Movie madness

Seven years ago Netflix Inc. shook up the movie-rental industry by enabling movie lovers to go online and rent DVDs, which are shipped and returned via regular mail. Today video on demand services may very well be ushering in a new era in how movie buffs rent, purchase and watch films after their initial ­theatrical run. This year Amazon.com Inc., Apple Computer Inc. and Instant Media, a company launched in May by Buy.com founder Scott Blum, have joined pioneers Guba.com, CinemaNow and MovieLink to leverage technology and market developments that are making a new business case for video on demand.

“We’ve seen more changes in the industry this year than we’ve seen in the past decade,” says Darren Giles, co-founder and chief technologist at CustomFlix Labs Inc., a company acquired by Amazon.com earlier this year that specializes in ­digitizing limited-run and old movies and manufacturing on-demand discs, which it mails to customers.

Amazon’s acquisition of CustomFlix—coinciding with its recent launch of the separate Amazon Unbox video on demand service—speaks volumes about the future course of the market for consumers renting and buying films and television programs online. While companies like Netflix have long expected that Amazon would launch its own video rental service, it came a bit out of the blue that even the world’s largest Internet retailer would invest in two different types of video on demand, also known as VOD.

Blossom
The blossoming video on demand market is showing a flexibility for supporting broad ranges of both content and distribution. It’s not just for video viewed on TV screens—the new batch of services cater to the viewing of recorded films and TV programs on desktop computers, laptops and other mobile devices as well as television sets.

“We see great potential in the VOD market and are ­committed to being a leader in the space,” says Doug Craig, vice president of programming and new media at Discovery Communications Inc., a provider of video programming content whose more than a dozen TV channels include The Learning Channel, The Science Channel and Discovery Times. In addition to creating a new line of sales, he adds, video on demand offers a new channel for advertising revenue through ads distributed through cable TV on-demand programming and enhances customer acquisition strategies.

Supporting the rise of video on demand is a combination of ­developments in the market and the technology, experts say. “There are a number of ­rising tides that met at the same time,” says Bart Myers, senior vice president of product development at video-sharing site Guba.com, which recently added the sale of movie downloads to its offerings.

The largest single driver of video on demand may be the spread of broadband Internet access, which makes it possible to download full-length features and begin watching them within a few minutes, according to Amazon.com and other merchants. Broadband now accounts for about 44% of U.S. households, about 50 million people, according to multiple reports.

Fifteen percent of broadband consumers watch video online at least once a week, Jupiter Research found in a July 2006 survey. Although these numbers include all types of online video, including free content generated by consumers on sites like YouTube and MySpace, the overall research points to a strong demand among a growing number of consumers for access to video content when and where they want it—a dynamic that ­obviously portends well for on-demand ­movies, Myers and others say.

In addition to broadband, new technology that supports video on demand, he and others say, includes better video cards, flat-panel computer screens that display high-­resolution images and DVD compression technology that enables consumers to receive files huge in size of high-­quality images through quick downloads.

The importance of being earnest
Still, while few in the movie and television program rental and sales industry doubt the importance of video on demand in the market, there are plenty of questions ­regarding just how fast it will take off.

The two most common arguments against a fast take-off are that there will be only a limited number of recent movies available to the video on demand format over the next few years and that there is no reliable and efficient means of transferring downloaded videos from PCs to televisions. Recent growth in the sales of large-screen and high-definition TVs, experts say, reinforces where consumers want to view their home video entertainment. And the rise in broadband households still pales compared with the 86% of U.S. households with VCRs and/or video-cassette ­recorders or DVD players.

“There’s a huge, crippling difference between online distribution of video and all other formats—online distribution lands the video on your computer, and that’s not where consumers want to watch movies,” says Josh Bernoff, vice president and principal analyst at Forrester Research. “That was true when Movielink started doing online downloads, and it’s true now with Amazon and Apple doing it. Until there’s a simple way to connect a computer and a TV set, the video download business will be a footnote in the video distribution landscape.”

Moreover, he and others add, movie studios largely still follow a distribution model that starts with theaters, followed by DVD sales and rentals, then video on demand. With huge contracts for wholesale sales of DVDs to Wal-Mart Stores Inc., Netflix and Blockbuster Inc., movie studios are in no hurry to migrate to video on demand, experts say.

Further, there are market battles within studios themselves. “Each studio has a division for DVD sales and another division for video on demand,” says Myers. “The online sales divisions are trying to offer a competing product while the DVD divisions want to protect their turf.”

Video on demand also has some catching up to do regarding viewing features available on DVDs, which offer extra content like behind-the-scenes documentaries and deleted scenes not typically offered through video on demand. “For now, and the near future, it’s a DVD world,” says a Netflix spokesman.

