More people are watching movies online, but few are buying them


Consumers long ago switched their shopping habits to the Internet, so that now most don’t hesitate to buy cameras, TVs, books, appliances, cars, clothing, even foreclosed homes online. There appears to be no product that shoppers don’t prefer to buy with the click of a mouse.

No product, that is, except movies.

A strange thing has happened on the way to the digital revolution. For more than a decade, Internet movie downloads and streaming — the two ways to watch movies online — were too complex for all but dedicated techies to use.

In the last couple of years, however, a proliferation of new consumer-friendly devices like Apple TV, PlayStation 3 and Web-enabled televisions have finally started to push online viewing of movies into the mainstream.


But although more people are turning to the Internet to watch movies, they have little interest in buying them.

“We are finally at the tipping point where digital is becoming relevant,” said Curt Marvis, president of digital media for Lionsgate. “But right now rental is dominant over sales.”

The shift in consumer habit is destabilizing for the Hollywood studios that had been hoping people would seamlessly transfer their DVD-buying habit to the Web.

Hollywood’s DVD gusher, which propped up studio profits for more than a decade, peaked at $20 billion in 2006, more than twice that of box office ticket sales. DVD sales were far more profitable than rentals, because the discs cost less than $1 each to stamp and were sold to retailers for $17.

But in the last few years DVD sales have plunged as recession-weary consumers cut spending and switched to cheaper rentals from Netflix and Redbox. Lower-margin rentals have, in turn, resulted in lower revenue for the studios.

Sales of more expensive high-definition Blu-ray discs are growing, but not enough to make up the difference. In the long run, home entertainment will eventually become primarily an online business, just like music. For the movie studios to maintain profits, it’s crucial that they persuade consumers to keep buying movies online.


“If purchases keep declining or go away and the industry migrates to rental and subscriptions in the digital world, there will inevitably be a reordering of finances in Hollywood,” said Warren Lieberfarb, a consultant who was previously president of home video for Warner Bros.

The trend toward online rentals has been accelerating.

U.S. consumers will rent 37.7 million movies online this year for $3 to $5 each, according to Screen Digest. That’s a nearly sevenfold increase from 2007, and it doesn’t include the more than 300 million estimated videos streamed via Netflix’s subscription rental service. Meanwhile, consumers will buy about 20 million movies this year for $10 to $15, a less than threefold increase since 2007.

There’s little dispute over why online viewing is flipping to renting from buying: Rentals provide the same experience for the same price as a DVD from Blockbuster without requiring people to get up from the couch.

When consumers buy a DVD, however, they expect to be able to watch it as frequently as they want, whether it’s on a player in the living room, bedroom or minivan. Online digital purchases of movies cost the same as a DVD but can’t be easily transferred between devices because of the same technical differences that make it impossible to use Mac software on a PC.

Some who follow the home entertainment industry believe the die is already cast. Renting a movie online is so simple, they say, that there will be little need to own a film anymore.

“We’re almost inevitably moving toward a model in which download-to-own is a niche business,” said Arash Amel, research director for digital media at Screen Digest.


Mitch Singer disagrees. The chief technology officer of Sony Pictures has spent more than four years putting together a coalition called Ultraviolet. Its members — studios, manufacturers and online stores — are working to allow anyone who buys a movie online to watch it on an array of devices.

Currently in tests and expected to launch next year, Ultraviolet would allow consumers to store movies they buy in a “digital locker” accessible from any connected device. A user could theoretically buy a film from a Web-enabled TV and then allow their child at college to watch it on a mobile phone.

Studios are considering other far-reaching plans to encourage digital movie sales, from free online copies of DVDs consumers already own to pre-loaded movies on new electronic devices.

“2011 might be a watershed year in making download-to-own better for the consumer,” said Thomas Gewecke, president of digital distribution for Warner Bros.

There are also plans to make rentals more profitable by charging as much as $30 for “premium” video-on-demand before a DVD release — in effect, a surcharge for getting to watch the movie earlier.

But obstacles remain. Convincing consumers it’s worth learning to use a new online registration system is no easy task. “It’s very challenging to describe this to consumers,” said Bruce Anderson, senior vice president of Blockbuster’s digital efforts.


And not every company is part of Ultraviolet. Walt Disney Studios is working on a competing venture called Keychest. Apple, the biggest seller of movies online, is not participating in either project.

Meanwhile, because of studios’ deals with pay-cable channels such as HBO, movies disappear from and reappear in online stores with no explanation, potentially confusing customers. That’s because the networks have exclusive rights to pipe movies into homes during a series of cycles that begin four to six months after the DVD release.

These pay-cable “windows” are so restrictive that consumers wouldn’t even be able to access movies they own in Ultraviolet’s digital locker during one of those blackout periods.

Studio executives say they’re optimistic that particular headache will be resolved soon. But the pay channels are unlikely to allow movies to be sold online while they have the rights unless they negotiate a reduction in rights fees worth hundreds of millions of dollars per year.

“We anticipate finding common ground with our studio partners on the issue of digital technology just as we have with many other technological enhancements over the years,” said Bruce Grivetti, HBO’s president of film programming. “We pay a premium price to our studio partners, and in return our subscribers get what they expect from HBO: high-quality, exclusive content.”

Digital distribution veterans say the HBO conflict is the latest example of a tension that has always underlain the business: the desire to increase Internet revenue without putting substantial but shrinking profits from DVDs and television at risk.


“It’s a bit of a Catch-22,” said Jim Ramo, who was chief executive of Movielink, a defunct joint venture among five major studios to sell movies online. “The studios don’t want to risk their traditional model unless they see an opportunity to make more in online distribution. Yet unless they add something new to digital, they may be holding that business back.”