It had the makings of a Triple Crown. Steve Jobs, the man who created the first truly successful legal download music service, who helped redefine the portable MP3 player as a portable video player, was now looking for triumph number three.

"Here we go again! First music, then TV shows, and now movies," Jobs said in a press release statement that accompanied an appearance last September at the Yerba Buena Center for the Arts in San Francisco. "In less than one year we've grown from offering just five TV shows to offering over 220 TV shows, and we hope to do the same with movies. iTunes is selling over one million videos a week, and we hope to match this with movies in less than a year."

But there was a glaring catch: Apple had signed on just one studio--Disney--the same studio that had recently purchased Pixar and put Jobs on its board of directors. So what happened to the rest of Hollywood? The answer to that question says a lot about the growing pains faced by the studios, who invest millions of dollars financing movies and now fret about piracy, as well as by retailers who sell those movies once they leave the theater. This is also a tale about the limits of wireless technology, the rising expectations of home viewers, the loyalty to large retailers who currently sell high numbers of DVDs, and the increasing ability of portable devices to carry all kinds of entertainment.

In making its movie announcement, Apple followed on the heels of Amazon, which launched its Unbox service of both downloadable TV shows and movies--the latter from, it seems, every studio but Disney: 20th Century Fox, Paramount, Sony Pictures Home Entertainment, Universal Pictures, Warner Bros. Entertainment, Lionsgate and Metro-Goldwyn-Mayer Studios, Inc. Other services include CinemaNow and its Japanese subsidiary, CinemaNow Japan, which says it has offered video downloads since 1999 and claims to have more than 4,000 movies in its library. Yet another download site, Movielink, is actually owned by several of the studios themselves. Meanwhile, Microsoft has announced a downloadable service for the Xbox 360.

Even so, while downloadable audio is unquestionably a business and downloadable television has every indication of becoming one, the verdict is out on downloadable movies. Sceptics point to the high-profile Apple announcement as proof: just one studio and just 75 titles, compared to the across-the-board music library that came with the original iTunes store announcement. Back then, Jobs had reportedly used his persuasive charm to sign on a large chunk of the recording industry. Jobs still has considerable charm-so what happened here?

The difference starts with the picture itself. MP3 files rival the quality of their WAV counterparts on CD-so much so that digital files, stored on a computer and downloaded to an iPod or competing device, are emerging as the standard for audio playback. Television shows seem a less likely candidate-why pay to watch one on your computer when you can do the same for free on a TV? But the ability to download episodes you missed has proven an attractive market. If you are willing to sacrifice some image quality, downloadable TV shows are essentially television on-demand.

Movies are another matter. Here, a computer screen is competing against the "silver screen" of movie theaters, as well as against DVDs that, in both Japan and the U.S., are being shown on 16:9 flat screens of ever-larger sizes. Prices for those screens are dropping: the 32-inch Sony LCD set I bought for $1800 less than a year ago is now $500 cheaper, and that $1800 will get you a screen several inches larger. Install home theater speakers and there is less and less reason to wait in line for popcorn. Here in the U.S., the theater-going experience itself has begun to diminish as theater owners--trying to squeeze profits--play commercials and an endless succession of movie previews. In the U.S., movie theaters remain a good way for people on dates to get away from the house, but for everyone else, the value proposition is less clear. Studios, which are happy to make money either way, are seeing rising revenues from DVD sales--and are starting to close the time gap between a film's theater and DVD debut. Needless to say, the theater chains are not amused, so much so that some of the stars of last year's Academy Award ceremonies were playing up the virtues of the theater-going experience. Not that they themselves necessarily go.

In the U.S., two other distribution methods aside from downloads have also come into play. Netflix combines a slick online interface with snail mail distribution to send DVDs to customers. When you return a DVD, Netflix ships another one, with all postage prepaid. The service claims to have more than 5 million customers and a library of 65,000 titles. The advantages: no late fees and a massive selection. The disadvantage: there's no instant gratification; you have to think ahead. Competitor Blockbuster has added a comparable service to its brick-and-mortar operation, but Netflix remains the sector leader.

