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Digital Rental Matches Consumer Behavior

29 Mar, 2007 By: Jessica Wolf

The digital rental segment of the burgeoning download market may not be as flashy as electronic sellthrough, but it's the one with the most staying power, providers say.

Netflix's announcement in January that it will add Watch Now — a free streaming service — to its subscription rental site came as a bit of a surprise to pundits who were expecting the company to launch a download service more along the lines of Amazon's Unbox or download vets Movielink and CinemaNow.

Netflix has been watching closely what people are doing on the Internet, said chief content officer Ted Sarandos. What consumers are doing, he said is watching “instant-access,” often ad-supported streaming content.

“What we're doing [with Watch Now] is much closer to that consumer behavior than what everyone else doing, which is trying to replace the DVD as a sellthrough piece, when as a sellthrough piece the DVD is a phenomenal product,” Sarandos said.

Right now, a digital file is actually less portable than DVD because of the difficulty of getting it to the TV set, he pointed out.

“That's why I don't think electronic sellthrough is that interesting of a business,” Sarandos said. “We do think that instant viewing — today online, and eventually on the TV — is a phenomenal business, and it's more in tune to what consumers are asking for, judging by their behavior.”

Focusing on Rental

Consumer behavior came very much into play as BitTorrent launched its newly designed and re-vamped BitTorrent Entertainment Network this month, with movies available for $2.99 or $3.99 rental and TV shows for $1.99-per-episode rental.

Right now, the site is focusing on rental only for major movies, mostly because of pricing issues, said Eric Patterson, VP and GM of BitTorrent's consumer services. The site's movie slate won't be rental-based forever, he said.

“You'll see us rolling out video sales pretty quickly, but we're in the midst of transitioning a user base that's used to getting stuff for free, so we're paying particular attention to price points,” Patterson said.

The $3 or $4 for a digital rental is a good range for sampling, and to get users comfortable with the new and improved BitTorrent, he said.

BitTorrent isn't the only company straddling digital rental and electronic sellthrough. Amazon's Unbox, Movielink and CinemaNow all also offer a slate of rental and sellthrough downloads.

Just last week, Microsoft was tooting its horn as the No. 2 provider of digital downloading, behind Apple's iTunes, thanks to the computer company's primarily rental-based Xbox Live Video Marketplace service for the Xbox 360 platform.

Building Partnerships

Meanwhile, the major rental chains are definitely interested in keeping on top of the digital rental evolution, whatever it may bring.

Top chain Blockbuster Inc. is rumored to be in talks to purchase one of the early players in the digital delivery market, Movielink, for about $50 million. Recently, No. 2 chain Movie Gallery added data-casting, set-top box service MovieBeam to its delivery coffers for less than $10 million.

Rental is a big part of digital downloading's future, said Mary Coller Albert, chief marketing officer for Movielink.

“There are a lot of movies you want to watch, but don't want to own, and these are big chunky [digital] files,” she said.

The biggest challenge for digital-rental offerings, outside of building a user-friendly technology infrastructure, is licensing content, providers said. Movielink always had it a bit easier, having been founded by consortium of studios Albert said.

But, even with the explosion of availability over the past year or so, because of complicated, lucrative and long-standing deals studios have with cable providers for pay-per-view, most movies are not available for digital rental at the same time they arrive on DVD.

For example, recent theatrical release Gridiron Gang, starring The Rock, hit DVD and electronic sellthrough Jan. 16 from Sony Pictures Home Entertainment, but didn't turn up on digital rental offerings until more than a month later.

Similarly, this year's best animated Oscar winner Happy Feet, which hit DVD March 27 from Warner Home Video, was widely available for electronic sellthrough last week, but not for digital rental.

Rental rights are similar across service providers. Most rental downloads will remain active for 30 days, with the option to view once a day.

Competition From VOD and PPV

Internet delivery of rental-priced movies can be seen as the biggest competitor to cable-based VOD and PPV. Studios have lucrative and tightly locked deals with cable providers on that front. To that end, only Starz Entertainment-owned Vongo.com can offer digital rental of major titles on a $9.99 monthly subscription basis. And even then, the site can only offer what titles are currently in rotation on Starz cable channels.

Several studios are testing simultaneous DVD and PPV with cable giant Comcast.

It's one reason studios are reconfiguring their organizations, Movielink's Albert said, to make sure they aren't leaving any licensing options on the table.

“I think you will see day-and-date DVD and digital rental starting to happen over the course of 2007,” said Curt Marvis, CEO of online movie site CinemaNow.

Meanwhile, computer company Microsoft has earmarked an early claim in the high-definition movie download market with its Xbox Live Video Marketplace.

The 4.5 million Xbox Live gamers have access to digital rental of new and library titles in high-definition from Warner Bros. Pictures, Lionsgate and as of last week, Paramount Pictures.

High-definition is pretty far out of the realm for most digital providers. Broadband penetration and bandwidth speeds is getting better all the time in U.S. households, providers said. But so far, it's just good enough for most people to download DVD-quality files.

Competition for the small-but-growing stable of Internet renters is getting fierce.

BitTorrent execs believe its service's speedy downloads, thanks to peer-to-peer sharing technology, will help set it apart from the pack. BitTorrent is also talking an editorial approach, with an “irreverent” attitude on the site, and upcoming options for independent filmmakers (not just anyone with a video camera and a few minutes to spare) to showcase their work, Patterson said.

Amazon has the luxury of offering promotions such as tying dollars-off download deals to DVD purchases, which it has done recently.

Netflix has a built-in subscriber base for its streaming service. Movielink and CinemaNow executives both said their services will rise above because they are pure-play Internet delivery companies.

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