Hollywood studios form joint Net film service

Sue Zeidler

LOS ANGELES: In Hollywood's biggest move to zap movies digitally to viewers
through the Web, five major film studios on Thursday announced a joint on-demand
movie service that will offer old and new releases for broadband Internet users
in the United States.

The studios involved in the service are Metro-Goldwyn-Mayer Inc. (MGM),
Viacom Inc.'s Paramount Pictures, Sony Corp.'s Sony Pictures Entertainment,
Vivendi Universal's Universal Studios, and Warner Bros., a unit of AOL Time
Warner Inc.

Among Hollywood's major movie studios, only The Walt Disney Co, News Corp
Ltd.'s 20th Century Fox and privately-held DreamWorks did not participate.
However, sources close to Disney said the company plans to launch its own
Internet VOD service through the Movies.com Web site within the next 10 days.

Sony spokesman Don Levy said launch of the service is at least several months
away and that a name and a chief executive officer for the service will be
announced at a later time. "We're eager to advance the launch. The venture
needs to complete development of its infrastructure, establish a management team
and complete testing," a Sony spokesman said.

The studios are working on technology developed by Sony over the past 18 to
24 months under a project called Moviefly, intended to allow users to download
movies from its Web site to their personal computers where they can be viewed
for a fee. "The service will be built on the core technology, work and
investments we made on Moviefly, but it will ultimately be different because it
involves five studios," said Yair Landau, president of Sony Pictures
Digital Entertainment.

In all cases, movies will be supplied to the service on a non-exclusive
basis. Each studio will independently determine its own release schedule and
pricing. Landau also said that Fox and Disney would be free to distribute their
films on the venture.

A spokeswoman for Disney reiterated its plan to launch a video-on-demand
service through its Web site Movies.com, but declined to say when the service
would launch or in what form. She also declined to comment on whether Disney had
been approached to be a part of the new joint service announced on Thursday. The
others were not available for comment.

Studios working a long time

The service will use digital rights management technologies by Microsoft
Corp and RealNetworks Inc. and will be viewable with either company's media
player. The major studios have been working aggressively behind the scenes to
develop Web services before facing a threat such as the recording industry's
high-profile challenge from the once wildly popular free song-swap service
Napster.

Security experts estimate that nearly 400,000 bootlegged films are already
swapped daily on the Internet. While broadband penetration is rising in the US,
the amount of broadband - or high-speed Internet connections - in homes is still
below the level needed to support a costly on-demand digital distribution
channel, experts said.

"Broadband penetration is still low and it is rather expensive to
deliver a film over the Web," said Matt Bailey, analyst with Webnoize.
"It's going to place a big burden on the suppliers. The economics will make
it difficult to turn a profit, but eventually costs will go down," he said.

Landau said the venture would price movies competitively to pay-per-view
services, between $3 and $5 per movie. "We are initially subsidizing the
development of this market. We're not waiting," he said. Another problem
for the studios is how to manage key relationships with cable companies,
pay-per-view channels and video chains, which could wind up competing with the
Internet.

"Initially, we'll make the video-on-demand available in the pay-per-view
(release) window," Landau said. Studios generally release movies to
pay-per-view two months after supplying them to video rental chains. But
industry officials expect changes in the business model as a result of the
Internet distribution services. "If and when we're successful, this will be
the time to address the compression of the (release) windows," he said.

"This could blow the business model for the video rental business,"
said PJ McNealy, analyst with GartnerG2. Others believe the deal will raise
regulatory eyebrows. The US Justice Department is now looking into online joint
ventures among major music companies and many film industry observers feel a
venture comprised of five of Hollywood's biggest studios could also come under
scrutiny.

But Landau disagreed. "We're creating a market, not combating something.
We're offering an honest alternative and I think Washington will recognize
that," he said. Some studios have dabbled with video-on-demand via the Web.
Universal cut a deal with broadband network Intertainer to deliver films over
the company's digital cable platform.

Intertainer said on Thursday that it welcomed the new deal for the promotion
it will give to VOD as a concept. Unlike the new venture, Intertainer offers a
streaming service over in-home broadband connections or cable television lines.
While not widespread as yet, cable video-on-demand is beginning to grow in
popularity, as well. Time Warner Cable offers its own system in a few markets
and Comcast has been in trials of late with Intertainer in some markets.

(C) Reuters Limited 2001.