Meanwhile, cable companies are experimenting with their own on-demand service. Comcast, for example, offers 7,500 programs, including movies, via its settop boxes. The company claims more than 3 billion "views," with "up to 800 movies every month." A high definition service has been announced, with some observers suggesting that on-demand HD programming may be the answer to the stalemate between the two competing formats: Blu-ray and HD DVD. The advantages with this model are potentially huge: no need to think ahead, and a movie delivered straight to your set.

Retailers, studios, reluctant

One potential advantage of downloadable movies is price. In theory, the cost per downloadable movie ought to be cheaper than a DVD because distribution is cheaper, the picture resolution is lower and viewing options are fewer. And of course, price has been a big selling point for iTunes: for just $.99 a song, you can buy just what you want, rather than investing in the entire album.

But price is at the heart of complaints by some large American retailers, especially Wal-mart and Target, which account for much of the DVDs sold. According to a Wall Street Journal report, Target president Gregg Steinhafel wrote a letter to movie studios asking for "a level playing field" when it came to pricing: the implication being that the download model substitutes cheap server disk space for more expensive retail space--and therefore could undercut retail prices.

According to Variety, Wal-Mart has used its considerable clout to tell studios that the retailer would expect the same terms as offered to Apple. "That was enough to keep Paramount and DreamWorks Animation out of the iTunes equation. DreamWorks CEO Jeffrey Katzenberg has a close relationship with Bentonville [Wal-Mart's Arkansas headquarters] and his studio depends disproportionately on its sales. Ultimately Fox, Universal and Lionsgate pulled out as well." Variety reports that Wal-Mart accounts for about 40% of DVD sales, and with that kind of market share, "the retailer can shave a few percentage points off an order and send sales plummeting."

Wal-Mart's story is actually more complicated in that the company is reportedly preparing to launch its own online distribution service. And, according to Variety, Wal-Mart actually loses money on some DVDs in order to attract shoppers. For example, the company will sell "Pirates of the Caribbean: Dead Man's Chest" for $12.99-"a hefty loss on each DVD to drive foot traffic in stores."

In an editorial, the Los Angeles Times said that the studios themselves don't actually want to reduce the cost for downloads. Already, most of the cost of a DVD is not represented by its $1.50 worth of manufacturing, but by the contents: the production cost, star salaries, and marketing that went into the movie in the first place. Estimates on what a retailer actually makes over the top of that vary, but it's not much. Even so, DVDs from all appearances seem like a win-win for the industry. Retailers are making money, while studios are sometimes making even more from the DVD than the theatrical release. The price is low enough to encourage people to purchase DVDs to own, and Netflix's own DVD rental business is also growing.

The Los Angeles Times concluded that "what's good news for Target is bad news for consumers: Initially at least, downloadable movies won't be much cheaper than DVDs. But those who like to watch movies at home can take comfort in the fact that, as entertainment becomes more widely available in more varied forms, prices will tend to go down. They may not fall as fast as consumers would like, or as believers in the digital economy once promised. But as surely as you're reading this online, the market will find the most efficient way to get entertainment (and news) in front of the people who want it. And eventually, all of us -- wholesalers, retailers and consumers -- will benefit from those efficiencies. That's the theory, anyway."

Another way to gauge the enthusiasm of movie studios to downloadable movies is to consider their own tentative steps into the business. Movielink.com is a joint venture of Metro-Goldwyn-Mayer Studios, Paramount Pictures, Sony Pictures Entertainment, Universal Studios and Warner Bros--with a library that extends to Walt Disney Pictures, 20th Century Fox, and several smaller studios. But as of September, the company claimed a library of just 2,000 titles--a small fraction of those available for sale as DVDs on Amazon or for rent on Netflix. Prices vary, but are comparable to Amazon's price for the same DVD. Mission Impossible III, for example, is $14.99 as a download via Movielink, or $14.88 plus shipping on Amazon for the DVD. (In the U.S., Amazon offers free shipping on purchases over $25.00.) Monster House is $19.99 on MovieLink, $16.78 on Amazon.