Speed
Some industry observers, however, contend the market already is changing faster than expected as movie content providers recognize the increasing popularity of online video along with new ­technology that makes downloading to ­computers and transferring content to TV screens easier and faster than ever before. And downloaded video also is starting to appear with more of the comprehensive list of features common in DVDs. Discovery Communications, for instance, recently re-launched its Discovery on Demand VOD service with expanded content including ­director’s cuts and behind-the-scenes content, Craig says.

Amazon Unbox already supports feature-film download times of mere minutes for users with broadband Internet access, and, with commonly available accessories, the downloaded films can be instantly transferred to a TV screen, says Roy Price, Amazon’s director of digital media who launched and manages Unbox. In fact, he says, the downloaded movies can be viewed on either a PC or TV screen within 2.5 to 5 minutes, depending on broadband speed, as the film continues to download from the Internet.

“We already offer movies from most major studios and at least one TV show from each of the major U.S. broadcast ­networks,” says Price, whom Amazon recruited from The Walt Disney Co. two years ago to design and launch Unbox. “‘X-Men,’ ‘Fast and Furious,’ ‘Garfield’ and ‘Click’ all are recent movies we have made available for download at the same time they were released on DVD.”

Instant Media launched in beta mode early this year, offering downloads of free web video content, such as online recordings of NBC TV’s “Meet the Press,” on its Internet TV media player, which can be ­downloaded for free from IM.com. It has since attracted about 600,000 users, says CEO Andy Leak.

With an established user base, Instant Media, also known as I’M, last month started offering premium content for a price. It signed a deal with Universal Studios Home Entertainment to provide for the downloading over the web of recent Universal DVD releases, including the movies “United 93,” “Inside Man” and the “The Break-Up.” I’M will also provide through video on demand downloads older films such as “American Pie,” “Erin Brockovich” and “Field of Dreams.”

“We’re plugging into the development of a megatrend toward consumer choice. By making the PC the core of their entertainment lifestyle, it opens consumers up to a broad spectrum of opportunities they don’t have with cable or broadcast TV,” Leak contends.

Instant Media provides a free I’M media player that can be downloaded from IM.com. The media player is designed to cache downloaded video to a computer hard drive, enabling users to play back purchased content whenever they choose. Users can log onto their account on the web from any computer and arrange to have video content automatically downloaded to their home computer equipped with the I’M media player. If the home computer were disconnected from the Internet at the time of the scheduled download, the downloading would commence once the computer is reconnected to the web.

September
When Apple Computer introduced iTunes 7 in September, it expanded the popular digital music store to now offer downloads of more than 75 movies from four major studios: Disney, Pixar, Touchstone and Miramax. “Here we go again—first music, then TV shows and now movies,” Apple CEO Steve Jobs said when the company launched its video service. “In less than a year we’ve grown from offering just five TV shows to offering over 220 TV shows, and we hope to do the same with movies.” Jobs added that he expects iTunes to sell more than a million movie downloads per week within a year.

Adds Disney president and CEO Robert Iger: “Disney is committed to providing innovative ways for audiences to enjoy their favorite entertainment content, and our association with Apple is yet another example of how we continue to reach consumers on their terms, regardless of time or location.”

CinemaNow, which includes Blockbuster and Microsoft Corp. among its financial backers, offers downloads of more than 4,000 feature-length films and other video content from 250 content providers, including 20th Century Fox, MGM, Paramount Pictures and NBC Universal.

In September CinemaNow introduced a service that lets its ­customers download movies for $9.99 each and burn them to a DVD for playback on DVD players for viewing on TV screens. The burn-to-DVD service provides movies at the same time they become available in retail stores, CinemaNow says.

IRCE 2008 Conference Multi-Media CD-ROM

“Our customers will be the first to experience a major step forward in movies on the Internet: the ­ability to download a DVD from the comfort of home the same day the DVD becomes available via retail outlets,” said Bruce Eisen, President of CinemaNow.

“Partnering with CinemaNow not only ensures secure online distribution for our content but also underscores Universal’s continuing push to leverage emerging technologies as new avenues of entertainment content delivery,” says Craig Kornblau, president of Universal Studios Home Entertainment.

Guba.com, which has been operating since 1998, began offering in late June and early July downloads of movies from Warner Bros. and Sony Pictures Home Entertainment. “Our traffic and sales have been up 300% since June 26,” the day Guba launched with Warner Bros., says Myers.

With an unusual mix of characteristics as both a social ­networking, free-content video site and a seller of premium content from TV and movie studios, Guba figures it’s just at the beginning of a major era of growth, its spokeswoman adds. “We’re playing both ends of the market,” she says, noting that many of Guba’s users e-mail their friends directly from Guba.com about Guba content they’ve accessed. “The viral marketing with our free content brings viewers back to our paid content.”

The expanding movie ­market extends to the limited runs and unusual movie titles and recorded TV programs promoted by CustomFlix, co-founder Giles says. “We’re starting to see studios overcome their own nervousness and partake in new processes,” he adds, noting recent deals CustomFlix has signed with TV networks for archived editions of the news interview programs “Charlie Rose” and “60 Minutes.”

