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The movie industry took out an insurance policy on Thursday, when five of the eight major studios announced plans to distribute movies across the Web.
The initiative, which grew out of a video-on-demand system that Sony (SNE) has been developing for the last year and a half, was a clear sign the studios want to avoid being blindsided by the Internet.
Learning from others
They were undoubtedly watching when their associates in the recording industry failed over the course of a year and a half to offer a viable alternative to the Napster song-swapping system, even as the record labels scored a string of victories against the company in court.
Record shipments fell 4.4 percent, or by about $300 million, in the first six months of the year, the industry announced Tuesday. That's despite what Webnoize described as an 87 percent drop in Napster activity between February and May thanks to the recording industry's legal victories.
"Renegade versions of Napster are springing up like mushrooms after a summer rain," said Raymond James analyst Phil Leigh.
Indeed, many online music lovers have simply switched from Napster to one of a bevy of imitators, including AudioGalaxy, MusicCity and programs for the Gnutella network like BearShare and LimeWire.
Those programs aren't quite as simple to use as Napster, but they are here now and generally provide access to a very wide assortment of music. The record companies, meanwhile, haven't even planned an online service where people can listen to songs from all five major labels. Instead, they are split into two camps building two different systems, neither of which has yet been deployed.
The film industry is more united, if only slightly. The five studios behind Thursday's announcement include AOL Time Warner's (AOL) Warner Bros. movie division, Sony's Sony Pictures Entertainmentand Vivendi's (V) Universal Studios, despite the fact that AOL Time Warner's Warner Music is in the online music camp competing with a joint venture between Sony's Sony Music Entertainment and Vivendi's Universal Music Group. Also included in the film alliance are Metro-Goldwyn-Meyer (MGM) and Viacom's (VIA) Paramount Pictures.
The three holdouts are Disney (DIS), DreamWorks and News Corp.'s (NWS) 20th Century Fox. Disney and Fox are thought to be working on competing services.
The studios also have technical advantages.
Because a movie file takes up about 100 times more space on a computer hard drive than a music file, movie files are much more awkward to trade online; even over a broadband Internet connection, a feature-length movie can easily take four hours to download, often more. This gives the studios time to plan, build and monetize an online movie distribution system before young hackers do that on their own, sans the money part.
It also doesn't hurt that the primarily vehicle for getting a movie inside a computer, the digital video disc, is scrambled, unlike the recoding industry's ubiquitous compact disc. That means movie files must be cracked open before they can be shared, so it is much harder to upload films to online file-sharing services than it is to upload songs.
The studios seem likely to keep pricing within reason. They have come to understand the profit potential of low-cost video rentals -- that business now eclipses the studios' ticket sales in annual earnings, according to Leigh -- and Sony, whose work led to the studios' Internet initiative, said through a spokesperson that it plans to price downloads competitively with video rentals and pay-per-view movie sales on cable TV, implying a price range of $3-$5.
"As long as you can get it for four dollars a movie, is it really worth the hassle to circumvent" DVD copy protections?, Leigh asked.
It remains to be seen whether the studios can make money on their initiative any time soon. The launch date has not yet been announced and is undoubtedly several months away. The size of the potential audience isn't clear; Americans are wiring their homes for broadband more slowly than expected, with various estimates putting about 8 percent of households having broadband access and thus eligible for the movie service.
The studios claimed in a press release that there are 10 million "broadband households" in the U.S., although Leigh said the unattributed figure is higher than most of the estimates he has seen.
The analyst does concede, however, that the studios will find many customers for their service not from homes but from college dormitories and office buildings; those types of locations contribute to a total pool of 35 million "broadband screens," he estimates. On the other hand, it remains to be seen how many people are keen to watch movies on their PC monitors.
The studios must also consider costs; it costs roughly a penny to stream one megabyte of video, and bandwidth costs could easily end up eating all of the money they take in from consumers. The studios are holding down expenses by eschewing streams in favor of downloads.
Not only are downloads cheaper to send through the Internet, but they mean the studios don't have to worry about bandwidth "hiccups" that can degrade or even stall video streams. Of course, downloads also mean that consumers will have to wait hours before any video plays on their monitors.
Down the road
In any case, Leigh said the large media conglomerates that own the studios won't even notice the revenue from online movie sales for the next couple of years; they are more excited by the strategic advantage of being ahead of the Internet movie trend.
New revenue streams, he said, "might be a consequence of this development, but I don't think that's the intent. The intent is to pre-empt a video version of Napster."