Just as we put the finishing touches on our Internet Video: Direct-to-Consumer Services (Second Edition) report this week, word came that a couple more Internet video pioneers were closing their doors, or at least seriously revamping their game plan. Vongo (the subscription movies-on-demand service from Starz) will end its service on September 20, 2008. As you'll recall, Starz recently announced a collaboration with Verizon, which provided some clues as to why the company pulled the plug on its stand-alone Internet movie service. The Starz Play service is the first of what Starz officials expect to be more white-labeled deployments of its service. In the meantime, ClickStar, which was a collaboration between Morgan Freeman and Revelations Entertainment, officially closed.

There is no question that among many of the premium Internet video efforts that exist today, the movie services have suffered the most, and largely due to the inabiltiy by consumers to view the content directly on their televisions. If you throw out the significant users of Internet video services such as Xbox LIVE! (and we'll get to its impact later), our TV 2.0: The Consumer Perspective study, conducted in Q2 2008, finds that a very small sliver - 1.5% - of broadband users surveyed are actually paying to rent or download movies in any given month. This compares to 24% who watch primetime TV shows on the Internet in any given month, and about 3.5% who pay to download TV shows from iTunes or other sites.

If you look just at the August 2007 fire sale of Movielink ($6.6 million from Blockbuster) - in which five major motion pictures studios had invested close to $150 million, the economics of the movies-only services have not been favorable. At the time of the purchase (the first half of 2007), Movielink had lost about $10 million on revenues of $1.9 million.

Something's gotta give here, and the movie services recognize this. In April, for example, CinemaNow (another early entrant in the online movie distribution business) announced that it would work with Technicolor to build a platform for the electronic delivery of movies, TV shows, music and software to consumers via a broadband Internet connection. This platform will include content encoding and encryption, digital rights management (DRM), hosting and storage, promotions and ad management, streaming or download delivery, order fulfillment, reporting, and forensics. Like Starz, CinemaNow sees that while the consumer-facing services for movie rentals and downloads may not scale, they can certainly offer white-label services that do create new opportunities to distribute content to wider audiences.

The second key point is that - to both survive and thrive - the Internet video services have to be easily accessible from the television set. This is something that Netflix has pursued quite successfully, as the Roku Netflix player has sold quite well since introduction in May. With LG's introduction of the BD300 Network Blu-ray Disc Player and the Xbox 360 supporting Netflix's Instant Queue, Netflix has set itself up well to take advantage of today's predominant video consumption model (the DVD), while keeping its options for digital distribution open to a larger audience down the road. We would fully expect Blockbuster to follow a similar approach with Movielink.

Here was a startling figure from our TV 2.0 study - among consumers who watch Internet video, only 5% use an iPod or other portable multimedia player to do so! The vast majority of Internet video consumption today is still occuring at the PC. With Apple's great penchant for self-promotion, one almost bought into the iPod as being the panacea for driving paid Internet video services. Guess what? Apple doesn't rule in Internet video. It's Microsoft! In estimating the revenues that Apple and Microsoft are deriving from video downloads and rentals this year (U.S. households), our estimates indicate that Xbox LIVE will bring in about $291 million in video revenues to Microsoft, whereas Apple is looking at $213 million!

The results from TV 2.0 are indicative of the direction that the Internet video market needs to move ... straight to the TV. Whether it's the broadband connected TiVo box (35% of users access Amazon.com's Unbox service on at least a monthly basis) or the Xbox 360 (24% of users pay for video content on at least a monthly basis), Internet video services show a significantly-higher growth potential when they are linked directly to the household's primary entertainment center. When 2.8% of all U.S. broadband households are paying for Internet video from an Xbox 360 - and only 1.5% are paying for Internet video consumed at the PC or the portable MP3 player, the results are clear. To not only survive but thrive, Internet video services must be more accessible directly from the primary entertainment center in the home. How the consumer electronics industry evolves to take advantage of growing array of premium Internet video content (both user-paid and ad-supported) will be a key development to watch in the coming years.