Movielink ? the Internet-based movies-on-demand service formed last year by MGM, Paramount Pictures, Sony Pictures Entertainment, Universal Studios, and Warner Bros. ? launched limited service on Monday, November 11. While not the first online movie service (CinemaNow and now-shuttered Intertainer were much earlier on the scene), the Movielink announcement has garnered a tremendous amount of press, even leading to ask if this could be the beginning of the end for retail video rental stores.

While this seems a bit far-fetched, those in the video rental are well aware of the potential damage that such a model could invoke. Blockbuster, the world?s largest video rental company, certainly believes the Internet delivery model may have a long term impact upon its business, and its 2001 annual report makes it very clear under what conditions Internet-based video-ondemand would become a competitive threat:

If quality content could be offered at a reasonable price; and
If newly released movies were made available at the same time, or before, they were made available to home video retailers for rental.

How does Movielink fare in these two regards?

In terms of pricing strategies, Movielink offers individual titles for between $1.99 and $4.99 each. Files are on average about 500 megabytes in size and, if an end-user has a broadband connection, take about an hour to download (which makes this model less ?on-demand? than pay-per-view). Users have 30 days to activate the title and, once activated, have unlimited viewing privileges for a 24 hour period.

In terms of content, Movielink is the first online service to make ?first-run? content available for (legal) downloading. In fact, many observers consider this to be the first real test of Internetbased movie rental.

To date, movies offered for (legal) download have been limited to second- or third-run titles, not the type of content that would truly test the business model. That was, until the studios decided to forge their own movies-on-demand service. With Movielink, consumers can now have (near) on-demand access to titles such as ?Ocean?s Eleven? and ?Harry Potter and the Sorcerer?s Stone? without having to make a trip to the video store.

But does the availability of first-run titles at reasonable prices via the Internet necessitate the end for the local video rental shop? Hardly. Then again, there are plenty of reasons for video retailers to be concerned.

First, Blockbuster and other video rental establishments currently enjoy a ?distribution window? over other post-theatrical movie distribution channels. Studios have come to depend heavily upon revenue generated by video sales and rentals, and have in turn supplied home video retailers with privileged access to certain titles for specified periods of time after their initial theatrical release. This distribution window is typically exclusive against most other forms of non-theatrical movie distribution, such as pay-per-view, premium television, basic cable and network and syndicated television. The length of this window varies by studio and video retailer, but typically ranges from about 45 to 60 days.

However, this distribution window is determined solely at the discretion of the studios, not the retailers. Should the studios decide to eliminate the window, alter its length, or modify the exclusivity of the arrangement, Blockbuster?s entire business model ? and the retail rental strategy ? could be ?negatively affected? (Blockbuster?s words, not mine).

Will this distribution window be eliminated? Probably not. Will it be modified? Absolutely, and almost certainly to the advantage of the studios. Keep in mind that, at least from the perspective of the studio, the primary driver for Internet-based movies-on-demand is to use Internet to deliver content directly to the end user, thereby bypassing both the video rental stores and network owners and avoiding revenue sharing while maintaining content integrity (i.e., avoiding the Napsterization of video content).

While this model holds promises, no one actually expects the local video store to disappear overnight anymore than online retailers displaced brick-and-mortars stores. Despite the hype, such a reality remains years in the future. Regardless of how pervasive Internet-based movies on- demand becomes, there will exist a large portion of U.S. consumers that relish the trip to the video store.

Nonetheless, Movielink ushers in a new genre of content provisioning capable of radically altering the business of movie rental. While you may disagree with this claim, to those likely impacted by this move, this is indeed big news.

Michael Greeson, senior analyst and director of broadband research, can be contacted by e-mail at or at 972.490.1113.