• by Laurie Sullivan , August 10, 2007

With rumors flying since March that Blockbuster had been in talks to acquire Movielink, a digital movie download service owned by major Hollywood studios, few were surprised by the deal announced late Wednesday.

The agreement for Blockbuster to acquire Movielink reflects the video rental retailer's efforts to grab a bigger foothold in the online purchase and rental business, as in-store market sales and service continues to come under pressure from mail and online orders, such as Netflix.

Wedbush Morgan Securities Analyst Michael Pachter calls the deal a defensive move that complements Total Access, Blockbuster's service that allows customers to receive DVD rentals through the mail. "All of Netflix's growth has come at Blockbuster's expense, and this is one way of pushing back," he says. "My guess is two-thirds of Netflix customers were Blockbuster customers."

Blockbuster's Total Access supports 3.6 million subscribers. Netflix has 6.7 million subscribers. Pachter estimates Netflix's service has potentially cost Blockbuster about $700 million in revenue.

Netflix launched the online service in January. Apple, Amazon, Wal-Mart Stores, and actor Morgan Freeman's ClickStar also introduced movie download services last year.

The paid download market will reach $279 million, up from $98 million in 2006, wrote Forrester Research Analyst James McQuivey in a research note. This year, 220,000 consumers will spend more than $100 to download digital content, up from 70,000 in 2006. On average, consumers will spend $25 this year, compared with $14 in 2006.

This will give way to ad-supported downloads that drive the next big change in video consumption. "It's the kind of chain reaction that leads to a big bang in the market," McQuivey writes in a research note.

"Increased streaming leads to confidence in ad-supported downloads, which encourages the development of cross-platform media players that cause digital video to spread like wildfire in the home and across the consumer market."

Given all the competition, Blockbuster's marketing efforts for Total Access paid off. In the second quarter of 2007, online subscribers grew by 600,000 between April and June, converting about 400,000 in-store customers to the Total Access service.

Blockbuster will continue to operate Movielink as a stand-alone service and eventually make some online options available through Blockbuster.com. The terms of the deal were not disclosed.

Blockbuster also has an investment in Movielink online competitor CinemaNow, which offers 4,000 film, TV and concert titles, compared with Movielink's 3,300.

Movielink, launched in 2002 by studios to lessen losses coming from movie pirates downloading flicks illegally over the Internet, is a joint venture of Sony Pictures Entertainment, Universal Studios, Paramount Pictures, Metro-Goldwyn-Mayer and Warner Bros.

It has rental and purchasing license agreements with the five founding studios, as well as numerous other studios, television-content distributors and foreign and independent content providers.