"Movielink, like many on-demand businesses, still faces numerous challenges that give it a disadvantage compared to DVDs," wrote Ben Fritz and Gabriel Snyder in Variety. "Factoring out taxes and shipping costs (or the inconvenience of going to a store), prices are a little higher. Users can't transfer files to portable devices as they can with downloadable songs and TV shows, though that feature will be added shortly. Most significantly, downloaded movies can't be watched on a DVD player. Movielink is waiting to get approval from the DVD Forum to let its users burn DVDs, a process that could take several months or several years. That's hugely important because despite years of hype, mass adoption of the 'digital home' that would make broadband the logical way to access movies is still years away."

In July, Movielink announced a deal with Sonic Solutions that would let customers burn content to DVDs, which is also providing the buring engine for Microsoft's Vista. The actual service requires a "secure format compatible with DVD players in the market today," said Jim Ramo, CEO, Movielink, in a statement. But as of now, no such service is available on the Movielink site.

Getting the picture to the television: DVDs and file servers

The DVD looms large, even with downloads, because for most Americans, the PC and the television remain two separate appliances residing in two parts of the house. That's true despite all the forecasts that the two worlds would converge. People want to watch movies on their new flat-screen TV--not just on their iPods or computer monitors. So before downloadable movies will become a truly viable business, two things will need to happen: the digital files will have to be as convenient as a DVD and the picture quality will have to approach, if not match, that of a DVD. And we're talking at least standard definition 480p quality, not HD. That ante will be upped in the next few years.

DVD's in Japan and the U.S. comply with the NTSC standard, in which an MPEG-2 file produces a picture pixel resolution of 704 x 576--or 337,920 pixels total. (These numbers are consistent both for 4:3 and anamorphic 16:9 aspect ratios--the former composed of square pixels, the latter of rectangular pixels.) For reference, 720p HDTV is 1280 x 720, while 1080i and 1080p are both 1920 x 1080. Resolution for movies on the Apple iTunes store is at the VGA standard: 640 x 480, which the company says is four times the resolution it previous offered. (Some movies may have less than 480 vertical pixels, depending on their aspect ratio.) Apple describes this as "near-DVD quality."

As for moving the downloaded file to a television, plans are afoot, but--just as with audio--the studios are nervous about losing control. For the time being, it is possible, but not anywhere near as easy as slipping a DVD into a player. Writing in the Seattle Times, Jeff Carlson describes how he connected a PowerBook G4 to his DVD player using an S-video cable, and to a stereo tuner via the PowerBook's audio-out port. For models like the MacBook and MacBook Pro that don't include S-video ports, an adapter is also necessary. "Since I don't normally push video from my Mac to my TV, making this work took a considerable bit of connecting and disconnecting cables, and reaching around behind equipment. Another option would be to purchase Apple's iPod AV Connection Kit ($100) and play the movie directly from a video-enabled iPod." He concludes: "If only there were a better way."

Apple's proposed "better way" is iTV, which Jobs, in an unusual move, pre-announced along with iTunes 7. iTV (Apple says this is the project, not product name, though that may change) is described as a thin appliance that attaches to the television and retrieves video and other content from a computer via an 802.11 connection--effectively turning a Mac or PC into a media server. Ports will apparently include USB 2.0, Ethernet, 802.11 optical audio, HDMI, and for retro-purposes, RCA stereo audio. While hardly the first such device on the market, the Apple/iPod branding puts the whole idea in the mainstream.

"To be sure, when it comes to iTV, Apple has a lot of proving to do," particularly in the area of wireless bandwidth, wrote Arik Hesseldahl on BusinessWeek.com, while praising the company for its consumer-friendly innovations. "My guess is that Apple will throw its lot in with one of the parties in the battle over the evolving standard known as 802.11n, the next version of Wi-Fi, which should be a lot faster than the current standard, 802.11g. Apple will have to do something new on the wireless front, because 802.11g, which is what its Airport Extreme line of wireless networking products supports, just isn't fast enough to handle video, at least not at the quality needed for a high-end TV set."

