WAS MOVIE SERVICE'S FAILURE A STUDIO PLOT?

By Michael Hiltzik
June 9, 2003

The one thing about the Intertainer service on which everyone can agree is that it was ahead of its time.

Founded in 1996 to deliver movies on demand to cable television subscribers, it soon evolved into a system to deliver movies on demand to customers' PCs over a dedicated Internet connection. In both incarnations, the service seemed to stretch the information infrastructure to the limits of its capabilities, and possibly a little beyond.

It relied on broadband Internet connections at a time when only a minuscule minority of American consumers had access to cable modems or DSL. (It's still a minority, but much larger today than it was then.) The very notion of receiving entertainment content digitally was a novel one for consumers, as Napster Inc. hadn't yet turned millions of music listeners into pirates. And many technical issues associated with managing and sending video streams through cyberspace were still being worked out.

But there was never any doubt that Intertainer Inc. was onto something revolutionary: video you could order for viewing at any time, with the ability to fast-forward, reverse, pause and stop the program at will. By September 2002, the company claimed 125,000 Internet subscribers and an additional 35,000 who received a TV-based service via Comcast Corp.'s cable system.

At that moment, just as the technical issues seemed to be on the verge of getting resolved and broadband penetration into the home seemed about to take off, Intertainer shut down. The reason, according to its co-founder, Jonathan Taplin, had nothing to do with technology or customer acceptance. Instead, he says, it was torpedoed by the movie studios.

Their concern, he contends in a lawsuit currently in the discovery phase in federal court in Los Angeles, was that Intertainer stood to become a serious competitor to a service, now called Movielink, that was about to be launched by five major studios. (Movielink's owners include Sony Corp.'s Sony Pictures Entertainment, Vivendi Universal's Universal Studios and AOL Time Warner Inc.'s Warner Bros., which had contracts with Intertainer and are named in the Intertainer lawsuit. The other owners are Metro-Goldwyn-Mayer Inc. and Viacom Inc.'s Paramount Pictures, which aren't named in the litigation because they never reached distribution deals with Intertainer.)

Because the studios saw Movielink as a vehicle to exercise control over the price and terms for digital distribution of their films, Taplin maintains, they wanted to make sure it had a clear field. The idea was that they could set prices for film licenses by negotiating Movielink's distribution deal with, in effect, themselves; they could then cite those terms as the industry standard in talks with other distributors.

Movielink "completely represents collusion," Taplin says. "It's price fixing. They're using it to not only screw us, but anyone else who wants to buy movies from them."

Pricing Leverage

He's not alone in that view, as it happens. "One of the main purposes of Movielink is to give the studios a way to put pressure on cable operators to get a better deal," Josh Bernoff, a media analyst at Forrester Research, told me.

For his part, Taplin also asserts that as a joint venture among a critical mass of major entertainment producers, Movielink signifies a new effort by Hollywood to control not only the creation of content but its distribution too. By that measure, it's part and parcel of the trend toward media consolidation in the U.S.

Already, a single company might control a movie studio, a TV network, a slate of cable channels and a big cable system. Implausible? Consider AOL Time Warner, which owns Warner Bros. studios; the WB television network; cable channels such as HBO, TNT and CNN; and the giant Time Warner Cable, which is in turn the largest cable Internet provider in the country. (And that's just a partial list of the company's holdings.)

This sort of consolidation was given a big boost last week by the Federal Communications Commission's vote to liberalize media ownership rules, but in the old days - when antitrust rules meant something - it used to be decried as "vertical integration." Given that Movielink is an alliance of AOL Time Warner with four other major entertainment companies, Taplin hardly seems out of line in labeling the service "vertical integration on steroids."

Studio spokesmen counter that this is all conspiracy-mongering. They say they started Movielink to avoid the mistake made by their music-industry brethren, who were so negligent about setting standards for Internet distribution of their goods that they allowed Napster and its offspring to turn us into a nation of digital thieves.

