The lowdown on movie downloads

IT'S A FAMILIAR story line in Hollywood: An innovative high-tech company unveils a revolutionary new way to sell entertainment, only to be waylaid by giant retailers that don't want to disturb the old ways. This kind of conflict delayed videotapes and DVDs, doomed CD-burning kiosks, slowed the development of downloadable music stores -- and now it's affecting the nascent downloadable movie business.

Apple Computer unveiled its long-awaited online movie store Sept. 12, offering for $10 to $15 feature films that could be played on a Mac, a PC or a video iPod (or all of the above). It also showed off a prototype of a TV converter box that would let viewers beam the films they buy from Apple from their computer to their TV set.

But despite the hype, the shelves at the iTunes store were relatively bare, offering only 75 movies, all from Disney and its subsidiaries. By contrast, when Apple launched its iTunes Music Store in April 2003, it had more than 200,000 songs from all five of the major record companies and top independent labels.

Where were the rest of the studios? Some reports blamed their absence on Wal-Mart and other big retailers, the partners that Hollywood can scarcely afford to alienate. It's a symbiotic relationship: New DVD releases drive shoppers into the stores, and the resulting sales -- with profit margins about 80% -- drive up the studios' revenues.

Thanks to aggressive pricing by Wal-Mart and other large retailers, DVD sales have become the lifeblood of the film business, accounting for more than 40% of the studios' revenue, according to analyst Jan Saxton at Adams Media Research. By contrast, downloadable movie sales are expected to account for less than $12 million this year, Saxton said. Studios make five times that amount from DVD sales and rentals every day.

The studios' reasons for withholding movies from iTunes are more complicated than that, however. Yes, they're leery of anything that could dim Wal-Mart, Best Buy and Target's enthusiasm for selling DVDs. But there are two other factors that pose an even larger hurdle to the sale of downloadable movies: technology and profit margins.