HBO Holding Up the Movie-Download Future

Exclusive output deals between HBO and three major Hollywood studios stand as major obstacles to a robust movie-dowload business, holding back a potentially lucrative distribution channel and creating conflict between the powerhouse divisions of TimeWarner — HBO and Warner Bros. — who for once find their interests at odds.

HBO’s output agreements with Warners, Fox and Universal prohibit download sales while top new releases play on the premium cable channel — effectively blocking efforts to grow the digital movie marketplace, a high-ranking official at Sony told TheWrap, speaking on the condition of anonymity.

Privately, officials for both studios and the cable network say they’re confident that ongoing negotiations will resolve the impasse. One will certainly have to be found for the movie download business to grow.

Though downloads currently make up only 3 percent of the home-entertainment pie, studios are aggressively looking to grow into an area that they, like the music industry, had long held at arm’s length.

Indeed, Sony — which has no pact with HBO — is tied to a consumer electronics company that has also committed itself to a digital future, and has emerged as an early leader in the establishment of movie downloads.

In 2008, the company seeded an initiative that would create an easy-to-access online movie and TV market for consumers — what it sees as an alternative to Apple’s iTunes, which studios fear could become as powerful and monopolistic in the realm of movie distribution as it has with online music sales.

Called the Digital Entertainment Content Ecosystem, it includes 48 entertainment, software, hardware, retail, infrastructure and delivery companies — as well as Fox, Universal and Warner.

The consortium, which is ramping up quickly, is seeking to create a so-called “digital rights locker” for movie and TV-show buyers. The group hopes to announce a consumer-friendly brand name in few weeks. Under the DECE initiative, a customer could buy a copy of a movie on Blu-ray, say, and then they’d have the right to download digital copies of that film from their “locker” for any device they might choose down the road at no extra charge.

Or, if they don’t care for discs, they could just buy the download.

Here’s where the problems arise.

Under one strategy Sony is mulling, films would become available for download 45 to 60 days after theatrical release, significantly earlier than the DVD and Blu-ray sales and rentals traditionally begin. The thinking is that consumers will pay a price of about $25 to view the film, over a 48-hour span, much earlier than they ever could before.

With theater owners already complaining about DVDs coming out too soon, inserting such a window already has stirred rumblings from the exhibition community.

Then there’s HBO.

Paying hundreds of millions of dollars a year for output deals with Warner, Fox and Universal, HBO currently restricts these studios from distributing their films digitally during its exclusive pay-TV window.

Typically, that window starts six months after a film debuts on DVD and extends for 18 months. It already has presented itself as a challenge for established download sellers including iTunes and Netflix.

For example, Fox films including “Taken” and “Bride Wars” were available for viewing on iTunes last year, but had to be pulled off the download service once their HBO windows started. Same with Warner’s Jim Carrey flick “Yes Man” and Universal’s “Role Models,” which are also currently staples on the HBO movie schedule.

Pulling films down from the “digital rights locker” would create a managerial nightmare.

HBO officials declined to get into specifics. They did say, however, that negotiations with studios regarding digital windows are ongoing.

"We do not publicly share details of our output deals,” said a network spokesman, “but HBO always had and continues to have open and productive dialogue with our studio partners on any issue.”

Two years ago, it should be noted, Starz sued Disney, claiming the studio’s distribution of the “Pirates of the Caribbean” and other films on iTunes violated its exclusive output deal.

The resulting out-of-court settlement enabled Disney — which is working to establish its own digital-locker system known as KeyChest — to keep distributing its movies on iTunes. Sony, which also has an output deal with Starz, can do the same.

“Our studio agreements go back as far as 1999 — and since that time, a variety of different organizations and enterprises have arisen on the Internet that no one could have even contemplated,” noted Starz senior VP Tom Southwick. “But one works these things through with their partners.”

Indeed, an individual close to the negotiations between HBO and the studios said the channel has “conceded in theory” that it’s willing to change contract rules. However, the pay cable channel pays handsomely for its movie rights, and concessions will have to be made.

Fox, for example, re-upped its output deal with HBO in 2007 for what was reported to be a sum of $1 billion covering 10 years.

According to one studio official, one proposal involves the studios moving up HBO’s window from six months after release to four months.

“Every time progress is being made, deals need to be re-invented,” added another studio executive. “HBO is a reasonable organization.”

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