Disney, Fox Join in Web Film Venture

Walt Disney Co. and News Corp. unveiled their venture to distribute movies electronically Wednesday, competing with the other Hollywood studios and cable TV middlemen to deliver films digitally to consumers.

Starting early next year, the new venture, Movies.com, will make movies available through high-speed Internet connections or cable TV video-on-demand services. Unlike the other studios’ initiative, which was announced last month, Movies.com will enjoy some exclusive distribution rights on new releases from Disney and News Corp.’s Fox unit.

That prevents the other studios’ as-yet-unnamed project from offering Disney and Fox movies until after they’ve appeared on Movies.com. It also forces cable operators to negotiate with Movies.com if they want new Disney and Fox films in their video-on-demand services before they’re available on other cable channels.

There’s not likely to be much demand from consumers for downloadable movies, at least not at first. But entertainment industry insiders and analysts say the studios’ Internet ventures are an important part of a long-awaited digital strategy to raise profits in more familiar venues, namely pay-per-view and video rentals.

That strategy is starting to bear fruit. In recent weeks, the seven major studios--Disney, Fox, Sony Pictures Entertainment, Metro-Goldwyn-Mayer, Universal Studios, Paramount Pictures and Warner Bros.--have made a flurry of announcements about new ways to distribute movies digitally, either through the Internet or through cable systems. And more announcements are expected soon.

For most consumers, the first payoff probably will be a dramatic improvement in their cable companies’ pay-per-view services. Cable operators finally may deliver on the decades-old promise of video on demand, letting consumers start, pause and rewind pay-per-view films as if they were on videotape.

One of the main holdups for video on demand has been the reluctance of several major studios, including Disney, Fox and Sony, to strike long-term licensing deals for their films.

Executives say the studios wanted to finalize plans for the Internet and other forms of digital distribution before signing those deals, and now that Movies.com has been announced, the last roadblock has been removed.

But Disney and Fox aren’t planning to deal with the cable companies’ current video-on-demand suppliers, such as In Demand, the programming service owned by four major cable companies. Instead, they want to supplant such middlemen with Movies.com, executives from the two companies said.

Disney and Fox have agreed to give Movies.com exclusive rights to all new, non-animated films for a critical but limited period of time. That period will begin sometime after the movies are available at the video store but before they appear on any cable, satellite or broadcast TV service.

Eventually, the studios could make films available on Movies.com as soon as they’re in the video store, said Peter Murphy, chief strategy officer for Disney. The venture also plans to license movies from the other studios.

Terms of the deal between Disney and Fox were not disclosed. The companies have started discussions with federal antitrust regulators “to get them comfortable” with the venture, said Salil Mehta, senior vice president of strategic planning for Disney.

Disney’s agreement with Movies.com doesn’t cover any of its animated films, the crown jewels in the company’s library. The company hasn’t decided yet what to do with those films, although it might create a separate video-on-demand service, Murphy said.

Analysts called the venture a sound strategic move for both companies, but they doubted that it would make money in the short run.

Chris Dixon, an analyst with UBS Warburg, also questioned whether Disney and Fox have the experience to tackle the many challenges the venture poses, from setting up billing systems to distributing royalties.

One reason for Disney not to join the other five studios is that it could maintain more control over its vast film library by teaming just with Fox. “Disney likes to control its own destiny,” said Jordan Rohan, an analyst with Wit SoundView.

Given the limited market today for downloadable movies, Movies.com is “in some respects more of a cable play,” said Peter Levinsohn, an executive vice president at 20th Century Fox.

Nevertheless, the companies hope to build the online site’s audience by offering extra movie footage, conversations with directors and other enticements for movie fans, he said.

Several analysts argued that both joint ventures by the Hollywood studios are more about negotiating leverage than anything else. And the recent licensing deals that In Demand struck with Sony and Universal, which are more lucrative than their pay-per-view contracts, show that the online ventures already are having an effect, said Ray Katz, a movie industry analyst at Bear Stearns.

The studios wanted more of the revenue from video on demand than the 50-50 split they get from pay per view, Katz said. The new deals will give Sony and Universal about 60% of the money.

But officials involved in the two joint ventures say the studios need to offer a legitimate source of movies online to combat piracy--something the record companies didn’t do until piracy on the Net was pervasive.

The news was announced after regular stock trading ended. Disney shares eased 35 cents to $25.36 in regular New York Stock Exchange trading. News Corp. fell 29 cents to $32.61 and its Fox Entertainment Group fell 70 cents to $24.10, also on the NYSE.