Lights, Camera, Download? Studios Focus on the Web
Several major Hollywood studios are working vigorously on plans for selling movies directly to consumers over the Internet, hoping to thwart Web pirates from undermining their copyright protections.
Sony officials say they are preparing a site for downloading movies to personal computers beginning next year. Walt Disney Co. and News Corp.’s Twentieth Century Fox also are talking about jointly providing movies to PCs, said industry executives close to the negotiations.
Although technological and security hurdles remain, this could be Hollywood studios’ first successful attempt to bolster their shrinking profit margins by bypassing third parties such as Blockbuster and Home Box Office.
The negotiations could eventually lead to a boon for consumers, eliminating frequent trips to the video store and driving down prices for viewing movies at home.
The studios’ closely guarded plans could eventually change the economics throughout the movie industry, affecting theaters, video stores and television networks that rely on current releases.
Skeptics, however, say the undertaking is beyond the studios’ expertise and that they will revert to third-party video distributors. Even optimistic studio executives acknowledge that it will be at least five years before households have the high-speed connections necessary to make downloading and streaming video convenient enough for the Internet to be a viable distributor.
Disney officials did not return calls and News Corp. declined to comment.
“We’re in the early period of a radical revolution over the next 10 years,†said Barry Diller, chairman of USA Networks, speaking Wednesday at the California Cable Television Assn.’s annual Western Show in Los Angeles. “There will be a multiplicity of services that will change people’s habits.â€
Diller was referring to an explosion of new forms of television being introduced by cable and satellite providers that will allow consumers to shop over television, chat with their friends, pull information from the Internet, bank, and watch movies and TV shows, past and present, on demand. The studios are looking to thwart online file-sharing services that could undermine their copyright protection much the way Napster threatens the music industry. Major music labels are suing Napster in an effort to shut down the controversial online file-sharing service.
“There are already multiple pirate sites, so the studios have about 18 months to deal with the alleged illegals . . . before they lose control of the marketplace,†said Frank Biondi, senior managing director of Waterview Advisors, an investor in Internet technologies.
Pirates are downloading an estimated 270,000 films a day from the Internet by relying on similar file-swapping capabilities used to build Napster, according to Viant, a Boston-based consulting firm.
“It’s cumbersome to use, but in the next four months, there will be new tools for improving film piracy,†said Lance Trebesch, general manager of the Los Angeles office of Viant.
In recent weeks, Sony has been looking to partner with other studios to provide a wider selection of first-run movies. Several sources say two alliances are emerging, with Sony heading a group that would utilize technology that allows users to download movies for their personal library. Fox and Disney are exploring video-streaming for one-time viewing, a system similar to pay-per-view now offered by satellite and cable providers. Other major studios are exploring both options.
“Because of the Internet, there are more opportunities for [studio] copyright owners than in 20 years,†said Mel Harris, president and chief operating officer at Sony Pictures Entertainment.
Talks have intensified lately in part because cable operators are pressuring the studios to strike separate deals with them for new “video-on-demand†services.
The studios plan to offer new movies over the Internet after they are available at video stores to prevent cannibalizing their biggest revenue source. Rentals and sales of movie videos account for 46.6% of studios’ annual $28.6-billion revenue worldwide.
The studios hope to link multiple Web sites or cross-license titles to make it easier for consumers to locate their favorite movies, even without knowing which companies made them.
Today, movies typically first appear in theaters, then move to video stores after six months before appearing 45 to 60 days later on HBO, Showtime or as pay-per-view offerings on satellite and cable television. The studios’ plans cut directly into the business of these pay-TV providers.
This could also put a wrench in the cable industry’s plans for video-on-demand, which operators are revving up as a replacement for pay-per-view. Video-on-demand, or VOD, services give customers the ability to watch programs and movies when they want, with the power to pause or fast-forward.
Cable operators see VOD as one of the most lucrative rewards of a $30-billion investment to upgrade their networks for two-way digital communications.
Video-on-demand, which some firms are rolling out on a limited basis in the Los Angeles area, such as Charter Communications in Pasadena and Media One in Culver City, is also seen as the industry’s most powerful competitive weapon against satellite television providers.
VOD allows cable operators to leapfrog satellite by offering hit movies at Blockbuster prices. Other offerings could include children’s, self-improvement and local programming as well as college courses and the entire lineup of networks such as HBO.
VOD negotiations between cable operators and the studios have been at an impasse for months, slowing a new business worth billions of dollars for both industries. This week, talks resumed with 30,000 industry executives attending the annual cable show.
The cable operators contend that technical barriers will prevent the studios from delivering on their Internet plans.
“Who’s going to watch a movie on their computer?†said Jessica Reif Cohn, an analyst at Merrill Lynch. She is among the many pundits who say cable networks are a more viable alternative for the studios for video-on-demand today because they control 75% of all TV households and are fast deploying new digital boxes for delivering advanced services.
But studios have been exploring several options, including emerging wireless technologies, hoping to bypass existing cable pipes for getting onto televisions. For instance, several studios are in discussions with Los Angeles-based iBlast, an upstart owned by broadcasters that proposes using TV stations’ digital spectrum to transmit programming into homes.
Officials at iBlast would not comment. But insiders said that within six months consumers could pay $50 for equipment to receive monthly movie packages through iBlast.
The studios also are eager to develop their own alternatives because they don’t trust cable operators to market their movies to customers. Poor marketing by the cable industry has resulted in low buy rates for pay-per-view movies, especially compared with the spectacular revenues achieved by satellite providers.
Studios have resented splitting half of pay-per-view revenues with cable operators.
While cable operators are desperate to obtain rights from the studios for video-on-demand services, Hollywood is in no hurry. Many studios have refused to give cable entities more than month-to-month contracts for movies.
“It’s like watching two fighters circle in the ring where no one wants to give up an advantage,†said Chris Goode, chief technology officer at DIVA, which sells servers to cable operators for storing video-on-demand movies. “My hope is that the impasse with the studios doesn’t prevent VOD on cable from going ahead.â€
Studios want more than their 50% share of revenues and a percentage of the fees cable companies collect from customers with new digital set-top receivers.
“If we are the reason people are coming into the store, we want part of the entry fee,†said Jules Haimovitz, president of MGM Networks.
Cable executives say the movie industry will not be able to hold out forever, particularly once a significant percentage of the old cable analog boxes are switched out. About 8% of U.S. homes have digital set-top boxes with VOD capability. But by 2004, that share could rise to 35%, according to Wilkofsky Gruen Associates, a New York market research firm.
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Studio Revenues
Studios are eager to capture a bigger share of the dollars from television but don’t want to cannibalize their far more substantial revenues from home video. How studios’ revenues break down:
Home video: 46.6%
TV: 28.8%
Theatrical box office: 24.6%
Source: PricewaterhouseCoopers, Los Angeles Times
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