantially by Intel. The new company, dubbed ClickStar, plans to distribute first-run, pre-DVD release movies over the Net to homes, in a secure digital format, and is already in the process of persuading other studios to join.

Nevertheless, Marlow's complaint is echoed by virtually anyone who has tried to make a business from video-on-demand services: Even as consumers and technology are showing signs of being ready for a video-on-demand service with the scope and appeal of Apple Computer's iTunes music service, Hollywood remains unconvinced.

The vision of the ideal service may have been outlined most succinctly by Qwest Communications' early advertisement for broadband services, in which a clerk in a third-rate motel blandly promised in-room access to "every movie ever made, in every language, any time, day or night."

Easy enough. After all, hasn't iTunes shown the way? Hasn't the increasing popularity of on-demand programming at cable networks such as Comcast shown the demand?

Yes, and no. Aspiring on-demand services face a chicken-and-egg problem similar to the early days of digital music. Consumer demand for their services remains low, in large part because their prices are high and they offer fewer choices than ordinary rental stores. Yet Hollywood won't offer them more favorable movie release policies until demand improves.

Nor has Net-based technology, with today's bandwidth constraints and PC-focused services, provided a movie-watching experience as compelling as a DVD.

"The problem that differentiates Internet-based delivery and cable and satellite...is quality of service," said Warner Bros. Chief Technology Officer Chris Cookson. "We are not going to get the quality of service readily over the Internet until the Internet gets its act together a little better."

On top of that, the studios already have a lucrative way to reach home consumers. For the last few years, DVD sales have soared to more than $15 billion a year at a time of falling box-office revenues. Industry wags are only half joking when they say that big-screen theater releases have become little more than promotional tools for home video release.

At least today, the studios aren't willing to risk undercutting those revenues by allowing on-demand rental services--which produce far less revenue than do DVD sales--to compete directly.

"It's not the best business right now," said Stephan Shelanski, senior vice president at the Starz Entertainment Group, which offers subscription movies and pay TV channels on cable networks and the Internet. "I know the studios are experimenting to try to make it more viable, but they have so much money coming in from DVDs. They're really trying to find a business model that works."

Take a number at the window
For years, the studios have tightly controlled what they call "release windows"--essentially the staggered release of a movie first to theaters, then to home video, to video-on-demand services and pay television, and finally to broadcast television.

Until the last few years, the video-on-demand side of this was the relative backwater of pay-per-view cable television networks, where more attention was focused on live programming such as sporting events. But with the advent of digital cable and Internet services, the offerings are evolving dramatically.

Yet even if on-demand content services now see themselves as rivals to a video store--without the hassle of driving--studios have left them in

 

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