The lowdown on movie downloads

IT’S A FAMILIAR story line in Hollywood: An innovative high-tech company unveils a revolutionary new way to sell entertainment, only to be waylaid by giant retailers that don’t want to disturb the old ways. This kind of conflict delayed videotapes and DVDs, doomed CD-burning kiosks, slowed the development of downloadable music stores -- and now it’s affecting the nascent downloadable movie business.

Apple Computer unveiled its long-awaited online movie store Sept. 12, offering for $10 to $15 feature films that could be played on a Mac, a PC or a video iPod (or all of the above). It also showed off a prototype of a TV converter box that would let viewers beam the films they buy from Apple from their computer to their TV set.

But despite the hype, the shelves at the iTunes store were relatively bare, offering only 75 movies, all from Disney and its subsidiaries. By contrast, when Apple launched its iTunes Music Store in April 2003, it had more than 200,000 songs from all five of the major record companies and top independent labels.

Where were the rest of the studios? Some reports blamed their absence on Wal-Mart and other big retailers, the partners that Hollywood can scarcely afford to alienate. It’s a symbiotic relationship: New DVD releases drive shoppers into the stores, and the resulting sales -- with profit margins about 80% -- drive up the studios’ revenues.

Thanks to aggressive pricing by Wal-Mart and other large retailers, DVD sales have become the lifeblood of the film business, accounting for more than 40% of the studios’ revenue, according to analyst Jan Saxton at Adams Media Research. By contrast, downloadable movie sales are expected to account for less than $12 million this year, Saxton said. Studios make five times that amount from DVD sales and rentals every day.

The studios’ reasons for withholding movies from iTunes are more complicated than that, however. Yes, they’re leery of anything that could dim Wal-Mart, Best Buy and Target’s enthusiasm for selling DVDs. But there are two other factors that pose an even larger hurdle to the sale of downloadable movies: technology and profit margins.

The concept of an online movie store with unlimited shelf space should be appealing to any movie buff who’s ever left a video store empty-handed. But today, there’s no easy way to watch a downloaded movie on your TV. With rare exceptions, sets can’t simply be plugged into a modem or home network, nor can the set-top boxes provided by cable and satellite TV services. That situation is starting to change -- for example, Echostar plans a Dish Network receiver that can get downloadable movies from CinemaNow, and Apple plans to sell its $300 converter box next year -- but it may take years before these devices proliferate and connect the average living-room TV to the Internet.

Apple’s video iPods can already bridge that gap. People who buy TV shows or Disney movies from Apple can transfer those files to a video iPod, then use a $19 adapter to connect the iPod to a TV. But several studios recoil from this approach because it leaves their downloads, which are scrambled to deter piracy, open to bootlegging. Someone could connect the iPod to a digital recorder instead of a TV and crank out unlimited copies of the movies they buy. The studios want Apple to require a specialized, secure connection between the computer and the TV, a concession Apple has not been willing to make on its iPods or, apparently, its converter boxes. Apple probably wants to know why, given that conventional DVDs are just as vulnerable to that kind of copying, it should be required to take such costly and user-unfriendly security precautions.

The simplest approach to moving a downloaded movie to the TV would be to burn it onto a DVD that could play on a conventional DVD player. But Hollywood has insisted that the discs have electronic locks to limit copying, just as packaged DVDs do.

This is no mean feat; conventional players can handle only one kind of lock, and today’s DVD burners aren’t equipped with them. There are some emerging technologies that can solve this problem, but either the studios have been reluctant to try them on new releases or the tech and entertainment industries have been slow to deploy them.

Summing up the technical landscape for downloadable movies, analyst Josh Bernoff of Forrester Research said that “there’s not going to be enough people with the right devices to have an enjoyable experience for three to five years.”

Apple Chief Executive Steve Jobs also pressed the studios to cut their wholesale prices sharply so he could sell downloadable movies for $10. That’s $6 to $8 less than the studios demand for a new-release DVD. Many studio executives fear that movie buyers will simply replace DVDs with downloads. They want to keep profit margins the same for both types of product. Given the relatively small difference in cost between a mass-produced DVD and a downloadable movie (as little as $2 to $3, analysts and studio executives say), studios are looking for wholesale prices of about $14 or $15. Throw on another dollar or two for the retailer, and a downloadable film doesn’t seem like much of a bargain -- especially when there’s no easy way to watch it on TV or make a permanent copy.

In spite of all these impediments, Apple still managed to sell more than 125,000 Disney movies in its first week, generating about $1 million for the studio. The store’s sales dwarfed those at all other downloadable movie outlets, suggesting that Apple was once again succeeding where its predecessors had failed. Still, the chances of Apple revolutionizing the way people buy movies as quickly as it did with music are slim, given the critical differences between those markets.

Simply put, the music industry was ready for change when Apple launched its iTunes Music Store in 2003 -- millions of people were already downloading tunes and using their computers as jukeboxes, and the sharp drop in CD sales made the labels receptive to Apple’s terms. Apple also was already selling a device that perfectly captured all the benefits of the change from CDs to downloadable tunes.

That’s not the case with movies. Downloadable movies may ultimately prove to be more compelling than DVDs, but they’re not today -- either for Hollywood or the average movie buff.

jon.healey@latimes.com