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.
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.
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.
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.
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.
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
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.
"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."
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.
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.
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
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."
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.
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."
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."
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.
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.
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
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.
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.
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
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.
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,
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.
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."
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