"We didn't want a piracy problem," says Susan Tick, a spokeswoman for Sony Pictures Entertainment, whose parent company was a shareholder in Intertainer and is a partner in Movielink. "We wanted a legal way of doing this" - downloading movies - "for people who wanted to buy it, not swipe it."

She insists that her studio's dealings with Movielink are all at arm's length, just as they are with other distribution services such as video rental companies, cable movie channels and retailers. The studios relish having multiple distribution channels of all sorts, she says. "We have never viewed Movielink as a one-and-only, any more than we view Blockbuster as the only rental outlet or Wal-Mart as the only retail outlet."

Yet Taplin tells a compelling story of how the major studios tried to extract onerous financial terms from his company before cutting off much of its movie supply just as Intertainer was undertaking a nationwide roll-out.

The 55-year-old Taplin started Intertainer with a partner and with financial backing from Microsoft Corp., Comcast and Sony. At the time he had been working with Microsoft to try to launch an entertainment Web site over the sluggish dial-up modems of the time. One day in early 1996, he saw a demonstration of a high-speed cable modem at an industry lab. "That was the 'a-ha' moment," he recalls. For the very first time the possibility of sending video-quality moving images over the Internet seemed real. A year later, Intertainer launched a test program for Comcast subscribers, and it was offering its service to PC users by 1998.

Taplin contends that the studios were always well aware that Intertainer's business plan required a 50-50 split of revenues on a pay-as-you-go basis. For every online viewing for which a customer paid $3.99, in other words, the studio and service each took in $1.99. Those were the terms under which the service started receiving titles from Warner Bros., Sony Pictures and Time Warner's New Line unit in 1998. (Universal signed up in 2001 with a 50-50 deal for 200 films, but it also demanded a $500,000 advance.) With such arrangements, Taplin says, the service could have broken even with only 175,000 subscribers.

Starting in mid-2001, however, the studios started turning the financial screws. One after another insisted on changing to a 60-40 revenue split in the studios' favor, as well as advance payments of up to $2 million a year. Taplin says he agreed to the terms because he had no choice: Without big-studio movies to offer customers, Intertainer was doomed.

But he also knew this new formula would spell disaster: The service's customer base was so small at that point, the upfront fees were almost certain to far outstrip the rental revenue.

Shrunken Supply

Despite the higher fees, the lawsuit charges, after 2001 the studios began finding pretexts to withdraw their titles from Intertainer's roster. Some cited concerns about the company's digital security. Then they raised concerns about whether the music in their films was legally cleared to be transmitted over the Web. Or they dithered over renewing expired contracts. For one reason or another, the list of movies available over the service shrank markedly. Warner's titles, for instance, dropped from 80 in 2001 to just six a year later.

By then, Sony had informed Intertainer the studio would not renew its contract. When the company asked why, according to the lawsuit, a Sony executive said, "You will find out soon." The reason, Taplin claims, is that Sony was already developing Movielink.

Although the big studios publicly profess to be on the whole untroubled by Taplin's case, they do display some decidedly edgy signs, possibly because they're sensitive about imputations of collusion at a time when the ramifications of media concentration have finally broken through to public consciousness. "As a matter of policy, Warner Bros. doesn't comment on matters of litigation - especially those that are ludicrous," says that studio's spokeswoman, Barbara Brogliatti.

But it does appear that Movielink, if successful, could give its partners a strong bargaining position if and when Internet distribution of film migrates from the personal computer, where movie-watching can be a painful and eye-straining experience, to the television set. The studios undoubtedly hope that this will be a way to reach TV viewers directly, without having to go through, and therefore pay off, cable services such as HBO or Showtime.

"Today 99.9% of cable modems and DSL lines are connected to the PC," says James Ramo, Movielink's chief executive. "As time goes on, we want to use the Internet to connect to all sorts of display devices, such as Internet-connected televisions."

Taplin foresees a similar evolution, and despite his bitter experience he still harbors the dream that Intertainer might participate in the business. "We'd go up again in a second if we win the lawsuit," he says, "and if we could do it on a 50-50 split."