The Internet's long-held promise of offering every movie ever made is facing a threat far more powerful than any studio chief, box-office star or pitbull uber-agent: the Hollywood contract.

Although the movie industry is taking steps that signal new seriousness about selling works online, complex matters of intellectual property rights could keep some titles offline for years, according to those negotiating such deals.

"Clearing rights to movies is the biggest single hurdle to Internet video on demand today," said CinemaNow Chief Executive Curt Marvis, whose company struck a deal late last year to sell first-run movies from Warner Bros., including the smash hit "Harry Potter and the Sorcerer's Stone."

"The studios would like to give us more, but can't clear the titles," he said. "There are strange clauses attached to almost every film because the Internet either wasn't contemplated or the contracts were loosely worded."

The movie business is hardly the first industry to encounter problems with online licensing. Internet music retailers are still seeking the rights to sell songs by The Beatles and other major artists, even after hammering out deals with all of the leading record labels. And in 2001, the US Supreme Court ordered Internet publishers to pay up or pull work by freelance writers whose articles were republished online without permission.

But those cases pale in comparison to the massive battles looming in the movie industry, which typically include many more legal layers and parties who bring considerable muscle--not to mention ego--to the bargaining table.

At the same time, the studios are anxious to avoid the kind of backlash that followed the music industry's efforts to control the copying of digital songs: Several studios contacted for this story either did not return calls or declined to comment.

Ever since it became a mainstream medium, the Internet has both tantalized studio executives with hopes of new profits and tormented them with fears of unprecedented piracy. As a result, many distribution licenses are laden with tough security demands and clauses designed to protect established distribution channels such as DVD sales and pay-per-view cable TV services.

The basic rights model for films had been set for many years in theater, TV and videocassette distribution. But every time a new medium comes along, studio lawyers must modify agreements with the likes of the Writers Guild of America, the Screen Actors Guild, producers, directors and agents--making the contracts increasingly complex at each juncture.

Some progress has been made. Many blanket contracts have been signed in the United States, such as the Writers Guild agreement to treat the Internet as one of its residual markets. As in the case of movies offered via pay-per-view channels, guild writers are paid fees when a film is played in its entirety over the Internet.

The picture gets more complicated overseas, where individual artists typically command far more control over their work than do their US counterparts. In France and Italy, for example, the director, composer, cinematographer and many others maintain separate rights from the studio, and these participants may have strong feelings about the quality of their work online. In some cases, they may hold veto power over where and how a movie is shown.

"There's a myriad of fingers in the profit pie," said Jim Banister, former executive vice president of Warner Bros. Online. "Going through all those fingers to secure that piece of intellectual property is no trivial task."

Rolling forward
Such details are gaining new importance for motion picture studios because momentum is building quickly for video-on-demand services after years of stalled efforts. In November, Movielink, a venture backed by five major Hollywood studios, launched after two years in development with 200 films for rent. Starz Encore recently said it would let cable subscribers view first-run films on the Internet in partnership with RealNetworks.

Larry Jacobson, president of RealNetworks and a former motion picture executive at Columbia Home TV unit, said today's legal wrangling is reminiscent of the VCR revolution two decades ago.

"What we're seeing now is similar to the '80s--all the studios are hiring armies of lawyers to clear rights for Internet distribution," he said. "There isn't a deeper catalogue of movies on the Internet because they're going through that process now. It will take a couple of years."

Internet movie negotiators said many of the license headaches stem from older works created before online distribution clauses were included in contracts. Most TV programs and movies made before 1990 do not include license stipulations that allow for digital distribution, they say, so lawyers must painstakingly review contracts and reach the appropriate license holders to make a film available on the Internet.

One of the biggest stumbling blocks involves rights to popular music played in films. Movie studios typically own the rights to the score of a movie--or music that's specifically written for a film--but popular music of the times played throughout a film must be licensed separately.

"The Internet is going to evolve as another substantial portion of a film's revenue stream," said Alex Alben, vice president of government affairs for RealNetworks. "And if you don't have the underlying rights to the music, it puts these movie rights holders in a position to hold up distribution in that new medium because very few films can be stripped of the music. Certain songs are integral to a film."

The plot thickens
Not everyone believes such licensing issues are as difficult as some claim. Jonathan Taplin, CEO of on-demand movie site Intertainer, said every movie studio claims to have problems clearing music rights. But he suspects that this may be a convenient excuse to keep content out of the hands of companies that want to use networks based on the Internet Protocol, or IP, to distribute movies.

Intertainer, which went dark in October, filed suit against five major studios alleging that they engaged in a group boycott against video-on-demand services.

"The studios all claim that they are having problems clearing the music rights," Taplin said. "On some levels this is a bit of posturing, as I think they want to release only a small amount of content to IP sites. They seem to have no problem releasing any film to cable systems, so it really becomes a definition of what is the 'TV rights' vis-a-vis IP delivery."

Indeed, video on demand is rapidly gaining traction in the cable market, with many cable TV operators experimenting in select markets, selling movies on demand and by subscription. Most of the tests are with first-run films that include distribution agreements for the Internet and cable video on demand.

But licensing experts say that such cable offerings may run into the same problems as Internet services when it comes to backdated video catalogues, given that licenses for the Internet and video-on-demand channels are typically renegotiated simultaneously.

Some online movie operators have decided to avoid working with large Hollywood studios for now because of negotiating complexities and high licensing costs. MovieFlix, one of the longest-running online distributors, deals only with independents and production companies with midrange to small film budgets, which usually secure and own licensing rights from all parties up front.

Others that work with the major studios, such as CinemaNow, admitted to some frustrations, saying that license negotiations depend largely on the size of the studio or production house. While some studios are still afraid of placing too big a bet on the Internet, others are coming around to see film distribution online as a viable market.

"Getting a return phone call--that's what the challenge is," said Bruce Eisen, executive vice president at CinemaNow, which is in its third year of operation.

Nevertheless, industry veterans say it is inevitable that people will be able to download almost any film or television program to a networked computer or TV set-top box. It will just take some time.

"In big studio deals, there's a lot more paperwork and a lot more contracts and people," said Movieflix co-founder Robert Moskovitz. "When there's a lot of money involved, things get more difficult."

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