After years of avoiding it, Hollywood studios are preparing to let people download and buy electronic copies of movies over the Internet, much as record labels now sell songs for 99 cents through Apple Computer's iTunes music store and other online services.
The movie industry has in years past made half-hearted attempts to let people rent a small number of movies online, but the rapidly growing use of Internet video, both legal and pirated, is prompting it to create more robust download options and to consider online business models it dismissed as recently as a year ago.
The studios have been working for months to confront the technological and business challenges of digital sales. Those initiatives gained new urgency on June 27 when the Supreme Court ruled that companies distributing software that allows users to trade pirated copies of audio and video files are liable for copyright infringement only if they induce users to break the law.
Sony, for example, is converting 500 movie titles to a digital format that can be downloaded and sold. Universal Pictures, a unit of NBC Universal, which is 80 percent owned by General Electric and 20 percent owned by Vivendi Universal, is preparing nearly 200 titles for digital online sale. And Warner Brothers, a division of Time Warner, says it has already digitized most of its library of 5,000 films and will start selling some of them online later this year.
The studios have strong incentive to make sure they offer consumers legal options: the rapid adoption of high-speed Internet connections is making the trading of pirated copies online easier and more widespread.
"It just will be easier and easier to be a legitimate consumer and harder and harder to be a pirate," said James Ramo, the chief executive of Movielink, a movie downloading service established by five major studios three years ago.
Of course, nobody argues that legal video downloads are going to take off quickly. It still takes half an hour or longer to download a movie, more than it takes some people to drive to a video store. The picture quality on a computer screen is not as good as a television with a good cable hookup. And there are not easy ways to move movies downloaded onto a PC to a television set.
Still, there is already a growing group of technology-savvy video buffs who are using free file-sharing software like BitTorrent to download pirated programs, especially movies that have not yet been released to DVD and new episodes of TV shows.
Not surprisingly, the videos that people most want to download are those that Hollywood is most shy about making available online.
Studios do not want to undercut box office receipts and DVD sales for hit movies, and TV networks do not want to put popular shows online, which might allow more viewers to skip the commercials. Nor do they want to rush into new technology that itself could be perverted.
"Broadcast, satellite and cable are all good models that provide us the ability to generate revenue for us and are relatively safe from piracy," said Robert C. Wright, the chief executive of NBC Universal, expressing the widely held view of studio executives. "The Internet may be more convenient, but it is Dodge City."
Josh Goldman, the chief executive of Akimbo, a company that sells a digital video service delivered through a special device that connects television sets to the Internet, said that while the industry was starting to experiment, "everyone is holding back the best of their programming until they figure out the right model."
For example, Robert A. Iger, the president and next chief executive of the Walt Disney Company, said at a recent investor conference that he was interested in concepts like what he called "Desperate Housewives Plus," in which consumers could buy the right to watch an episode starting the day after it was broadcast along with additional scenes and "a few more bells and whistles."
Even without Hollywood's offerings, consumers are already seeing more video online as faster downloads and better software improves the experience. In the past, users had to download player programs in order to watch small blobs of color do herky-jerky dances in a small corner of their screens.
These days, more people watch free music videos online than on MTV's cable channel. Short videos, like political spoofs by JibJab Media, and clips of Paris Hilton's latest escapade, can be seen by millions of people.
CNN just moved most of its online video content from a paid service to its free Web site, with a commercial in front of each clip.
And even lengthier programming is gaining appeal. About 700,000 people watched the season premier episode of WB's "Jack and Bobby" through video streaming when it was on AOL last fall.
"We are finally getting to the point that enough people have high-speed connections," said Blair Westlake, the former chairman of Universal Television who joined the Microsoft Corporation last year as its chief ambassador to Hollywood.
"For digital downloads to take off, the content owners have to treat it as a viable business," Mr. Westlake said. "They say why rock the boat if you don't have sufficient numbers of potential customers?"
Hollywood is now betting that consumers will want to own digital copies of movies, much as they have embraced collecting DVD's. The final business deals are still being negotiated, and movies are not expected to be available for sale until this fall, but the outlines of how the business will work is clear.
The studios will most likely make downloads available to a wide range of online distributors. Those that are preparing to offer the movies include Movielink, MSN, Sony's Connect service, the Target Corporation's Target.com, and CinemaNow, an online movie rental store. Prices, to be set by the retailers, are expected to be similar to prices for DVD's, generally between $10 and $20.
The studios have decided that this model could well be at least as profitable as DVD sales.
Without the cost of distribution and the traditional retail markup, said Jeffrey L. Bewkes, the chairman of Time Warner's entertainment and networks group, a downloaded copy of the fourth Harry Potter movie, for example, could be sold "for the same price as wholesale." The wholesale price of a DVD is around $12.
Mr. Ramo, from Movielink, said downloads would appeal to people who travel because the movies can be viewed on laptop computers. And many more titles can be made available online than in a typical retail store.
"The more video retailing goes through big-box retailers like Wal-Mart and Best Buy, the more constrained shelf space will be. Therefore, it's likely the consumer will want to go online for a broader catalog," Mr. Ramo said.
Still, Movielink's initial business, which was an online video rental service, has had a tepid response, with only 100,000 rentals a month. And, the five studios that own Movielink have had a hard time agreeing on its business plan, and its offering has not been attractive to consumers: major movies cost $5, more than the cost at rental stores, and can only be watched for a 24-hour period.
Most important, the selection of films has been limited by Hollywood's complex method for selling the rights to a movie. After a movie appears in theaters, it is made available in succeeding time "windows" for showings on airplanes, cable pay-per-view systems, subscription cable networks like HBO, and then advertising supported broadcast and cable networks.
The only films that the studios can make available for Internet rental are those in the relatively short pay-per-view window and much older films. And even with the older titles, Internet rights have to be negotiated with the producers and owners of any music used on the film.
These rights issues have stymied NetFlix, the popular DVD-by-mail rental service, from carrying out its original plan of shifting its distribution online.
"If you asked me when we started in 2001 what percentage of our content would be downloaded in 2006, I would have said 30 to 40 percent," said Reed Hastings, the chief executive of the company. Mr. Hastings says the company will offer a downloading service this year, but only a small fraction of its 40,000 DVD titles will be available for download rental.
The download-to-own market does not face the tangle of rights issues as the rental market because selling an online copy is seen as the same as selling a VHS tape or DVD.
Still, there are some pesky technical issues that may limit the appeal of buying movie downloads. At first, the movies will be restricted to playing on a single computer with a television hookup. Some studio executives think this is far too narrow and consumers will want the ability to transfer movies to several computers, to portable devices and possibly to burn them to their own DVD's.
"The consumer experience is not good enough yet," said Yair Landau, vice chairman of Sony Pictures Entertainment, which is trying to work with other studios and electronics companies to define new legal structures for downloaded movies.
"If I sell you something that doesn't allow you to do what you want, it's not worth it," he said.
Other studios worry that more permissive schemes would invite piracy because the technology hasn't been commercially deployed that would allow people to make a limited number of copies of films without duplicating them for millions of their closest friends.
Kevin Tsujihara, an executive vice president of Warner Brothers Entertainment, argues that Hollywood must overcome those fears if it is to give consumers what they want. After all, the record labels were so cautious about not cannibalizing their existing business that they allowed piracy to flourish.
"If we are protecting a business, while at the same time not giving consumers what they ultimately want, it's not a sustainable model," Mr. Tsujihara said. "The music industry did a great job of not harming their ecosystem, but by doing that they killed their ecosystem."
From NY Times