Curtain’s Finally Rising on Movie Downloading
By David Lieberman
NEW YORK — Tiny retailers usually tremble when Wal-Mart invades their turf. Not CinemaNow CEO Curt Marvis.
For eight years he has offered people with high-speed Internet connections movies and TV shows to buy and download from his website. They can watch them when they want — typically on a computer or a portable device.
His problem? Hollywood studios have released just a handful of their most popular flicks to services like his and another longtime player, Movielink. They also often strictly limited how many copies buyers could make.
“They did not want to alienate Wal-Mart,” which generates 40% of all DVD sales, Marvis says.
That’s why he says he was excited in February when Wal-Mart, with the support of every major studio, joined Amazon, Apple and other retailers rushing into the download-to-own (DTO) video business.
With the Godzilla of retailing on board, Mavis says, “We’re on the cusp of this business really beginning. I think you’ll see significant growth in 2007.”
He predicts that “by 2010 downloading of movie and video content will be as commonplace as downloading of music is in today’s world. It will happen that fast.”
If he’s right, it would be a revolutionary change in how millions buy movies and TV videos.
It also could give the home video business a shot of adrenaline as growth in DVD sales slows. Consumers spent $15.9 billion last year to buy home videos, up 1.4% vs. 2005, and $7.7 billion on rentals, down 1.5%, according to Rentrak.
There are many skeptics, however, who say that even Wal-Mart can’t overcome problems video downloading sales face. A movie download can take an hour or more with a high-speed connection. Copying for viewing on other computers and TV sets is typically restricted. Movie downloads are priced about the same as DVDs, but most have inferior video and sound. And most movie downloads don’t include bonus features found on DVDs, such as trailers or non-English soundtracks.
“There’ll be a few people doing a lot of downloads over the next couple of years,” says Blockbuster CEO John Antioco, who plans to begin offering video downloads this year. “But this is going to be a migration process. … Over the next couple of years I don’t see it being a big business for anybody.”
Still, retailers believe they see where the video industry is headed: The problems with downloads will be resolved sooner or later, and the future could belong to retailers who plant seeds in the market now.
“Big companies like Wal-Mart and Amazon are taking the market seriously, and they don’t do that unless they think it will grow to be big,” says Netflix CEO Reed Hastings.
On Wednesday Movie Gallery indicated it’s ready to take a different approach to digital downloads. It acquired MovieBeam, a service that transmits films via broadcast airwaves to a hard drive-equipped box connected to the TV.
Disney opened the door
Studios began to offer some movies online in the late 1990s through services including CinemaNow, Movielink, Starz Vongo and Guba. Yet the business was largely an afterthought until late 2005.
That’s when Disney cracked open the TV download market by allowing Apple’s iTunes store to sell episodes of ABC shows, including Desperate Housewives and Lost. Other networks quickly followed.
Disney CEO Bob Iger grabbed the industry’s attention again last September when he added movies to his offerings on iTunes and said that he expects revenue to be $50 million in the first 12 months.
How big video downloading will be and how fast it gets there will depend, in part, on how fast sales of broadband Internet service grow. Bernstein Research says 87 million homes will have it in 2010, up from about 55 million now.
As that happens, sales of TV show downloads are forecast to take off to 496 million episodes in 2011, up from 41.5 million last year, and movies to 213.3 million, up from 1.6 million in 2005, according to Adams Media Research.
Movies, however, will make the bigger financial splash. New releases typically cost about $15 to download, as opposed to about $2 for a TV show episode.
Hollywood’s number crunchers like the idea of movie downloading because they don’t incur the manufacturing, packaging and shipping costs DVDs require — and there is no risk of unsold inventory.
“The DVD is a consignment business,” says University of Southern California digital media expert Jonathan Taplin. “You think you sold a million DVDs to Wal-Mart. But if they only sell half a million, guess what? You take the other half a million back at full price.”
