One of the key reasons we all don’t have 100 megabit broadband connections to our homes is what is known in the telco industry as the last mile. The last mile is the gap between the fat, fiber-optic network pipe that runs through every city and your home.

In the digital entertainment world, the big problem is what I like to think of as ‘the last 10 feet’ – the distance from your computer to your flat screen tv. The problem is not a technical one — a trip to Best Buy is all anyone needs to get hooked up — it’s a business problem. For digital distribution to go mainstream, there needs to be something as simple and easy — and ubiquitous — as the iPod / iTunes combo was for music. Best Buy is not the answer for my mother, which is my general litmus test.

So why is it a business problem? Studios and other distributors who control licensing are sitting tightly on the digital rights to their films. The pipes are empty without Spiderman and Pirates of the Caribbean. And the people who own the spigot want to make sure they are the ones who control things like pricing and windows — and not the plumbers (Apple, Microsoft, Netflix, etc).

The issue is the content owners don’t actually understand (or care) about how people want to consume entertainment in a digital world. Since the plumbers already spend a lot of time in your home and day-to-day life, they have a much better intuitive grasp for how you want to watch, listen, and pay.

So it’s a business problem. That is, until someone comes along with enough market share to really throw some weight around, as Apple finally did with music. And while they have way more than half the market in the digital world, that market today is still very, very small.

The contenders to date have been Apple, Netflix, Amazon, and recently Hulu. At the beginning of 2008, all were primarily small-screen-only solutions (TiVo members can watch Amazon Unbox titles on their TV, but that is a very small part of the very small market). Then, in January the Apple TV finally got real with rentals and HD. Everyone (except Hulu) followed suit with announcements of impending big screen solutions.

The problem now becomes that everyone is going to want to be the one to sit between your computer and your TV. I say the one because if I already have a DVD player, cable box, and Wii, I’m running out of shelf space and HDMI inputs to my TV. This is partially why Vudu is in trouble, and also why TiVo, having not won the war, is going to lose.

Interestingly enough, the folks out in the lead here are at Microsoft. As of last month, there have been over 19 million Xbox 360’s sold. Each one is both broadband and HD-compatible, and the online store sells feature films on demand. Microsoft’s problem is that they’re not Apple, who clearly gets my mom in a way that Microsoft never, ever will.

Which brings us to Netflix. Yesterday, Netflix finally made the last 10 foot leap with the Roku Netflix Player, a $100 set-top device that lets Netflix subscribers stream any of the 10,000 Watch Now titles available on Netflix to their TV. Early reviews are extremely positive. Saul Hansell of the NYTimes Bits has a good breakdown of why here.

What’s smartest about Netflix’s move is that they decided to stay out of the hardware business themselves. The last 10 feet will be a bloody battle, and aside from the one winner, the real beneficiaries will be those with a) great selection and b) the ability to guide audiences to discover what they want. Which is what Netflix does just about better than anyone on the planet.

Anthony Kaufman of Indiewire wrote a great story today on indie digital rights. I was pretty pleased to be included in the story in the company of folks like Liesl Copland of Netflix, Robert Nathan of Cinetic, Jason Janego of Magnolia, and Lisa Schwartz of IFC.

Most people agree that digital distribution will become the most dominant form of media consumption in the not too distant future. Where people tend to diverge in their thinking is just how distant that future is. And where they diverge even further is what to do in the mean time.

The big technology players (Netflix, Apple, Microsoft, Amazon) are investing (read: losing) a ton of capital under the (correct) assumption that they can’t afford not to. Whenever we reach the promised land, if they’re not already there, it will be too late. To be fair, Google (YouTube) is definitely making money, but in a different space (short-form vs. long-form). And even Fox & Universal are now in the mix with Hulu (they are private, but unlikely to be making money yet).

With close to 60% of the total market, Apple today is still the 800 lb Gorilla. But to put that in perspective, last year they sold only 7 million feature films on iTunes. At $9.99 a pop, that’s less than $70 million. Which is less than than the opening weekend gross of I Am Legend – last year’s #6 grossing film. Which means the whole market is roughly $117 million, or less than the opening weekend of Shrek the Third – last year’s #2 grossing film.

So what does this mean for filmmakers? That for the foreseeable future, digital distribution is still experimental. To put it another way, don’t put all your eggs in one basket.

Currently, the various models include download-to-own, such as iTunes, or subscription-based, such as Netflix. In the age of “freeconomics,” however, as outlined by Chris Anderson’s March 2008 WIRED cover story “Free! Why $0.00 Is the Future of Business” (link), “the trend lines that determine the cost of doing business online all point the same way: to zero.” The most successful future model, then, could be simply to give the movies away.

That’s at least what Hyams’s B-Side has been doing in theaters: B-Side has been promoting over 300 free screenings around the country for their most successful title, the music documentary “Before the Music Dies,” in the hopes that it will drive online sales.

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“I don’t believe there will ever be a time when you can just put your movie online and make money,” said Hyams, who believes that a cross-platform approach is integral to getting movies watched and purchased.

At B-Side, that means that we spend most of our time and energy on innovative (we think) approaches to marketing — eg, check out what we’re doing with Super High Me. And we spend the rest of our time and energy on partnering with distributors to pair online distribution with offline outlets — eg, our partnership with IFC.

I do believe the first pure-online million-seller will happen in the next year. But it will likely come from a movie version of Radiohead’s In Rainbows experiment — ie, a known-entity with established brand taking a great film and making it available online only.

The keys there are a) established brand, and b) great film. One thing people often forget is that while digital distribution absolutely does reduce friction in the system, it can’t make something bad turn good. In fact, I believe the online world is more Darwinian, drawing a sharper line between “good” and “bad.” This is true for two key reasons:

1. Audiences are no longer captive. When massive selection and on-demand availability becomes a reality, why would anyone bother spending 90 minutes on something that doesn’t resonate? If I’m bored, I’ll just fire up something else.
2. Viral can mean life or death. Word of moth travels fast for things that are great, and faster for things that suck. This is one that people tend to forget / ignore. The only things that benefit from buzz are the ones people love. You can’t manufacture true buzz.

So, not really big news that the future is uncertain. But Kaufman’s story is a great view into what some of the indie players are thinking and doing.

You can read the full story here.