CustomFlix also digitizes ­videotapes of old movies, making them available for on-demand orders. Its discs are sold through Amazon.com as well as through customized CustomFlix E-Stores that content providers can set up on their own web sites.

A simple plan
Having access to downloadable movie content is one thing; making it available to television screens is another, experts say. “Until there’s a simple way to connect the computer and TV set, the movie download business really will be just a footnote in the video distribution landscape,” Bernoff of Forrester Research contends.

Some industry analysts also have questioned the ease of use of some of the new download services and tools. Michael Gartenberg, a media analyst at Jupiter Research, writes in his blog at MichaelGartenberg.com that when he attempted recently to download videos from Amazon Unbox, the imbedded digital rights management software apparently aborted the download process mid-stream, ­causing him to give up on the whole idea. Digital rights management software regulates the amount of time users can view rented downloaded videos by locking the files after the rental period expires.

Amazon declines to comment on such difficulties, but notes that it is still in the early stages of ­perfecting VOD. “This is still Day One for Unbox, and Day One largely for the entire VOD industry,” Price says. “This is the beginning of the early adopters.”

Discovery’s Craig says he believes the image clarity and resolution on Amazon Unbox, as viewed on either a computer or a TV screen, is “virtually the same” as watching a DVD. “I think the quality is really good,” he says.

The combination of evolving technology systems and increasing availability of content, Price says, is enabling Internet-based VOD to provide the most flexibility in the business of distributing video. Most computers operate with Windows operating systems, and many users already have the necessary Windows XP operating system and Windows Media Center technology needed to download movies from the web. The same technology can also be used to transfer downloaded video to TV screens. The Windows Media Center, sold separately for $300, already is included in many Windows operating systems and is expected to become a standard feature of Microsoft’s forthcoming Vista operating system.

Instant Media expects its customers to eventually watch its downloaded content on their TV sets, even though it’s initially focusing on serving consumers such as college students and business travelers who see value in watching downloaded content on their desktop computers and laptops, Leak says. “Many people spend more time in front of computers than in front of TVs,” he adds.

But Instant Media expects long-term growth among customers who will use a new generation of PC-to-TV video ­converters from companies like GrandTec USA to view downloaded high-definition video on large TV screens, Leak says, echoing the views of Amazon Unbox and Guba.com. “The second audience for Instant Media will be people who like to view their downloaded video on a flat screen,” he says, adding that prices are beginning to drop for devices that convert high-­definition video from PCs to TV screens. GrandTec, for instance, already lists high-definition ­converters at GrandTec.com for $100.

Although VOD still is in its early stages of development, the market and its technology are ­evolving quickly, experts say. Wait several months and it may change drastically with higher levels of service, says Guba’s Myers, a former technologist at IBM Global Solutions who has worked on e-commerce strategies since the Internet’s early boom days. He declines to specify what changes are in the works for Guba, hinting only that it will offer far more personalization in the video shopping experience. “Things will be very different a year or two from now,” he says.

paul@verticalwebmedia.com

Flix picks clicks-pix mix

Perhaps nothing is as good a harbinger of the future course of video on demand as the actions of Netflix, whose complete focus on the online DVD rental market makes it more susceptible than most to the speed at which both consumers and movie content providers take up video on demand in large numbers.

It’s telling, meanwhile, that Netflix is deploying the dual strategy of investing in video on demand while talking up its strengths in its established system of online rentals backed by its highly regarded video recommendation system and its expansive network of distribution centers. “We’re investing a significant amount in video on-demand—five to ten million dollars this year, following one to two percent of revenue last year,” a company spokesman says. Netflix had 2005 sales of $688 ­million, putting its investment in VOD last year between $7 million and $14 million.

Netflix co-founder and CEO Reed Hastings, who is holding off interviews for now on the company’s video on demand plans, will address them in a conference call with industry analysts in January, the company spokesman says.

Hastings has said that when the market is fully ready for video on demand, Netflix will begin serving it with the same level of personalized service, including its video recommendations system, that it provides its online rental customers. But the company doesn’t expect a wide migration to video on demand anytime soon.

Besides, even if Hollywood makes available its feature films to video on demand services earlier in the distribution cycle, Netflix still will command the market for older and rare titles, the spokesman says. Netflix ships about 1.4 million DVDs daily, in which there are between 35,000 and 45,000 different titles. It maintains 65,000 different titles in toto in its catalog. But more than 70% of the titles it ships every day are non-new releases, the spokesman adds, which VOD at least early on will not be able to do.

Blockbuster has not commented on specific plans for video on demand services, though it holds an investment in CinemaNow, the first to announce a burn-to-DVD video on demand service.

So with video on demand, the Internet retailing industry for now is microwaving its popcorn, plopping on the couch, and waiting to see if the feature film will be “How to Succeed in Business Without Really Trying,” “When Worlds Collide” or “Apocalypse Now.”