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Intertainer Shuts Down — Whither VOD? Friday, October 18, 2002, 7:10 PM ET

by Ben Fritz

Intertainer, the dominant player in the Internet video-on-demand (VOD) space, has shut its doors, most likely for good.

The L.A.-based company raised approximately $125 million in VC money, about twice as much as the infamous DEN. Only a small amount of that is believed to be left.

CEO Jonathan Taplin says Intertainer is no longer able to operate due to alleged price fixing and unfair competition by the major studios that provide its content. Last month, Intertainer filed a lawsuit against AOL Time Warner, Sony, Vivendi Universal, and MovieLink, the online VOD joint venture the three are planning to launch along with MGM and Paramount.

“We came to the conclusion that it would be better to get the business model straight in court so we no longer are faced with negative gross margins,” Taplin told DCR. “Studio demands have gotten much worse over the past year to the point where they’re no longer reasonable. At one point, we had around 1000 movies from every studio except Paramount. Now we have only 50, and with the exception of Dreamworks and MGM, which have been straight up with us, those are provided only due to advances we paid.”

Taplin accused the studios of engaging in unfair practices to undermine Intertainer as soon as they decided to band together to form MovieLink. He singled out Sony, an Intertainer shareholder, accusing the studio of suddenly refusing to provide Intertainer with its content and of using its position on Intertainer’s board to share proprietary information with MovieLink.

None of the studios would comment on the suit, although a Warner Bros. spokeswoman called it “ludicrous.”

Since launching a broadly available VOD service last year, Intertainer has signed 147,000 subscribers, although it’s unknown how many of those signed up for just one month or were regular customers.

The company has said its site will only be down until its lawsuit against the studios is resolved. Even if Intertainer wins, however, the only likely result is that it will recoup some cash for its investors. The chances of studios providing content to a company that has sued them is virtually nil.

With MovieLink still facing an anti-trust investigation by the Department of Justice (DOJ) and waiting to launch, the remaining players in the VOD space are CinemaNow, which offers a small selection of content from major studios along with independent films, and MovieFlix, which has mostly public domain films and an increasing number of independent movies.

Both companies said they are in negotiations with major studios to add their content and, whether out of a desire to stay on Hollywood’s good side or a genuinely different experience than Intertainer claims to have had, said their dealings with the studios have been slow, but fair.

“A year ago, I think the studios were very wary of Internet distribution, but that seems to have slowly changed,” said Curt Marvis, CEO of L.A.-based CinemaNow, which has short-term distribution deals with MGM, Universal and Warner Bros. “All the studios are currently in business with us or are in negotiations and we haven’t seen anything that leads us to feel we can’t run a successful business with them.”

Robert Moskovits, COO of L.A.-headquartered MovieFlix, was harsh in his analysis of Intertainer’s downfall, accusing it of being another dot-com that failed due to too much VC money and optimism about the space’s growth.

“They were shooting for the stars, but this space is just a primordial soup now and there are no stars to be had,” he stated. “Going through over $100 million in this business is just criminal. We’ve done this for half a million of our own money and while we’re much smaller than Intertainer, we’re still around.”

Both CinemaNow and MovieFlix offer monthly subscriptions to view their premium content, priced at $9.95 and $5.95 respectively. CinemaNow also charges $2.99 for downloads of its major studio films, such as “Erin Brockovich” and “Harry Potter.”

Marvis declined to release the number of CinemaNow subscribers, but said there was a “major up tick” in the past two months since CinemaNow began signing major studios. Moskovits said MovieFlix currently has 6300 and projects it will have 10,000 by the end of Q1 2003. MovieFlix, which is run by Moskovits and a partner, is currently cash flow positive, while CinemaNow, which has major investors such as Microsoft and is majority owned by independent studio Lions Gate, is shooting for profitability in the first quarter of 2004.

Both companies expressed optimism that the launch of MovieLink will bring increased attention to the VOD space, increasing their own opportunities as purveyors of more niche content. CinemaNow is also looking to profit from its deals abroad, as MovieLink will only be available in the U.S.

MovieLink has said it will launch by the end of the year, but the DOJ investigation is ongoing and launch dates have been repeatedly delayed over the past two years. Some industry insiders have told DCR they believe MovieLink may never launch due to DOJ anti-trust concerns.

If it does, though, MovieLink will no longer have to face the one competitor that was in a position to be a direct rival. It now remains to the courts and the fate of MovieLink to prove whether Intertainer’s failure was due to illegal behavior by studios, or a space that’s not yet ready for prime time.