Cliff Edwards, who covers consumer electronics for Business Week, argues that even 802.11n wouldn't provide fast enough download speeds. "Jobs says it will take 30 minutes to download a movie if you have a 5-megabyte Internet connection," Edwards said in a Business Week interview. That ignores the fact that most DSL customers get nowhere near that. And Apple right now is only promising 'near-DVD quality' for movie downloads. You can bet purists will notice the difference when watching on a pricey big-screen HDTV."

His colleague, Steve Wildstrom, added that HD would be the resolution to beat, thereby increasing bandwidth requirements even more. "Worse, Hollywood's relentless demand for content protection has created systems that make it difficult to connect digital HD devices with cables and all but impossible to do so wirelessly. Apple clearly intends to do HD because it demonstrated HD content, but I'm mystified as to how. I've learned not to underestimate Apple, but the laws of physics have to be dealt with -- even in the reality-distortion field that makes you believe everything Steve Jobs says while he's on that stage."

At this writing, the IEEE 802.11n project is in draft, with expected approval some time in 2007-although some routers implementing a preliminary version of the spec are already on the market. The aim is to boost 802.11n to "a maximum throughput of at least 100Mbps, versus 54Mbps for 802.11g.

Microsoft, and presumably Sony, will also be in a position to offer HD movies through their respective video consoles--which support HD DVD and Blu-ray, respectively. The primary attraction so far is in HD video games, but Microsoft announces a scattering of downloadable HD movies and TV shows via the Xbox 360. The announced library is comparatively small: about 1,000 hours of programming, with about 200 hours of HD content, according to press reports. Questions remain as to how the console's 20 GB hard disk will cope with the large files required by HD-and there are no announced plans for wireless LAN distribution or, for that matter, downloads to mobile devices, including its own forthcoming Zune device. But if Microsoft's usual strategy holds true, this is just a start in what appears to be an prolonged battle with Apple's iPod and iTunes in which Microsoft, not Apple, is the come-from-behind underdog.

Portability may be key

All of this suggests that at least for now, the studios, retailers, and distribution websites are all looking at the wrong distribution model for downloadable movies. For movies displayed on television, movies-on-demand and DVDs--both rented and purchased--are the likely winners. Both are convenient, reasonably priced, both deliver a high-quality image today, with the right equipment, an HD picture as well. If people are looking to a personal hard disks to store their movie library, that may well come, but some would argue that that's the old model. Why try to build your own bookcase, when an on-demand or mail-away service can, for a reasonable fee, store a larger library than you could possibly amass?

The real market for downloadable movies is likely to be on small screens and portable markets. All those commuters on the Tokyo subway who are listening to iPods or sending text messages by phone are potential customers for portable movies that they can watch in the palm of their hand. Yes, the quality on a small screen isn't as good, but then, nobody expects concert conditions when they listen to their MP3s.

I've experimented with my own early version of this model using a piece of software called Pocket PC Studio, which converts DVDs into AVI files that can be played on a PocketPC PDA's 320x240 screen. The company has gone on to support iPods, PSPs, and smartphones. The resulting AVI files are surprisingly small: two typical size movies can fit on a 1GB memory card. Turning on my PDA while on a flight, I held it up to the monitor where the in-flight movie was being shown. Both movies--mine and United's--were on comparatively small LCD screens. Neither was particularly dazzling--you wouldn't want to watch Star Wars or Matrix on them. But neither was particularly better than the other. The biggest difference was the content--I liked my movie better than theirs.

Converting your own DVD into an AVI file may or may not constitute "fair use" under America's Digital Millennium Copyright Act. I'm not a lawyer, but as I watched the AVI once, then erased it, and as I owned the DVD in the first place, it seemed like fair use to me. But the amount of work involved did not make this a casual act. I'd prefer to go to some future version of iTunes or Movielink or Unbox--or indeed a new version of Netflix. I'd like to browse through a library of 50,000 titles, choose one to download, pay a reasonable fee, and watch it once. If some digital rights management scheme wants to erase it after that, that's fine with me.