However, almost inevitably, there is a concentration of innovation, in both platforms and business models, in the dominant US hothouse. This means that the backbone history of online distribution must perforce concentrate on the US. The next chapter will explore rest of the world (ROW) developments. It also means that international and independent content creators have either needed to establish direct links with the emerging online distribution market leaders e.g. iTunes, Hulu, Netflix, Amazon (and its European subsidiary LoveFilm) or deal through content aggregators that supply indie product to those majors, or alternatively by self-distributing using open-access platforms, for example YouTube, CreateSpace (with its feeder channel into Amazon Instant Video) and IndieFlix, taking on the task of marketing and monetising their content. There are, of course, exceptions to this general situation. The two most important are: the radical shift very recently that sees major commissioning of content by the emerging market leaders in online distribution, and the one big territorial exception, China – as we will see in the next chapter.

All firms entering the online distribution space during its first decade were confronted with the harsh realities of trying to establish a sustainable business within the context of a volatile, complex and emerging technological environment of what was becoming almost a new industry whose trajectory was unknown. Although some of the barriers they faced have receded, many remain. In the pre-broadband era, the principal factors undermining the first wave of online distribution websites were those common to the majority of commercial ventures in the web 1.0, dotcom era, with the additional challenge that many of their wares were eminently substitutable through extralegal means. Online audiences suffered lengthy download times due to copper wire telephone dial-up connections and primitive compression software for large video files. Large flat-panel computer monitors were not yet available, so the viewing experience on small monitors was poor, and there were only clunky methods of sending film content direct to television sets. There was also a lack of high-quality film entertainment legally available online – most were B-movies or older film or TV content in the public domain. Added to this mix was the rapid shift of emphasis of “ripped” film content to online and informal markets following the Napster-led P2P “creative destruction” of the music business and the fact that software was available to digitise content and upload DVDs and more recently high-definition 1020p quality Blu-rays. A great deal of film or video content could be accessed illegally, anonymously and freely, with just a few clicks of a mouse.

In the online distribution space, during the pioneering stage and the longer shakeout stage that has followed, three waves of firms can be identified as market leaders that sought to develop sustainable business models, which resulted, for the most part, in widespread failure and many casualties – firms large and small, some well-financed and others poorly capitalised, from the US and from the rest of the world. We will cover those from outside the US in the next chapter.

Table 1.1 lists the key milestones in the evolution of the online distribution of on-demand film and TV content via the Internet in the US market from 1997 to 2013.

There were even attempts by Hollywood to use the BitTorrent platform – the bastion of film piracy – to attempt to develop a profitable business model. In2Movies was a joint online distribution venture in Germany, Austria and Switzerland by Warner Brothers and Arbato Mobile (a division of Bertelsmann) that used legal delivery of Warner Brothers movies and TV programmes via a BitTorrent P2P network that was established in 2006 but it closed down in 2008 due to intensive competition in the German market (Screen Digest 2008).

So from 2001 to 2008, Hollywood’s efforts online through Movielink, MovieBeam, In2Movies.com and some other minor experimentation failed to make any significant impact on the uptake of legal downloading services for on-demand movies online or to slow the rate of illegal downloading. When taken together with the failure of Steven Spielberg’s earlier aborted Pop.com (discussed below), Hollywood’s major players lost combined investments of well over $100 million in failed online distribution ventures (Eller and Miller 2000; Reisinger 2007; Robischon 2000; Sandoval 2007).

Undermining Hollywood’s attempts to dominate online distribution were two key factors: firstly, that the core cinema-going audience, aged under 25, was both the heaviest Internet user group and the age group most likely to engage in informal downloading – students had easy access to broadband services in their college dorms; and secondly, that rapid upgrades to technological affordances (faster broadband and better compression software) benefited file sharing P2P sites more rapidly than legal online distribution and e-retail video businesses.

Hollywood had failed to find the right formulas for making sufficient money in the over-the-top online distribution space to justify its investment and ongoing costs. For the first time in the history of the movie business, the Majors voluntarily pulled back from tendencies to vertical integration (studio–distributor–exhibitor/e–retailer) by selling their two online distribution businesses that enabled them to directly push content to audiences without any cut going to a middleman. It is worth remembering that it had taken a two-decade-long anti-trust case by the US Justice Department and finally a US Supreme Court decision in 1948 to force the Hollywood majors to sell their theatre chains and then further Justice Department scrutiny to deter them from trying to acquire and control the embryonic television industry in the late 1940s and early 1950s (Wasko 1994).

During the early shakeout, the pioneering firms faded either because they failed to establish viable business models and folded or were taken over and absorbed by larger companies. Viacom’s MTV Networks acquired both short-form video content sites IFilm (2005) and Atom Films (2006). Sightsound.com had patented and operated the first online video distribution e-commerce platform on which it sold the Internet’s first movie on-demand – Darren Aronofsky’s Pi in 1999 – and had also premiered the first made-for-the-Internet feature film Quantum Project in 2000. It filed suit against Apple for patent infringement after iTunes launched and General Electric then took a 50% equity position in SightSound in 2003. Although no longer an active player in online movie distribution, G.E. continues to pursue Apple in the ongoing SightSound patent infringement lawsuit (Garrahan 2012).

CinemaNow launched the first commercial online movie download service in 1999; it was the first movie VOD service to legally offer downloadable Hollywood content and was also the first VOD site online to offer movies as a download-to-own. The company was sold for only $3 million in 2008 after which new owner Sonic Solutions entered into a strategic alliance with Blockbuster (which had acquired Movielink in 2009), and the two operations were merged before Sonic on-sold the CinemaNow trademark to BestBuy. Intertainer, which launched an online movie service in 2001, was another early VOD platform during the pioneering stage of the new industry. Comcast, Intel, Sony, NBC, Microsoft and Qwest all became investors in the company.

Steven Spielberg’s Pop.com had planned to produce short films featuring A-list Hollywood talent and distribute them online but it folded prior to its launch despite burning $50 million in establishment costs. It failed because of the classic innovator’s dilemma – it was ahead of the market. It is notable that FunnyorDie.com is one of a number of commercially successful online sites in 2013 that uses the same basic formula that Spielberg had envisaged for Pop.com. Business Week noted, on Pop.com’s demise, “Too few folks are sufficiently wired to get superfast broadband connections to watch Hollywood’s Internet fare, and therefore too few people are willing to pay anything for it” (Grover 2000).