The Internet provides a toll-free digital super-highway that leads directly into the homes of millions of consumers. It is the perfect delivery route for those digital video data packages otherwise known as movies. And yet, neither the content suppliers from the Hollywood studios (at one end of the chain) nor the home-based consumers (at the other end) have rushed to use this road. Traffic remains light and market analysts and pundits remain skeptical. Indeed, many times they have pronounced the online movie download market dead, only to see it rise from the grave again. This market has begun to resemble a grade-B Zombie flick.
Among the crash-and-burn carcasses scattered along this highway of death is MovieBeam, a movie rental service and set-top box provider that was once backed by Walt Disney, Intel, and Cisco Systems. According to Yahoo! Finance, venture capitalists had pumped $50 million into the company before it was sold to the Movie Gallery store chain in 2006 for a mere $10 million. Then in December 2007, as part of a Chapter 11 bankruptcy reorganization, the Movie Gallery pulled the plug on MovieBeam.
Even Wal-Mart, the world's largest vendor of packaged DVD movies, has been less-than-lucky with online movie downloading. In November 2006 Wal-Mart launched its own movie download service, offering a library of 3000 movies. (That's not bad considering that Netflix started off with 1000 titles.) Then a year later Wal-Mart gave up on the service and closed it down, which begged the question: If the world's largest retailer (with its world-renown brand name, the participation of all six of the major movie studios, and a website that gets 800 million hits per day) can't make a business out of online movie downloading, who can?
But what really led prognosticators to put premature nails in the coffin of this industry (before the first round of resurrections) was the sad saga of Movielink. This pioneer site was founded in 2002 by five of the six major film studios (MGM, Paramount, Sony, Universal, and Warner Bros.). For years the service/site went nowhere and was apparently hemorrhaging millions of dollars a year. After investments totaling $148 million, the company was sold to Blockbuster for a paltry $6.6 million. And this begged another big question: if even the studios themselves can't make a business of movie download, who can?
Indeed, pessimism about this business seemed hit its apex last year when Forrester Research’s Principal Analyst James McQuivey called the video download market a “dead end” and said it would soon become extinct. In a May 2007 report he predicted that the entire paid download business model will soon be replaced by ad-supported streams and "subscription models that imitate premium cable channel services." In other words, as far as movie and video delivery goes, the Internet would become just another clone of the cable/broadcast TV. The report also suggested that at $279 million (up from $98 million the previous year of 2006), the market had hit its peak in 2007.
Since the release of that report, however, most other analysts, though still less that bullish, have cut the market some slack -- it's not dead, it has just been convalescing. It will awaken from the trance-like state of the undead any day now. One of those who sees the market heading up rather than down is Michael Greeson, principal analyst and president of The Diffusion Group (TDG), a market research firm. "People haven't even begun to experience digital download yet,” he says. “People now prefer to rent versus buy. Digital download is still too new to be a mainstay. Very few people have partaken of movie downloading. Our surveys show that less the 10 percent of adult broadband users have ever downloaded a movie. Of course, that’s going to change, but it will change gradually.”
In fact, the market has turned a corner and things are already beginning to look up. “A lot of the market’s early problems have been largely remedied,” he says. "You now see high-value content pouring onto the Web from the major studios."
But don’t expect this market’s ascent to be rocket-like, Greeson cautions. He predicts it will take from three to five years before the market hits a “critical mass” of 16-20 million users.
Variety/Market Leaders
Despite lackluster consumer demand there is currently an abundance of movie download sites/services on the Internet. A quick, less-than-exhaustive Google search will get you about 20 strong legitimate sites, discounting the sites that are simply aggregation sites and discounting the countless BitTorrent-powered P2P pirate operations.
Among these 20-or-so movie download sites, about five have held off bankruptcy long enough to become, if not profitable, at least mainstream: Movielink, CinemaNow, Apple iTunes--which just added day-and-date DVD download releases last week--Vongo, and Amazon Unbox.
Movie download sites differ somewhat in regards to: business model, type of DRM used, portability of files, video formats offered, bitrates and corresponding visual quality, and the breadth of their library of offerings. But they also have a lot in common (perhaps too much).
