Rental downloads more popular than sell-through

Prices, limited viewing options limit download-to-own sales

By Jennifer Netherby -- Video Business, 1/18/2008

JAN. 18 | With its move into the movie rental business this week, Apple became the latest digital player to acknowledge that the download-to-own movie business, as currently executed, isn’t catching on with consumers.

Movie download sales—also known as electronic sell-through (EST) or download-to-own—were expected to launch the home entertainment business into the digital era when they were first offered in 2006.

But with prices at or above that of DVD and limited viewing options, online consumers are choosing to rent movie downloads rather than buy them.

Apple sold 7 million movies through iTunes in the last year, more than all competitors combined, but CEO Steve Jobs said during his MacWorld keynote this week that sales failed to meet expectations.

“We think there’s a better way to deliver movies to our customers,” he said.

In the last six months, major Internet players Google and AOL both canceled their digital offerings citing poor sales, and Wal-Mart was forced out at least temporarily after service provider Hewlett-Packard exited, also blaming poor performance.

Meanwhile, Netflix and Microsoft’s Xbox Live Marketplace have entered the digital business in the last year, but steered clear of digital movie sales altogether. Netflix streams movies online as part of its DVD subscription plan, and Microsoft sells rental downloads. Starz Vongo has been one of the leaders in the market with its subscription service.

CinemaNow and Amazon.com Unbox, which offer both movie rentals and sales, say more customers rent than buy downloads.

“When we went to electronic sell-through a year ago, we had very high hopes that that was going to break this market open,” CinemaNow CEO Curt Marvis said. “The truth is, that didn’t prove to happen.”

Some of the high hopes for electronic sell-through came from the fact that movies are available the same day they debut on DVD, unlike rental downloads, which are available in the video-on-demand window 30 to 45 days after a film debuts on disc.

But execs say high pricing and restrictions on where consumers can watch downloaded movies have limited their appeal.

CinemaNow’s Marvis estimated that an electronic copy of a movie costs around $17, as much or more than a new release DVD. A digital rental costs around $4 for a new release, on par with a DVD rental.

Apple pushed for lower wholesale prices for digital movies, but retailers Wal-Mart and Target fought back, insisting the studios price digital copies comparable to DVDs.

Beyond pricing, execs point out that digital downloads tend to include just the movie, whereas DVDs also offer bonus features.

“Consumers do perceive a value difference,” Microsoft senior director of media and entertainment Ross Honey said. “When a consumer can hold the jewel case in their hand with all the studio put into them,” he said, noting booklets and other extras, “consumers attribute value to that, and digital doesn’t have that.”

Also, consumers who rent don’t have to worry about whether the type of file they are buying might become obsolete in the future as it is watched in a short time frame.

“Whether one becomes standard or works on a number of devices doesn’t matter, because they just care about tonight,” Honey said.

Microsoft saw its business double between December 2006 and December 2007. The company is exploring offering ad-supported movies and subscriptions, Honey said.

That’s not to say electronic sell-through is dead.

Amazon Unbox director Roy Price is more hopeful about digital sales, noting that although more consumers choose to rent, some prefer to buy a permanent copy.

Alex Carloss, Paramount Pictures Digital Entertainment executive VP and general manager worldwide for digital distribution, said that in the studio’s experience, rental and sell-through sales are about equal, noting that the studio saw strong sales of Jackass 2.5, which it debuted online.

Amazon’s Price said digital offerings are continuing to improve and one of the biggest drivers for the industry will be connection to the TV.

“One thing that’s going to evolve to some extent is the home environment and how easy it is to get video from the Internet to your TV,” Price said. “There are going to be a lot more options for people than there used to be.”

Amazon began offering its downloads through TiVo last year, something that Price says has helped sales.

“There’s no question that people like to watch movies on the TV,” he said.

What the shift to rental and subscription could mean for DVD is anyone’s guess at this point as the digital business is so small. In its latest report on online movie viewing done in June 2007, NPD Group found that just 5% of consumers had downloaded a movie in the prior four weeks, and the research firm doesn’t expect those numbers to change much when it does its next report in February.

“It’s not big enough of a category” to impact DVD, said Ron Sanders, Warner Home Video president. “Even if it was 100% cannibalistic, there would not be much of an effect.”

He noted hopefully that the Walt Disney Co. has reported that its iTunes business is all additive.