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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.

A correction was made to this story. Read below for details.

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.

News.context

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 the old pay-per-view category, which means they get first-run movies as much as two to three months behind video stores or Netflix, and are allowed to offer those movies for only a few months at most. Cost is also a factor, with Netflix providing a much better bargain for frequent movie watchers.

That's badly hampered on-demand's ability to compete with DVD rentals. Even Netflix CEO Reed Hastings, who plans to launch a Net-based service later this year, has publicly said he expects the first versions to be "underwhelming."

Indeed, these tightly drawn categories also hamper the ability to create such an online Netflix, in which subscribers would pay a monthly fee for unlimited viewing. Under the studios' current contracts, cable television companies Starz, HBO and Showtime have exclusive contracts for subscription services that cover both broadband Internet and cable television distribution.

"The truth is that VOD (video on demand) can get a lot better," said Macrovision Senior Marketing Director Adam Gervin, whose technology is used to protect movie content against copying. "What people want is the ability to get a movie from a cable or satellite provider closer to the same day they can buy it at Wal-Mart. But that won't happen until the studios feel confident that their content won't be cannibalized."

To be fair, the technology for the perfect video-on-demand service isn't quite ready either.

On the cable television side, what's available is essentially constrained by the server capacity of the cable company. Starz, which tends to have several thousand titles under license at any given time, usually has only a few hundred available through cable networks such as Comcast.

Internet-based services have the flexibility to offer far more content. But even as bandwidth has grown, and video-compression technologies such as Microsoft's Windows Media 9 and the new MPEG 4 AVC have improved, studio executives aren't satisfied with the quality of delivery.

Once a movie reaches the home, most Internet services remain aimed at the PC, which remains a poor alternative to the television for watching movies. However, a new generation of "media adapter" devices, scheduled for release this fall, promise to make it increasingly easy to stream video from a PC directly to a television.

Taking the long way around
Given these constraints, it's no wonder that the Net's on-demand services have remained small. But a few changes are on the horizon that could transform the business.

Some involve new technology that will bring on-demand rental services into the movie sales business. Studios are warming quickly to the idea of "digital sell-through," an industry term for selling a permanent copy of a movie that can be downloaded to a computer. Sony Pictures, Warner and others expect to offer this kind of online distribution as early as this year, executives say.

CinemaNow CEO Curt Marvis, who has been negotiating with studios since his service opened in 1999, says this could help reinvent his business.

"I think the DVD business has proved that people like to collect movies, maybe more than people anticipated," Marvis said. "I think when we get into digital sales, where sell-through has some pricing advantages, the content offering can be more broad and vast and deep than what you get in the retail store."

Studios are also talking about new digital sales channels, such as selling movies on flash memory for mobile phones.

"It's not about locking things up," said Marsha King, the general manager of Warner Home Video. "What we like to do is find as many ways as possible to make compelling propositions about movies, so that consumers can find exactly what works for them. What we investigate are things that consumers would like to see. It comes down to whether consumers want to do it."

Marlow's Greencine and a handful of other companies are pursuing a more indie approach, which may ultimately do as much for the future of digital distribution as the efforts of Greencine's venture-funded and studio-backed rivals will.

Greencine today has about 3,000 works available for on-demand viewing. It's in the final days of an online documentary film festival, where the winners will be shown in a San Francisco theater.

Marlow's goal now is to persuade independent filmmakers to put their works on Greencine at the same time as the theatrical release. Even the biggest indie films rarely get shown in theaters outside the biggest cities, and the smallest ones are lucky to find a theater screening at all, he notes. On-demand can level that playing field.

It's still a hard road, although he thinks some filmmakers with recognizable names will assent this year. The problem is that old traditions, from the windowing to eligibility for Academy Award nominations, still die hard.

"If you're fortunate enough to get a review in The New York Times, but you're only playing in New York, it seems wise to leverage that publicity with a way that people can actually watch the film," Marlow said. "We keep talking about it but haven't found anyone bold enough yet to try. But we're close."

 

Correction: The original story misquoted Macrovision Senior Marketing Director Adam Gervin. Gervin's quote should have read: "What people want is the ability to get a movie from a cable or satellite provider closer to the same day they can buy it at Wal-Mart."
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