Coming Soon to a Computer Near You: Movies Off the Net

Certain that many consumers will be downloading movies from the Internet within a year or two, executives of online firms are for the first time scouring the film market here for movie rights and for partnerships with companies that control film libraries.

Their presence, along with some recently announced deals, is sparking a widespread recognition among movie industry leaders that a vast change in the methods of distribution is coming much sooner than they expected.

“There is a potent cocktail of fear and greed that is driving these guys right now,” said Scott Sander, president of Sightsound.com, one of several Internet companies here with a business model that encompasses distribution of full-length motion pictures. “What we thought was happening in 2002 is happening right away.”

Michael Metcalfe, chairman of Global Media Corp., said he attended the festival last year just to educate himself about the movie business and couldn’t get anyone to meet with him. This year, he said, “it’s a gold rush.”

Some movie industry executives still believe it may take five years or more to solve the many legal, technical and practical problems with video on demand over the Internet. Movie and Internet companies alike have been surprised over the last six months by the advances in software compression technology and access to faster online connections that make movie downloading a more immediate prospect for many consumers.

Initially, such films will be viewed on computer screens--a prospect that may be unsatisfactory for most movie fans. But the transition to viewing on a television set isn’t expected to take long.

Even the most skeptical movie executives have come to believe that a fundamental economic restructuring of the business is within sight. They say the next big flow of cash to pull the movie business out of its doldrums will come from the Internet through direct distribution of movies.

The change is likely to have little impact on the theatrical release of movies, but it could dramatically change the video rental, pay television and free television markets for film. “Everybody in the business is talking about it,” said John Miller, managing director of Chase Securities and perhaps the most powerful banker in the movie business. “We’re on the threshold, and the potential revenues are mind-boggling.”

The history of the movie industry has been defined by cycles of miserable economics rescued by huge new infusions of cash from new avenues of distribution--for example, from television rights, from foreign demand and from the videocassette boom.

Movie industry executives also are chastened by having watched the music industry over the last year get overtaken by events on the Internet. Last year, many music industry executives said it would be years before Net distribution of music would have an impact.

As a result, the music industry lost control of online distribution, at least temporarily, with software technology and fast-increasing bandwidth creating a haven for music piracy of new songs.

Canada-based Global Media and other Internet companies scrambling to get into the business of movie distribution believe the movie industry may be less likely to make the same error.

“If the music industry hadn’t screwed things up so badly, we’d be having a much harder time,” said Sander of Sightsound.com. “But they watched the debacle.

“We told the music industry that if they didn’t release music over the Internet, they’d lose control. They wouldn’t do it.”

Using the broadband Internet connections available at most universities, Sander said, college students can download a full-length film in about 20 minutes, then watch it at near-television quality on the most recent version of the Microsoft media player.

“Everyone entering college now will watch movies on their computer,” Sander said, predicting that the market will be driven by students entering college in the fall.

In an open letter to the industry published Friday in the Hollywood Reporter trade paper, Sander warned: “Maybe you should start thinking about how you’re going to distribute your movies tomorrow, because that’s how soon an 18-year-old kid could be doing it for you on the Internet for free.”

So far there have been only a handful of deals. Few online companies are prepared to offer cash, and even small movie companies hungry for every dollar are hesitant to jump into a medium they don’t fully understand and can’t control.

But independent film companies are likely to be the first to experiment. Sander and Jeff Mandelbaum, a Real Networks vice president attending Cannes for the first time, each said there are discussions going on with the major studios. But the majors tend to be extremely conservative because they have the largest libraries and face the greatest risk from Internet piracy.

The biggest deal thus far has been between Broadcast.com and Trimark Entertainment. Broadcast.com, for about $4 million in stock, got a stake in Trimark earlier this year, as well as the rights to distribute about 50 titles, including “Warlock.”

The deal was followed by Sightsound.com’s obtaining rights from Artisan Entertainment to distribute the movie “Pi” last month, in what was billed as the first Internet sale of a movie.

The fear of piracy is still holding many movie executives back, but those fears are dismissed as groundless by Internet executives.

“Piracy is a bogey,” said Broadcast.com President Mark Cuban, in a phone interview from the company’s Dallas headquarters. “There’s always piracy. But not to move forward because of that is crazy.”

Sander said movie companies have far more to fear from VHS or DVD copies being distributed on the Internet than from the theft of files encrypted by his company.

“Video is inevitably moving to the Internet,” he said. “The only question now is whether studios will get paid for it.”

Internet executives note that the major studios were completely misguided in their prolonged resistance to videocassette distribution. Despite fears that piracy that would result from copied tapes, the video business proved to be the most powerful economic force benefiting the movie business in decades.

Sander, 39, president of Sightsound.com, based in Mount Lebanon, Pa., decided only a few weeks ago to come to Cannes. Now, wearing a badge that labels him a “buyer” in the market here, he’s wandering along the Croisette--the beachfront boulevard lined with hundreds of film company sales offices--to meet with movie firms.

His company’s business model is straightforward: video on demand and pay-for-view on the Internet.

“We’re capable of downloading 387,000 full-length motion pictures a day right now,” Sander said. “Think of Sightsound as HBO meets Blockbuster on the Internet.”

Sightsound.com may possess a unique advantage in the online video-on-demand marketplace. The company contends it has a broad patent developed in the 1980s that essentially covers the entire business of selling a movie by download on the Internet.

The patent is likely to be the subject of extensive court tests. “We have the No. 1 most-requested patent in the country at the moment,” Sander noted wryly.

David Glasser, the 28-year-old chief executive of Tarzana-based Cutting Edge Entertainment, a small production and sales company, has agreed to distribute “Fait Accompli,” starring Rosanna Arquette and Michael Madsen, through Sightsound.com before any other venue. The two companies will split the revenue.

“His company is a ray of light for us,” said Glasser, speculating that it won’t be long before films are cast based on which actors are popular among Internet movie buyers.

To companies that tell him that Internet distribution poses a worldwide rights problem, Monte Walls Burris, a 28-year-old vice president of Global Media said: “Hey, this is a world change. Get on it.”