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NetMovies, in Beta, Is Another Blockbuster Move to VOD

28 Nov, 2002 By: Holly J. Wagner


While most eyes in the video-on-demand (VOD) arena are focused on the soft launch of the major studio joint venture Movielink.com, another service, NetMovies, is beta testing for a first-quarter launch next year.

Both services are focused on delivering ‘A' movies via the Internet and both face the same hurdles in terms of home broadband penetration and consumer acceptance of computers as entertainment hubs -- a theory analysts doubt out of the gate.

“Only 10 percent of those consumers surveyed said they were interested in watching feature films online. And interest does not equal willingness to pay for such a service,” said Jupiter Research senior analyst Lydia Loizides. “Thirty-one percent expressed frustration with online entertainment because video is too slow, and 26 percent expressed frustration because the content they want is not free.”

But NetMovies has a couple of significant differences. For one thing, Movielink has backing from five major studios: Sony, Universal, Paramount, MGM and Warner Bros. Netmovies is backed by angel investors, including the company's president, John Fanning; CEO Martin Kay; and, quietly, Blockbuster Video, which Fanning said ponied up “more than 30 percent, but less than 50 percent” of the venture's $4.8 million in seed capital.

“They put in millions of dollars into the company, and they are very involved in the content licensing process with us. That is something we are essentially working hand in hand to negotiate with the studios,” Fanning said. “We've gone around the major studios with [Blockbuster CEO] John Antioco and [general counsel] Ed Stead. They introduced us as their deal in this space.”

Another difference is the peer-to-peer (P2P) service NetMovies runs on, a distributed network harnessing the aggregate computing power of its users.

If that modus operandi sounds suspiciously like the technology behind the infamous Napster, it's no surprise. NetMovies.com president Fanning was one of the major forces behind Napster, the P2P file sharing network his nephew, Shawn, invented.

“The most unique feature is our architecture, which drives our cost structure,” Fanning explained. “One of the biggest impediments is the cost of bandwidth, the cost of moving a file” from a hub network.

“We combined the economics of P2P with the digital rights management,” Fanning said. “Ours is not a published network like the others are. We distribute one copy.”

As a result, Fanning estimates the cost of bandwidth for distribution is at about 10 cents per movie vs. about $1.50 from a central hub. The way he explains it, if Movielink is an entertainment smorgasbord, NetMovies is more of a potluck, at least as far as computing power and fee structure are concerned.

“They're terrified of the football team showing up at their all-you-can-eat buffet. Our users bring their storage and bandwidth,” he said. “That's sort of at the core of our approach that makes it different from any other service out there. It allows us to emphasize catalog versus new-release content. Movielink is happy with a couple hundred movies because of their structure. The more users we have, the more content we can have. We can make money off a very low number of downloads. A broadcast model can't make money on a movie that only 100 people want to watch.”

Not everyone is convinced.

“As for whether or not the infrastructure of NetMovies gives it an advantage -- possible but not enough to skyrocket them to success,” Loizides said.

“Several factors need to converge to achieve success: acquiring top-tier content, getting distribution and attracting an audience willing to pay for such a service.”

Movielink CEO Jim Ramo echoed those concerns, adding that Movielink is positioned to refine its services while household penetration and consumer behavior catch up.

“There is a minimum critical mass of broadband-enabled residences to launch a service like Movielink, but there has to be the development of consumer behavior to view paid-for movies downloaded over the Internet. That takes an investment in infrastructure and marketing, and a large penetration of the existing broadband market or the further expansion of broadband's footprint,” said Ramo. “One of Movielink's roles is to be an application that helps grow broadband in general and the ‘entertainment on broadband' category in particular to get more users.”

NetMovies' planned content could also put it in competition with another VOD site with Blockbuster backing, Cinemanow.com, which relies heavily on independent and catalog content. Cinemanow CEO Curt Marvis did not respond to requests for comment for this article.

Still another differentiation for NetMovies is its offer of a subscription pricing model.

“Right now, our pricing is $4.95 a month for a basic subscription that allows you to access older content as much as you want,” Fanning said. “We may at some time go live with a premium subscription level. Newer titles will be offered on a pay-per-view basis” priced at $1.99 to $3.99.

NetMovies should be on a roughly equal footing for access to content and fees as other VOD providers, Fanning said, because studios are being careful not to fall afoul of the federal Department of Justice, which is monitoring the VOD ventures for antitrust concerns. While NetMovies has yet to announce a deal, Fanning said studio deals are in place and that NetMovies will revenue-share on its titles at the customary 40 percent to 60 percent rates, depending on title.

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