Download service fails to impress

Empty unveiled its Unbox movie download service last week, causing a collective yawn on Wall Street. Unless you count its effect on Netflix.

While many analysts made note of the new service that lets consumers rent or buy downloadable movies for viewing on computer screens and handheld devices, few were particularly bullish on Unbox.

Several, in fact, wondered who would want to pay about the same price for an Unbox movie as they would a DVD. Unbox movies, after all, must reside on a computer hard drive and may not be burned to a DVD.

Amazon's restrictive rules and unfavorable pricing had formerly worried Netflix bulls cheering the lack of competition.

"The net impact of this release should be positive for Netflix, as the stock has been hurt by concerns about Internet download competition," Citigroup analyst Tony Wible said. "As these services are shown to be relatively minor threats, we expect investor anxieties to subside and Netflix's multiple to expand."

Indeed, Netflix shares rose 1.1% last week while Amazon shares sunk 3.9%.

By contrast, Mark Mahaney, also of Citigroup, said, "Unbox is very unlikely to have a material impact on Amazon's financial model for the foreseeable future."

Likewise, Jefferies and Co. analyst Youssef Squali said of Unbox that "its pricing is not aggressive enough to pose a threat to Netflix short term. Longer term, we expect Netflix to be out with a competing offer."

Some analysts speculated that Amazon has been forced by studios to set its price high enough as to not damage sales -- and relationships -- at traditional stores where DVDs are sold.

"We believe that the studios are adopting this pricing, in part to protect their retail partners who generate a majority share of the studios' revenues," Squali said.

Pali Research analyst Richard Greenfield was even more direct, writing that "the rules and pricing scheme of Unbox make us believe that movie studios do not want legal movie downloading to be terribly successful in the near-intermediate term."

Given that studios complain so much about piracy, the restrictions they force on Unbox "makes no sense to us," he said. The analyst even compared Unbox to the illegal ripping of a movie and determined that the latter was not only free but also faster and came without restrictions.

Apple Computer is set to unveil its competing product today. Writes Greenfield: "We hope the Apple service is significantly more innovative than the Amazon service, as the studios need to accelerate the attractiveness of digital delivery to prevent illegal P2P from capturing too much market share."