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Roxio CinemaNow and the maturing market for downloadable movies

February 5, 2010 |  6:14 pm

CinemaNow screen grab I was introduced to CinemaNow almost a decade ago by its first CEO, Curt Marvis, who briefed me on the downloadable movie service while I was working for the San Jose Mercury News. And after almost a decade of indifferent results, the company may finally be taking off.

Originally based in Marina del Rey, CinemaNow made its formal launch in 2001 with the help of investor Lionsgate, which licensed its films for downloading as soon as they hit the pay-per-view channels on cable. Other studios were not so forthcoming, however, which is one reason the company struggled to build a customer base. Other hurdles included the consumer-unfriendly conditions that studios placed on downloadable flicks (e.g., making it all but impossible for customers to watch the movies they rented or bought on a living-room TV set) and the pokey broadband connections that were common in the first half of the decade.

The company gradually shifted its focus away from its online store, concentrating instead of providing the technology that would enable retailers and consumer-electronics manufacturers to offer movie downloads through their own websites or devices. Still, the prospects for CinemaNow were so uncertain that Sonic Solutions of Novato was able to buy it from investors for only $3 million in 2008. (Marvis had left earlier that year to become Lionsgate's head of digital media.)

Sonic reported its quarterly earnings Thursday, and its numbers reflect how the company has shifted ...

... from the costly process of building a digital distribution platform to the more lucrative practice of deploying it. While revenue was slightly less than than the same quarter last year, net losses were significantly lower.

CEO Dave Habiger said the company invested more than $300 million on the "plumbing" for distributing movies through the platform it now calls Roxio CinemaNow. "For the most part, the building is built," he said. "Additionally, you actually have people using it, renting and paying you."

One reason more people are using CinemaNow is that the company has closed the gap between the Web and the TV set. Its technology is embedded in a rapidly growing number of Internet-connected TV sets, Blu-ray players and set-top boxes, enabling people to rent or buy movies from their couch with a few clicks of the remote, then watch them minutes later.

That beats the heck out of downloading a movie to a specially equipped PC and burning it onto a copy-protected disc, as Hollywood requires for its online releases. (Sonic makes the technology for that, called Qflix, but it's a better fit for DVD-on-demand services.)

Habiger said 300,000 devices with the CinemaNow service were in the field in September. The number grew to 1 million in December, and now stands near 1.4 million, he said. In December and January, the number of people who started using the service grew by "multiples of 10."

And that's just the start. The company expects the number of devices with its technology to rise to 3 million by the end of June, and to 30 million a year after that. That's because it has deals with a number of major equipment makers (e.g., Samsung, LG and Funai) and Best Buy. The latter deal, Habiger said, will result in CinemaNow technology being embedded in every TV and set-top sold at Best Buy that's equipped to pull content off the Internet. 

Another factor that Habiger expects to help Sonic is the studios' evolving attitude about digital distribution. Noting the deal Netflix struck with Warner Bros. to delay DVD rentals until they've been on sale for four weeks, Habiger said there's growing interest among Hollywood executives in giving downloads an advantage over discs. That's one way studios could push back against cheap DVD rental services such as Redbox, which generate lower profit margins for Hollywood than digital services can.

The studios' growing enthusiasm for the Net will help Sonic's competitors too, including Amazon.com, Apple and Blockbuster. Even so, the industry has much yet to learn about what prices and business models consumers will embrace. And the studios' contracts with conventional distributors limit the ability of online outlets to experiment with subscription services, a la Netflix. Still, Habiger likes the position Sonic is in today. "How you price it is easy," he said. "Building a platform is not easy."

-- Jon Healey

Healey writes editorials for The Times' Opinion Manufacturing Division. Follow him on Twitter: @jcahealey

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