HD confusion boosts downloads
Studios might have held off on supporting video downloads if they had more faith that consumers will upgrade their DVD libraries with high-definition DVDs, which cost about $25 apiece. Hopes for high-definition DVD have dimmed as studios and technology companies still battle over two incompatible HD disc formats, Sony’s Blu-ray and Toshiba’s HD DVD.
Netflix’s Hastings, for one, says that he’s “less optimistic today than I was a year ago” that either of the HD formats will catch on. He says movie distributors are confusing customers and retailers in much the same way as the music industry did when companies split over two high-definition audio formats, DVD-Audio and Super Audio CD.
“The whole ecosystem didn’t thrive,” Hastings says. “Then people just went to downloading standard MP3 tracks.”
Challenges to the growth of video download sales:
*Mixed standards. Downloading isn’t for computer neophytes.
For example, each site has its own system requirements. Movielink works with PCs running on Windows 2000 or later. Amazon, CinemaNow and Wal-Mart require at least Windows XP. If you’ve got an Apple computer, enjoy iTunes. Most online video stores also require customers to download their software to organize and play the videos.
“Many of these companies are creating their own silos of distribution,” Marvis says. “When you download the player for the content from company XYZ, it only works within the player format of company XYZ. That makes it very difficult for consumers to decide: Which one do I choose?”
In addition, the quality of the downloaded video can vary from site to site, and sometimes from film to film.
Things get a lot more complicated for portable devices. Most of the big video sellers use a version of Microsoft’s digital rights system, which means they won’t work on many of the most popular devices, including video iPods.
*Complicated movie rights. Studios can’t just pull a film out of their vault and sell it online. They often must get on board a constellation of stars and companies that have a stake in the movie.
“One of the reasons there aren’t hundreds of thousands of movies on the Internet is because it’s difficult to get music license rights,” says Movielink CEO Jim Ramo. “Generally, with movies made prior to 1995, the distributors did not get the music license rights for the Internet. Nobody thought of the Internet as a distribution channel for movies. It takes a lot of arms and legs to make those calls and do the follow-ups.”
*Limited playback on TVs. Only a small market of people want to watch their feature-length movie purchase on a computer or handheld device. Most potential buyers will want to watch their movie on their TV and, for the most part, doing that easily with downloaded video is a ways off.
“That kind of device is the whole ballgame,” says Adams Media Research President Tom Adams. “We’re a technological generation away from (video) being in a consumption format people want.”
Lots of companies are on the case. At the Consumer Electronics Show in January, “You couldn’t walk 30 to 40 feet without seeing a solution to bring video from the PC to the TV,” says the Yankee Group’s Michael Goodman.
Apple is preparing to unveil its computer-to-TV technology. Amazon announced in February a deal that enables people with a TiVo DVR and a home network to buy some of its movie and TV downloads to watch on TV sets.
*Copy limits. Download buyers wouldn’t have to worry about PC-to-TV technology if they could simply burn a DVD of a downloaded movie on their PC and then pop it into their living room DVD player.
“People are used to (music) where you can burn a CD and play it in your CD player,” Marvis says.
But the only copying most retailers now allow is for a backup data DVD — a type of DVD that won’t play in a conventional DVD player.
Studio executives insisted on that restriction, fearing buyers would make free copies for friends who’d otherwise buy a movie DVD (which can’t be copied) or download themselves.
The impasse was broken, in a way, in November. The DVD Forum, an industry standards group, agreed on a system that lets buyers make at least one playable DVD copy. The catch: You’ll need a new model of DVD burner that should be available later this year.
CinemaNow uses a different standard that enables customers to burn DVDs of some downloaded movies that are identical to retail DVDs, including the extra features. But studios only allow a few titles to be sold that way.
“Last time I looked that was 3% of their library,” Goodman says. “The vast majority of their downloads are crippled DVDs.”
Marvis acknowledges that these problems are real and need to be solved, but he says he’s unfazed.
“When we started CinemaNow in 1999,” he says, “I would never have predicted that by 2007, the age of digital distribution would still not have really arrived as a mainstream business.
“With that said, things are finally starting to converge.” (c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.