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By Carl Howe

Today's New York Times combines two interesting news stories about movie downloads into one. First, it describes Wal-Mart's (WMT) plans to provide digital movie downloads for an add-on fee to DVD sales, beginning first with Superman Returns this week. Then, it contrasts this effort with the news that BitTorrent is striking deals with studios to offer their movies using its peer-to-peer (P2P for short) technology. The article gives the impression that one of those two deals should really get movie downloads going.

My view: both efforts are not going to get significant traction. They both have fatal flaws.

Let's start with Wal-Mart. That's the easy one to dismiss.

Wal-Mart's offer is to allow customers to buy a digital download for their portable music player or PC as an add-on purchase to a DVD. Cool, huh?

OK, so let's say that I'm planning a trip to California, and I decide I'd like to take a copy of Superman Returns along with me. First, I have to buy the DVD at Wal-Mart. Seems silly to run out to the store to do this, but I'll do it a few days ahead and buy the DVD online. Ok, done.

Now if I have a DVD, there's an interesting question: why do I need to download anything? Wal-Mart just shipped me this nice shiny disk. If I want to view that on my laptop, why not just put it in my laptop and watch it? Strike one.

Oh, but perhaps I want to watch it on my iPod video. Well, that's not going to happen unless Wal-Mart has struck a deal with Apple -- the movie would have to be FairPlay encoded, and last I knew, Apple (AAPL) wasn't licensing FairPlay. Strike two.

And wait a minute. Why should I have to download anything even to watch it on a non-iPod media player. That eight gigabytes of DVD Wal-Mart just shipped to me has plenty of room for a low-res version for my Zune or other device. Why should I tie up my Internet connection for an hour (or witnessing Amazon's (AMZN) and Microsoft's (MSFT) challenges in getting downloading services right, probably more like five or six hours) when I should be able to just pull the bits off the disk? Strike three.

Wal-Mart's plan is just a silly offer, and my prediction is that it will suffer a quick and well-deserved death due to lack of consumer interest.

The BitTorrent deal is similarly flawed, but for a more traditional reason: they haven't thought out the user experience properly. Just read the Times description:

In the new service, BitTorrent’s partners will upload authorized versions of their TV shows and films onto the network. No pricing details have yet been announced. Files will be protected by Microsoft’s content management system, and files will play right inside the user’s Web browser. Users who buy content will have to enter a special encryption key before watching the movie, and they will only be able to view it on two computers — say, a desktop and a laptop they might bring with them on a business trip.

Mike Goodman, an analyst at the Yankee Group, says networks like BitTorrent shift bandwidth costs to users. “You can argue that peer-to-peer will ultimately be the cheapest way to distribute this content,” he said.

Studio executives agree, and think BitTorrent will take its place alongside the giants like Wal-Mart in the emerging digital download world.

“I think everyone is going to do a BitTorrent deal,” said Thomas Lesinski, president of Paramount Pictures Digital Entertainment. “You have to be in a position where you make your content available everywhere the consumer is interested in downloading it.”

The problems with this offer are more about how many hoops you make the user jump through to watch a movie. Enter encryption keys? That's ridiculous -- I don't have to enter an encryption key to watch a DVD; why should I do so to watch a movie I downloaded? Play in my browser? Just what I wanted -- lots of distracting buttons and logos to ruin the viewing experience. And, of course, since the system uses Microsoft's content management, it won't play on iPods -- or Zunes either.

So is movie downloading hopeless? No, and actually the idea of using a peer-to-peer protocol to do it is exactly the right one. But the experience can't be so geeky as to require users to enter 50-digit encryption keys and watch the resulting movie in their browser. Instead, a successful movie downloading service will:

torrent1. Have a critical mass of users,

2. Be dead simple to use,

3. Work with TVs and portable devices as well as PCs,

4. Provide user accountability and billing.

There's a really nice package that does all this: it's called iTunes. I predict it will simply grow encrypted peer-to-peer downloading capabilities.

This fits perfectly into what we already know about Apple's media plans. Apple is already rumored to be building a peer-to-peer protocol into Leopard. We also know Apple is very interested in moving around very large high-definition files to use with its iTV box. And it fits the criteria defined above nicely because:

1. iTunes already has 200 million users. Peer-to-peer networks only work if you have a critical mass of peers to share bandwidth with. Apple's existing network of iTunes users satisfies this need -- and is hard to replicate.

2. iTunes has proven its usability. Five years of deployments have gotten people used to the iTunes user interface, and everyone from five-year-olds to grandpas use the program every day.

3. Apple dominates music and video players. With the iPod occupying nearly 80% market share now, and with the iTV on its way next year, consumers will be able to enjoy their content in situations ranging from their living room couch to airplanes.

4. Financial accountability is already in place. Almost every iTunes Store customer has a credit card on file. Apple has proven mechanisms for charging those accounts for downloads -- as well as for crediting users for providing copies of movies to other users!

If Apple integrates peer-to-peer sharing into iTunes AND provides studios a revenue stream for the sharing of movies, it has the potential to dominate the digital movie business in the same way it has dominated digital music. And best of all, it will have cracked the technical problems necessary to make high-definition movie downloads actually competitive with a NetFlix (NFLX) delivery. And once that happens, there are going to be a lot of studio corporate jets returning to Cupertino.

Full disclosure: I do own a small amount of Apple stock.

Source: Apple's P-to-P Movie Downloads To Eclipse Wal-Mart and BitTorrent