It's Blockbuster vs. Studios for Online Film Franchise.

FEEL the pain. Blockbuster Inc. is the world's No. 1 renter of videos, but its stock is trading 25 percent below its price in August, when parent Viacom Inc. sold an 18 percent stake to the public.

Like a giant trapped inside its own brick and mortar, Blockbuster desperately wants to burst out of its "old media" box and reinvent itself as a "new media" company. It wants to do all sorts of nifty things, like delivering the movie-of-your-choice over high-capacity cable and telephone wires.

To that end, Blockbuster has recently announced deals with America Online Inc., TiVo Inc. and Metro-Goldwyn-Mayer Inc. to develop such services. Each announcement has provided a momentary lift to Blockbuster's stock, but there are well-known problems: downloading a movie is still a lengthy process, and there are copyright issues.

The biggest obstacle is the least discussed. Leading Hollywood companies haven't agreed to let Blockbuster distribute their movies over the Internet or directly over telephone or cable lines -- and they aren't likely to. The prevailing attitudes around town: "Who needs a middleman?" and "Over my dead body."

When pressed, Blockbuster executives concede that the company doesn't own the necessary rights. Yet. "We have other pokers in the fire," said Karen Raskopt, senior vice president for corporate communications.

No doubt we'll hear more "new media" announcements, as Viacom tries to spruce up the Blockbuster subsidiary for a "split-off" of its remaining 82 percent holding, by exchanging its Blockbuster shares for Viacom shares. Viacom Chairman Sumner Redstone has said he won't proceed until Blockbuster is trading in the 20s, or nearly double its current price.

High time, then, to scrutinize Blockbuster's broadband ventures.

As Time Warner Inc. shareholders have learned, nothing drives a stock higher than the pledge of an investment by America Online. Blockbuster shares rose 35 percent to a high of $16.88 three days after AOL agreed to make a $30 million equity investment in an entity called Blockbuster.com and to partner with Blockbuster to develop broadband content and the means of delivering it.

Back-door clause

Not mentioned in the press release was the caveat that AOL has the option of pulling back its investment, plus the cost of capital, if an initial public offering of Blockbuster.com is not completed within 18 months of the closing of the transaction. The disclosure was made in a filing at the Securities and Exchange Commission.

On Jan. 7, Blockbuster made a splash at the Consumer Electronics Show in Las Vegas, when it announced an alliance with TiVo to come up with a video-on-demand service.

TiVo sells a "personal video recorder" that allows TV viewers to locate and record programs and even pause live television. The recorders store picture and sound in digital format on hard drives. TiVo went public in September at $16 per share.

Blockbuster and TiVo said they would work to provide TiVo subscribers with movies that could be viewed through TiVo receivers. The announcement sent TiVo shares up 31 percent that day to $50.38. On the same day, Blockbuster rose 16 percent to $11.63.

With nearly 50 percent of the video rental market, Blockbuster has significant clout. The retailer improved its prospects in 1998 by persuading Hollywood to switch to a revenue-sharing formula for video rentals, allowing Blockbuster to stock more titles of current movies.

In November, Blockbuster Chairman John Antioco told Bloomberg that he thinks his company will become "the logical choice" for the so-called "video-streaming" of movies because consumers already are familiar with the Blockbuster brand. "We expect to have a significant share of the electronic delivery of movies," Antioco said.

That, of course, is what worries executives at some of the biggest studios. Electronic delivery of movies could become Hollywood's premium business.

And remember, major companies are still smarting from their mistake some 20 years ago in ceding the pay-TV business to Home Box Office and Showtime.

Partnering with MGM 

But Blockbuster has already found a chink in Hollywood's armor. The other week, the video retailer announced a deal with Metro-Goldwyn-Mayer, the weakest of the major studios. The two companies said they'll explore ways to download MGM movies via the Internet or other home delivery technologies.

Some rival studio executives concluded that Blockbuster must have written a check to persuade MGM to open its film vault. But that's not the case. The companies said the deal was reached during negotiations for a revenue-sharing arrangement for MGM videos in Blockbuster stores.

MGM was scarcely in a position to say "no," having only recently regained control of its home video business, which previous owners had licensed to Warner Home Video.

Simply put, MGM needs shelf space and promotion in Blockbuster stores. In 1999, MGM Home Entertainment had a scant 3.6 percent share of the $8 billion video rental market, compared with Warner's 21.5 percent and Walt Disney Co.'s 19.2 percent, according to the VideoScan data tracking service.

Details are still emerging on the experiment. No particular MGM titles have been selected yet. Since the deal is non-exclusive, MGM will be free to proceed on its own or partner with others, said David Bishop, president of MGM Home Entertainment.

The real test of Blockbuster's muscle would come at Paramount Pictures, which is also a Viacom subsidiary. Would Paramount soon entrust its "video streaming" future to Blockbuster? I doubt it. Paramount, after all, is the asset Redstone intends to keep.

He'll want to keep all of its profits at home.

Kathryn Harris is a columnist for Bloomberg News.