Disney Is Thinking Inside the Box

For nearly 50 years, Walt Disney Co. has been entertaining the public for free on television.

Now, in a new twist on old technology, the company plans to use local TV airwaves to entertain the public for a fee.

Disney is poised to offer movies “on demand” in three cities this fall, with a national rollout slated to start next year.

For a few dollars per flick, customers with special set-top boxes attached to their TVs will be able to start, pause, rewind and replay movies as if they were on tape or DVD.

This sort of on-demand service is widely viewed as the future of home entertainment, and other major Hollywood studios are well ahead of Disney on that front.

But though Disney’s competitors have lined up behind the services on cable TV or the Web, Disney is spending an undisclosed amount of money to develop its own service, called MovieBeam.

It’s a risky strategy, and analysts are pessimistic about the prospects. Not only does Disney face stiff competition from cable operators, it has to convince consumers to add yet another set-top box to the pile around their TV sets.

“If the idea is to just get this off the road and target some sort of niche, there’s some chance,” said analyst Adi Kishore of Yankee Group, a research firm. “If they’re looking for a mass-market product, I don’t see any way they can get that.”

If it succeeds, though, Disney will have cut out the biggest middlemen in home entertainment -- cable operators and video rental stores.

That’s important to Disney Chairman Michael Eisner, who has publicly called for the company to establish direct pipelines to the consumer, Kishore said.

A profitable MovieBeam also would give Disney’s local TV stations a new revenue stream. That money could help defray the millions of dollars the company is spending to convert its broadcasts from analog to digital, as mandated by the Federal Communications Commission.

Many television-industry executives and analysts agree that on-demand technologies will revolutionize TV by giving viewers much more control over what they watch.

But there are many different ways to deliver an on-demand service, and the industry is trying to figure out which ones will win public support.

Some, such as the personal video recorders from TiVo Inc., store programs in a viewer’s home. Others create central libraries of programs that users can view on demand, through either their cable TV system or the Internet. And some rely on personal computers. Still others use sophisticated set-top boxes.

The MovieBeam service will rely on a dedicated set-top box with a huge hard drive that stores about 100 DVD-quality movies. The box will enable users to view as many of the movies as they wish, and Disney will bill customers only for the ones they watch.

Every week, MovieBeam will replace 10 to 12 of the movies on the box, meaning that the entire contents should be refreshed in two to three months. The updates will be performed wirelessly through local TV channels, using technology supplied by Dotcast Inc. of Mountain View, Calif.

Douglas B. Evans, Dotcast’s president, said the technology can insert digital movies, games and other files into an analog or digital TV broadcast without interfering with the TV picture. With transmission speeds up to 4.5 million bits of data per second on an analog channel, the technology can load a movie in DVD quality onto a set-top box in about 40 minutes, Evans said.

Consumers who want the MovieBeam service will go to as-yet undisclosed retailers to pick up a MovieBeam set-top box, which already will be fully loaded with movies from a number of studios. Disney plans to charge a monthly rental fee for the box and a fee for each movie viewed.

No prices have been disclosed, but they are expected to be in line with what cable operators charge for their equipment and on-demand movies. Rental fees for digital boxes are typically $3 to $6 a month, and new video-on-demand movies tend to cost about $4.

Disney is expected to offer parents two ways to control what their kids do with the service: They can lock out movies based on their ratings and they can set monthly spending limits.

Eisner announced the MovieBeam initiative at the National Assn. of Broadcasters’ convention in Las Vegas last month and provided the outlines for the service. Since then, though, the company has declined to provide many details about the service, Disney’s investment in it or the business model.

According to Disney, MovieBeam will have its first public tryout this fall in Salt Lake City and two other, undisclosed cities. The service will transmit movies through ABC stations -- 10 of which Disney owns -- and Public Broadcasting System outlets, using their analog channels because they work better with indoor antennas. The service could easily be moved to the stations’ digital channels, if needed, people familiar with the technology said.

The service is one of the first to be built around over-the-air data broadcasting, or “datacasting,” a field that has drawn considerable hype and investment but little deployment. One of the pioneers in the field, Geocast Network Systems Inc. of Menlo Park, Calif., went out of business two years ago despite raising almost $80 million from investors.

Another datacasting pioneer, IBlast Inc. of Beverly Hills, hasn’t moved beyond the trial stage with its video-on-demand and video game-delivery services.

“Disney’s trial is very exciting for us. We think it validates the business,” IBlast Chief Executive Michael Lambert said.

But IBlast’s technology is designed to work with set-top boxes already in consumers’ homes, and Disney’s isn’t. “The problem is getting that box into the home,” said Jim Penhune, a broadband analyst for Strategy Analytics.

Even if Disney can convince consumers to install another box, “the idea that the other studios are going to be all excited about jumping onto a platform that’s run by Disney is pretty beyond belief,” said analyst Josh Bernoff of Forrester Research, a technology research and consulting firm.

He added, “I don’t really think that Paramount and Warner are ready to say, ‘We’re sick of the middlemen at Blockbuster.... What we really need to do is go to another middleman that’s run by Disney.’ ”

Disney is negotiating with all the major studios. In addition to whatever financial incentives Disney may offer, it also can promise anti-piracy techniques that are better than those on Internet-based systems and at least as good as those on cable networks.

With the top cable operators pushing video-on-demand aggressively, though, Bernoff questioned whether there was much need for MovieBeam.

Existing systems can give consumers the same ability to start, pause, rewind and replay as MovieBeam will -- plus a larger number of titles.

The main thing missing from most cable operators’ on-demand services is Disney’s movies. That’s because Disney has licensed its films only to the video-on-demand service at Time Warner Cable, a division of AOL Time Warner Inc.

Analyst David Card of Jupiter Research, a technology consulting firm, said there are a lot of strikes against Disney and MovieBeam. “I’m really surprised,” he said, “that they’re doing any work on this.”