As far as business models go, some sites offer only subscriptions, some offer rentals but not download purchases, some offer downloads but not rentals. Some offer free ad-supported streams or progressive downloads. The smarter services are beginning to grasp the idea that offering consumers more options is smarter than offering them fewer.
Different sites/services also offer different degrees of file portability. Some offer movies in formats and bitrates and resolutions appropriate for cell phones but not for big screen TVs, while some offer specs appropriate for big screen TVs but not for handheld/mobile devices. Some, of course, try to offer both.
There’s not a lot of difference in the type of DRM used – most of these sites employ Windows Media DRM. It has come to dominate this industry. The other highly visible DRM is Apple’s FairPlay, but it is proprietary and not open to 3rd-party providers.
A number of interesting and innovative fringe sites have foregone DRM altogether (which in some respects is a great idea), but it means the major studios won't touch them. Consequently, their miniscule catalogs contain shorts, documentaries, and a handful of independent features films and foreign films.
Perhaps the most successful movie download site and the one everyone measures against is Apple’s iTunes Store. The site got a head start in the movie download business by being the world's number one music download site. But a movie is a very different thing from a 3-minute MP3 file song, and iTunes suffered for a number of years by restricting its business model to download-to-own. Recently, it has wisely begun offering movie rentals, though it still refuses to offer a subscription service for movies. The site also has quality and pricing problems – visual quality is less than stellar and prices nearly as high as you’d pay for a packaged DVD. Then there is the proprietary technology problem – if you are an iPod owner, this is a great site; but if you aren’t, tough luck.
Another thing all the movie download sites have in common – inflexibility. None of them seems to be flexible enough to provide the consumer with what he/she really wants.
Experimenting With Different Business Models
TDG’s Michael Greeson believes that this industry got off to a slow start because Apple dismissed all business models other than their entrenched one, and they sort of poisoned the well for everyone else.
"Steve Jobs came out and said that they would never rent,” says Greeson. “He said that the download model used for music on iTunes was directly applicable to movies. And we said – ‘No it’s not; it’s a completely different experience. You can’t just go willy-nilly applying it analogously to video.’ And we were right on the money. And Steve Jobs had to come back and announce download-to-rent. So now they are doing download-to-rent and the reason why is because download-to-own didn’t take off like he thought it would.”
For the moment at least, online movie rental is more popular the online movie purchasing, so movie distribution sites will “grow the market by using download to rent,” he says. Eventually, of course, after rental has blazed the trail, download-to-own will come into its own. Of course, the smart vendors offer will both download-to-rent and download-to-buy, he adds.
One company that has been experimenting with business models is EZTakes, a Massachusetts-based company that has distinguished itself in several ways, but mostly by giving customers the ability to burn their downloaded movies to DVD-R discs. While Flynn doesn’t agree with McQuivey’s prediction that the ad-supported model will push aside all the others, he does think the model has its place. His company has been using it (though not exclusively) for a while now and finding some success with it.
Many people have said that the ad-supported model will never fly. Viewers hate commercials, they say. Movie buffs expect either a close approximation of the commercial-free theater experience or the commercial-free DVD experience, they say. Others argue, on the other side, that if it were true that no one is willing put up with commercials-laden movies, there would never have been a broadcast TV industry. Obviously, some people are willing to put up with commercials in return for free content; and equally obviously, some people will pay extra to avoid commercials. The only question is – how much extra?
EZTakes will often offer the same movie in both free and download-to-buy versions. If you opt to buy, you get the movie sans commercials and at a better quality. Plus, you can burn a copy on a DVD-R disc and look at it whenever and wherever you want.
Flynn has found that offering free ad-supported movies like this serves to lure people into his EZTakes site. Often viewers will start watching the free movie, get sick of watching the ads and the lower-quality images on their PC and pay the extra money to download the DVD-quality movie so they can burn it and take it to their DVD player in their living room.
Offering free ad-supported movies has also given EZTakes a bonus, according to Flynn – it has increased traffic on the site. “It gets people to go to the site, and maybe they’ll see something they might be interested in downloading to buy, something they wouldn’t ordinarily see. This allows you to sample it for free and decide whether you think it’s worth $7.99 to download.”
