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YouTube Explores Renting Movies Online

A service offering $3.95 movie rentals would be a departure from parent Google's advertising model—and a leap of faith for wary movie studios

The video-sharing site YouTube is hoping its attempt to woo Hollywood studios will go better this time.

Sources close to the discussions with studios say that YouTube executives have raised the notion of a service that would charge $3.95 to rent a movie, the same rate Apple's iTunes Store charges for new movie rentals and similar to video-on-demand prices. If reached, the deal would put Google's (GOOG) YouTube in direct competition not just with Apple (AAPL) but also with online movie rental services from Netflix (NFLX) and (AMZN). It would also, for the first time, allow YouTube to begin charging consumers for its content. However, the sources said talks are at a very early stage, could take three months or more to come to fruition, and that details are far from set in stone.

YouTube is by far the most popular video site, though much of the material is either clips or snippets provided by studios and other companies for marketing purposes, or videos contributed by amateurs. YouTube's traffic, however, represents a huge audience ready for movies and other professionally produced video—Google sites, chiefly YouTube, drew nearly 121 million viewers in July, according to ComScore (SCOR).

For the past year or so, Google has pressed to come up with ways to make money on YouTube, which is believed to be losing money, though how much remains a matter of great debate. It has come out with a series of new ad formats. But so far, even Google CEO Eric Schmidt has conceded that the site hasn't lived up to its revenue hopes. Schmidt said in April that YouTube would try micropayments and other subscription models.

Strong Objections from Paramount

YouTube's Hollywood efforts apparently began with talks involving Warner Bros. (TWX), which led to an agreement to allow more clips from TV shows Warner produces, such as Gossip Girl and The Ellen DeGeneres Show, to be seen on YouTube. Warner has so far resisted allowing YouTube to show full episodes of its shows. The Wall Street Journal reported that YouTube also is talking with Lions Gate (LGF) and Sony (SNE) about the movie service. Industry sources told BusinessWeek that MGM is also talking with YouTube. Notably absent so far are two Hollywood studios that tend to be toughest on protecting their copyrights: Walt Disney (DIS) and Fox, a unit of News Corp. (NWS).

Perhaps not surprisingly, Google is hearing strong objections from one corner: Viacom's (VIA) Paramount studio, the home of recent movie hits Iron Man and Transformers. Viacom has a two-year-old lawsuit wending its way toward trial that seeks $1 billion in damages and alleges that Google looked the other way as pirated TV shows and other content were being viewed on YouTube.

Lingering concern about YouTube's ability to protect copyrighted content from being illegally uploaded to its site seems to be hanging over YouTube as it tries to line up studios to give it their newer movie releases, says one knowledgeable Hollywood source. YouTube officials say they work hard to keep copyright-infringing material off the site.

The studios are less concerned about pirating of TV shows—currently YouTube hosts ad-supported TV shows such as those streamed online by, the site that is supported by NBC, Fox, and ABC. One studio executive explained that's because TV shows tend to have commercials embedded in them. Movies, however, are another matter. And Viacom's lawsuit is a reminder to some in the movie industry that YouTube can be less than accommodating to its needs.

Still, with DVD sales declining, companies such as Sony and Warner Bros. have been pressing for new ways to exploit their movies. They might take a chance on a YouTube service and hedge their bets by holding back some of their higher-grossing films, said one executive who has followed the discussions. There is also an outside chance, says another studio executive, that a deal with Paramount could include a settlement with Viacom over the copyright lawsuit. "They had better be prepared to write Viacom a big check if they think that's going to happen," says the source. "There is very bad blood between those two."

Grover is Los Angeles bureau chief for BusinessWeek. Hof is BusinessWeek's Silicon Valley bureau chief.

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