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MARCH 24, 2003

COMMENTARY
By Jane Black

Hollywood Needs a Digital Story Line
[Page 2 of 2]


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WHY WAIT?  These phases, known as distribution windows, sprang up over the years as new platforms for watching movies emerged. Each cycle is designed to extract maximum revenue from each film. Moviemakers say the windows also serve the needs of different types of fans -- from the Lord of the Rings aficionado who'll line up to pay $10 to see the film on the big screen to the movie-loving insomniac who'll watch it in reruns at 2 a.m.


On-demand content is almost certain to throw this orderly -- and profitable -- train off the rails. Once consumers acquire a taste for on-demand movies, they may no longer be content to wait six months or a year to see Catherine Zeta-Jones shake her stuff in Chicago. The windows that Hollywood relies on will narrow, and perhaps collapse. And without them, it'll be hard to spring for big-budget pictures like Gangs of New York that cost more than $100 million to produce.

Already, arcane distribution windows are hampering Movielink's efforts to create a compelling service. It rents its catalog of 250 movies during the 90-day pay-per-view/on-demand window. That means you can get The Bourne Identity, Vin Diesel's XXX, or Barbershop just after they come out. But three months later, Movielink purges them from its library for two years while they're shown on cable and broadcast TV. If you unwittingly rent a film on the 89th day of the window, it will disappear from your hard drive in 24 hours (Movielink codes it with an automatic self-destruct mechanism) rather than the usual 30 days (in either case, you get only 24 hours to watch a film once you've started).

"CLEANING UP."  "The only reason [Movielink] was created was as an answer to Napster," says David Miller, an entertainment analyst at investment firm Sanders Morris Harris in Los Angeles. "Execs don't want on-demand to become a reality because they're cleaning up on DVDs."

Indeed, DVDs are to movies what CDs were to the music industry a decade ago. The new format has better sound and extra, behind-the-scenes content that have captured the public's imagination. DVD sales of the first installment of Lord of the Rings grossed $280 million in 2002, according to trade paper The Hollywood Reporter. Spider-Man came in No. 2 at $215 million, while Pixar's animated hit Monsters, Inc. tallied an estimated $214 million. DVD operating margins are of old-fashioned star quality: Analyst Miller puts them at 45% to 50%.

The movie industry may be mistaken, however, in thinking that the good times will roll forever. If Hollywood is to avoid the same grim future facing the music companies, which have been embroiled for years in legal battles with Web sites and consumers, it must permit digitization and on-demand content, and turn the time-honored business model on its head. That means deciding that home video and pay-per-view windows aren't sacrosanct.

NO REVOLUTION?  Why not let a Julianne Moore fan pay a premium to watch a double feature of her in The Hours and Far from Heaven before the DVDs hit the streets? "Digital enables greater flexibility," says Charles Swartz, executive director of University of Southern California's Digital Cinema Lab. "It's important for businesspeople in the entertainment industry to keep their minds open and think about what digital really can enable."

Of course, some folks believe that digital distribution is just another Hollywood window, not a technology that will turn the business upside down. "We don't think a revolution is coming any time soon," says Leo Kivijarv, director of research at Veronis Suhler Stevenson in New York, an entertainment-business research firm. "College kids may download movies and watch them on their PCs, but the farmer in Nebraska won't do it. Nor will a waitress in New Jersey."

Tell that to the music industry, though. A survey last month by polling firm Ipsos-Reid revealed that 40 million Americans downloaded illegal music from one file-sharing service or another in 2002. New compression and storage technologies are making it faster and easier to download movies over the Net.

If Hollywood doesn't act now, it will, like the music industry, learn to regret it. Maybe not today. Maybe not tomorrow. But someday. And for the rest of its life.

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Black covers technology for BusinessWeek Online in New York
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