Now, about that innovation thingy: here's the idea. Well actually, before that you need some context. Last weekend, in yet another successful effort to waste what should have been productive time, I ended up watching this movie on YouTube (surprisingly funny and stylistically interesting actually!)
Now, some random user took the trouble to rip, split and upload the movie on YouTube. His/her only motivation seems to be: the "thank yous" that other users posted. YouTube's motivation to keep the content on there: the ad revenue. The content owner gets nothing, even though they've done most of the work, and the classic economic argument is that eventually they will not have the incentive to produce content and everyone in the world is worse off. Now, my watching this movie on YouTube is a great example of why content providers don't get it.
The movie industry's argument here is that they lost revenue (one movie ticket or DVD) that they should have got because I watched this movie online. They didn't! I wasn't going to pay 10 bucks and do the 2 hour commute that I'd need to do to watch this movie...and I'm not into renting DVDs, but watching this movie (in breaks) on my laptop while getting some work done on the side (kinda) worked for me, and the minute I was done (simply because the movie was so much better than I'd expected) I felt like I wouldn't mind paying something for it.
Signs are though, that the movie industry (especially Bollywood) is getting it. The best example of this is Rajshri's website. They've got the right (and pretty large) mix of streaming/downloadable, old/new and free/paid content. The number of views they have for their shows is pretty impressive too, and now they're starting to figure out the competition. I started watching this movie on YouTube a couple of weeks ago, then it disappeared because Rajshri asserted their content rights.
Their suggested option is to download the movie off their site for $10. Now this is a pretty good option to have, but I didn't bite. I did end up finding a way to watch the movie, and felt like "hey, not bad!I wouldn't have minded paying a couple of bucks for watching this on my laptop."
My point: there is an opportunity for a variable-pricing (maybe even "pay if you feel like it" and "pay what you feel like" pricing model), for a low-bandwith, low-fidelity Internet-distribution for movies; especially niche movies. It's risky and you will have a free-loader issue, but right now the content providers are making nothing! This way they will be able to at least add to their revenue stream, and my feeling is given the demographic they're targeting, the expanded market will make up for any cannibalization in revenue that they might see from their current distribution schemes.
Just a theory anyway.:)