Netflix, TiVo Plan Movies on Demand

Intensifying the battle for control of the living room, Netflix Inc. and TiVo Inc. said Thursday that they were developing a service to deliver movies over the Internet.

The service, which the companies said might debut next year, would allow owners of TiVo digital recorder devices to download and, potentially, store dozens of movies.

Delivering movies on demand is viewed as one of the next frontiers in home entertainment and a range of computer, consumer electronics, cable and satellite companies are jockeying for dominance.

Executives at Los Gatos, Calif.-based Netflix and Alviso, Calif.-based TiVo offered few details.

And they probably won’t until they lock up distribution agreements with studios. Those deals, analysts said, won’t be easy.

“This doesn’t mean anything until you have the studios sign on,” said Josh Bernoff, an analyst with Forrester Research in Cambridge, Mass.

TiVo spokeswoman Kathryn Kelly confirmed that “the actual relationships with the studios needs to be figured out.”

More than 50 million households have the ability to buy individual shows or movies, either as video-on-demand or pay-per-view, according to Forrester.

Some download the movies on their computers from services such as Movielink; CinemaNow Inc.; or Starz! Ticket, an all-you-can-watch subscription service launched in June by RealNetworks Inc. and Liberty Media Corp.’s Starz Encore Group. In addition, MovieBeam, a service offered by Walt Disney Co., can blast movies electronically to specialized TV set-top boxes.

But the vast majority buy from their cable television providers, said Bernoff, who estimated that the market for on-demand video will be $900 million this year.

The reason is simple. “Services that connect directly to your TV have an advantage,” Bernoff said. “Anything that’s not connected to a TV is marginal. Families don’t lounge in front of their computer to watch movies. They do that in front of their TVs.”

From that perspective, Netflix and TiVo would have an advantage because their service would download movies to TiVo’s devices, which are attached directly to TV sets.

TiVo has sold 2 million such devices, but the agreement with Netflix applies to just 800,000 of those devices. That’s because 1.2 million were sold to News Corp.’s DirecTV satellite cable service, which is not a part of the agreement.

“While we have yet to be briefed by TiVo about this agreement, it certainly looks like a compelling new feature,” said Robert Marsocci, spokesman for El Segundo-based DirecTV, which currently does not have a video-on-demand service.

For Netflix, which gets all of its $272 million in annual revenue from mailing DVDs to online subscribers, the deal is a part of an effort to get ready for a distant future when mainstream consumers can sit on a couch and order movies at the click of a button.

Until then, “DVDs will remain the dominant way people watch movies at home for a long time,” said Netflix Chief Executive Reed Hastings. “Our announcement with TiVo is just the first step in a very long process.”

Netflix and TiVo face an uphill battle to win over Hollywood studios, which already have signed electronic distribution rights with other companies such as HBO, Showtime and Starz.

Starz, for example, has multiyear agreements with three major Hollywood studios and several independent studios for exclusive rights to electronically deliver movies on a subscription basis for six to eight years.

“We will vigorously defend those rights if any other entity attempted to” offer a similar subscription service, said Bob Greene, Starz’s senior vice president.

Shares of TiVo, which fell 17 cents to $6.62 on Nasdaq, jumped 43 cents to $7.05 in after-hours trading after the announcement. Netflix, which lost 96 cents to $15.42 in regular trading on Nasdaq, gained 87 cents to $16.29 after hours.