Perhaps the most technologically interesting and highly publicized business model for DVD downloads is Sonic's Qflix, which will use proprietary DVD-R media specially equipped to incorporate CSS encryption--the first time CSS-capable recordable media has been introduced to any part of the DVD market. We'll look more in depth at the Qflix technology and business model in a future installment of this series.
Future Demand for HD?
Assuming this market overcomes the many obstacles inhibiting it and survives the next few years, what will the future bring? As Blu-ray Discs supplant the popular DVD format, how will this affect the movie download market, for example?
With Blu-ray players costing about $300, TDG’s Michael Greeson thinks it’s going to take a while before people get dissatisfied with the quality of their DVD players. But the prices of digital LCD TV sets are quickly dropping, he notes. “About 85 percent of current broadband users surveyed said that when they buy a new TV it will be a digital HD set,” he says. “As more and more digital TVs make their way into the marketplace, they will up the visual quality ante.” People will become dissatisfied with the quality currently provided by most download sites, and: “A differentiator will be HD,” says Greeson.
Eventually consumers will expect HD quality, and “these sites will realize that and will begin thinking about HD real fast,” says Greeson.
One site that currently specializes in hi-def is Jaman. “Everything on our site is HD,” says Jaman CEO Gaurav Dhillon. “Right now we’re trying to match our desire to provide HD with the realities of the current broadband situation, so we mix it up in terms of frame rates and bitrates so that it is better than DVD. It’s not all the way up to 720p, but I can’t tell the difference on a 60-inch plasma. It’s probably better than what you can get from anybody else.”
Given the bandwidth limitations of “the current broadband situation” (as Dhillon puts it), waiting for a HD movie to buffer (Jaman uses progressive download.) requires some patience. Dhillon says that the broadband service where he lives in San Francisco permits him to start watching a Jaman movie in as little as two minutes. “It starts quickly and is a good experience; if you have sort of fringe DLS, however; it could take as long as 30 minutes to buffer enough to start watching the movie,” he says. “We are working to make it faster and faster, but it still requires some forethought on the part of the user. So you simply relax and have a cup of coffee or glass of wine while the movie starts buffering.”
Yes, providing HD is difficult, but Jaman exercised some forethought by making HD part of their business strategy from the beginning. Dhillon says that Jaman decided it didn’t want to “cheese out” on visual quality. They preferred to go the extra mile to offer HD from the outset. “We are taking longer view than some of the other companies,” he says.
CinemaNow is planning for a future of HD but doesn’t seem to be in a big rush. “We’re not sure how aggressively consumers will upgrade to Blu-ray versions of movies,” says CinemaNow CEO Curt Marvis, and the reported recent slowdown of the last three months in Blu-ray adoption, according to a recent NPD report, makes this an especially valid question. “We still believe that there are a large and significant number of users who are satisfied with the standard-def resolution of ordinary DVD. However, High-Def is something that people clearly enjoy. People will get used to it as more television channels get offered in High Def and more DTV sets get into the market. Hi Def is something we’ll be able to offer soon on a rental basis, with a slightly elevated cost. On a sell-though basis, it will be slower to take hold; but that’s something that will happen in the not-too-distant future as well.”
Conclusion
Almost everyone in the world, except the sites/services and the studios, knows why the online movie download market has faltered -- for various reasons, consumers are being offered everything except what they want. Consumers want good content, good image quality, good flexibility, and good price. Most movie download sites are not coming through with these goods.
Consumers expect a movie experience at least a good as the one they can get from a shrink-wrapped DVD package and at a price as good or better, and they expect to get it in the comfort of their living rooms. And this market won't go anywhere until someone delivers this combination.
Right now these movie download sites/services are presenting consumers with way too many hoops to jump through and far too few options. As long as people can get a better movie viewing experience from a quick ride to Wal-Mart or through the mail from Netflix, they will continue to do so.
Mark Fritz (markfritz at intergrafix.net) is a contributing editing to EMedialive and Streaming Media.