As media companies carve out their space in the growing video-on-demand market, the route taken by the nation’s second largest video rental company leads through the San Fernando Valley. Movie Gallery Inc. announced earlier this month it acquired MovieBeam, Inc., the Burbank-based on-demand service funded by The Walt Disney Co. and other investors. Movie Gallery, owner of Hollywood Video and two other chains, said the acquisition and ongoing development costs would be no more than $10 million. So what is Movie Gallery getting for its bucks? The MovieBeam name, its patented technology, and a subscriber base in 31 major metropolitan areas who paid $200 for a set top box and shelled out for rental fees of $1.99 to $4.99 to view feature films from nearly all the major studios (Sony Pictures Entertainment is the lone exception) for as many times as they like in a 24-hour period. It also gives the company an entry into a field whose players include Amazon, Walmart, Netflix, and Apple. “If they can get that system in the minds of their customers they can make a go at it,” said Marty Shindler, an Encino-based management consultant on business issues for creative and technology companies. Attempts to reach a representative of MovieBeam and to obtain subscriber numbers were not successful. Callers to the main phone number are asked to leave a message or go to the company’s website and send an e-mail that will be answered in up to two business days. Movie Gallery spokesman Andrew Siegel was not aware of future plans for the Burbank location and said executives were not commenting further on the acquisition until the company’s conference call later this month. In a prepared statement, Movie Gallery Chairman and CEO Joe Malugen said the acquisition was the first phase of the company’s long-term strategic plan to provide digital content. MovieBeam began as a solely-owned Disney service tested in three cities starting in 2003 and spun off three years later with $48.5 million in funding from its partners Cisco Systems, Intel Capital, and three venture capital firms. How Disney went about getting the service off the ground begs the question of how did they know it was going to work, said Gigi Johnson, a lecturer at the UCLA Anderson School of Management’s Entertainment and Media Management Institute. “You’re asking the consumer to have yet another device on their TV set and pay a fee on top of that,” Johnson said. “Who is going to sell the boxes, who is going to market this? Was this more of an experiment on Disney’s part?” Experiment or not, MovieBeam’s video-on-demand service comes at a time when the home entertainment industry transitions from physical delivery to digital delivery and its acquisition occurs when Movie Gallery and its rival Blockbuster must redefine who they are and what their customers want. MovieBeam uses patented technology to capture content sent over airwaves but video-on-demand is also available through cable television, and via the Internet from downloads, the model used by the Amazon Unbox, Walmart, and Movie Link, a joint venture of five major studios including Warner Bros. Entertainment and Universal Pictures. Apple TV takes streaming video from a computer and displays it on a Hi-Def widescreen television. The Movie Gallery purchase reinforces the importance of digital delivery of programming into the home and the benefits of greater choice and convenience for the viewer, said Doug Sylvester, chief operating officer with TVN Entertainment Corp., a Burbank company licensing programming for video-on-demand services from cable operators in North America. A service offered by TVN has the benefits of the choice and convenience without the challenge of convincing viewers to buy expensive hardware, Sylvester said. “Even when it’s simple, easy to use and elegantly designed there’s still an obstacle to convince substantial numbers of consumers to purchase these devices,” Sylvester said. In the home entertainment market, however, video-on-demand makes up a small percentage of revenue compared to the $24.2 billion in sales and rental of DVDS in 2006 as reported by the Digital Entertainment Group, a trade organization tracking the DVD industry. There are 28 million homes with video-on-demand services, a number expected to double by 2010, Sylvester said. Shindler predicted that this year and 2008 will see big changes in the delivery of content with the rollout of digital cable, higher broadband capabilities and more people going for on-demand services. “Right now everyone else is trying to carve out space for on demand,” Shindler said. “You’ve got Unbox from Amazon. You’ve got Netflix getting into the download business; Walmart in the download business. Why not Movie Gallery through MovieBeam?”
