Blockbuster (NYSE:BBI) is buying (subscription required) film download service Movielink. It's about time. The service is owned by several Hollywood studios.

While every company from Wal-Mart (NYSE: WMT) to Amazon (NASDAQ: AMZN) has a movie download service, the largest retailer of premium video content does not. That appears to have been an important missed opportunity. According to The Wall Street Journal, the price was less than $20 million, which is another reason investors should wonder why the movie rental company would take so long.

Blockbuster has one huge disadvantage getting into the download business. That it that it is very late to the party. Cable and telecom fiber-to-the-home products already offer video on demand with large libraries. Huge DVD retailers, especially Wal-Mart, are already in the business, and digital stores, especially Apple (NASDAQ: AAPL) iTunes, have already blown past a million video downloads.

But, Blockbuster has one massive advantage -- its customer lists. The video rental firm has data on all of the people who rent movies at its stores and all of its DVD-through-the-mail project which competes with NetFlix (NASDAQ: NFLX).

Blockbusters is almost certainly too late getting into the download business but, if it is very aggressive marketing the product to it millions of existing customers, it might just start to rebuild its revenues.

Douglas A. McIntyre is a partner at 24/7 Wall St.

MAJOR PAPERS:

• The Wall Street Journal (subscription required) reported that Oracle Corporation (NASDAQ: ORCL) has agreed to acquire Hyperion Solutions Corporation (NASDAQ: HYSL) for $52 per share.
• The Wall Street Journal reported, citing people familiar with the matter, that Blockbuster Inc (NYSE: BBI) is in advanced talks to acquire Movielink LLC, an online movie-downloading company owned by major Hollywood studios.
• Also reported in the Wall Street Journal, McDonald's Corporation (NYSE: MCD) is moving closer to adding lattes and cappuccinos to its menu, a move that would be a direct shot at Starbucks Corporation (NASDAQ: SBUX).
• According to the Financial Times (subscription required), DirecTV Group Inc (NYSE: DTV) is considering ways to bundle high speed internet access to its 15 million satellite television customers.
• The Financial Times reported that private equity is "hovering" over Home Depot Inc's (NYSE: HD) wholesale supply business, which could fetch $11B in a sale.

• The Detroit News reported that Ford Motor Company (NYSE: F) won a court order forcing diesel engine supplier Navistar to resume shipments to Ford's Louisville plant.
• Investor's Business Daily's "New America" column highlighted bank and broker SWS Group (NYSE: SWS).

The announcement that Warner will sell not only TV but film content via BitTorrent is really quite remarkable.  BitTorrent technology is currently the number one way that Hollywood content is pirated online, which makes it both an obvious threat but also a long-term opportunity. 

It's a different strategy than the other current Hollywood efforts, Movielink and CinemaNow, which initially looked like a somewhat half-hearted effort to say "See, we offer legal downloading, so do the right thing."  Both sites have improved their technology and usability this year, but still involve changing the habits of an audience that's already downloading feature-length content someplace else.  Working with BitTorrent is a gutsy but logical step: go where the potential customers already are.  While some commentators contend that Warner has still set its pricing and DRM restrictions too high, I think that's inevitable: lowering prices and reducing restrictions, once you have your feet wet, is much easier than trying to go the other direction.  (Just ask the print world how well they're doing charging for newspaper and magazine content on the Web.)

What's in it for Hollywood?  First, they've learned from the recording industry: if you don't get in front of illegal downloading, you'll face a really, really tough catchup game.  Legal music downloads are growing fast, but they're still nowhere near the volume of the illegal file-sharing that had years to gain momentum before legal alternatives appeared. 

But past that, selling direct to the consumer could ultimately cut out all the other folks who take a slice of the profits in film distribution: theater owners, Blockbuster, Netflix, cable, satellite.  The metric to watch here is the theatrical window: what's the time period before movies appear on DVD, pay-per-view and soon, the Internet?  The window is getting shorter and shorter, and some producers suggest it will ultimately become no more than thirty days, even for the biggest titles. 

None of this will happen overnight, of course, but fitting nicely into this pattern is the fact that older moviegoers are increasingly building their own theaters at home.  I've spent time recently with some of the mass-market homebuilders--the people who build more than a thousand homes a year--and many feel that the media room will soon become a standard expectation in new homes.  It will be years before the Internet can easily deliver a top-quality home theater experience, but it's none too soon for Hollywood to explore the best and cheapest way to reach that audience.