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By SARAH MCBRIDE, JESSICA E. VASCELLARO and SAM SCHECHNER

Google Inc.'s YouTube is in discussions with major movie studios about streaming movies on a rental basis, a test of whether the online video giant can persuade its millions of users to pay for premium content. For Hollywood, the move could represent a bold attempt to offset its dwindling DVD sales with online revenue.

YouTube is talking to Lions Gate Entertainment Corp., Sony Corp., Metro-Goldwyn-Mayer Inc. and Time Warner Inc.'s Warner Bros. about charging for new titles on the existing YouTube site. In some cases, these titles might be available on the site on the same day that they come out on DVD.

Some studios already make full-length movies available on YouTube free, though they tend to be older, lesser-known films. It is unclear to what extent older movies or television shows will be a part of the new agreements.

While details vary from studio to studio, generally speaking the agreements would allow consumers to stream movies on a rental basis for a fee. However, in some cases, the movies could be available in way that they have been previously -- free, with advertising.

Negotiations are continuing and there are no guarantees the deals will be struck. Many details remain in flux, including whether users will eventually be able to download movies. People familiar with the matter say that new movie rentals are likely to be around $3.99, the price Apple Inc.'s iTunes Store charges for new movie rentals. The companies hope to keep pricing on par with what consumers pay for video-on-demand for new titles, these people say.

In a statement, a YouTube spokesman said the company is always working to expand on "its great relationships with movie studios and on the selection and types of videos we offer our community."

The talks are a sign of how YouTube is emerging as a competitor to a broad spectrum of entertainment outlets, including Blockbuster Inc. and Netflix Inc. as well as iTunes and Amazon.com Inc. The Hulu LLC joint venture and Sony's Crackle allow users to watch full-length movies free, but don't generally include new releases. Hulu is a joint venture of General Electric Co.'s NBC Universal, News Corp. and Walt Disney Co.

YouTube began as a place for scrappy, home-grown videos, but it has become increasingly aggressive in striking deals to host television shows, movies and other professional content as a way to draw in advertisers and viewers. But movie studios and TV networks won't give up their most popular content for a share of advertising, which they complain isn't sufficient. The negotiations with the studios are part of an effort to open up new revenue streams by charging users themselves.

Hollywood has also been eager to distribute more of its films online -- as long as it can collect a reasonable fee. Though many studios now sell and rent movies online through services such as iTunes and Amazon.com, that has yet to produce meaningful revenue. By cutting a deal with YouTube, which had nearly 428 million global visitors in June, according to comScore, it can potentially reach a much wider audience.

Studios have been pursuing these kinds of deals with renewed urgency, as revenue from DVD sales has eroded more quickly than they had anticipated. Adams Media Research says studio revenue from DVD sales should fall by about $850 million this year to $12.9 billion.

However, YouTube users aren't accustomed to opening their wallets to watch videos. And the full-length movies that already exist on the service -- ranging from classics such as the 1940 "His Girl Friday" to more recent movies like the 1999 horror flick "House on Haunted Hill" -- have drawn a modest number of views compared to content like comedy clips and music videos. Many consumers balk at watching full-length films on a computer screen.

You Tube and the studios are still hashing out how to divide revenue from the new arrangement. For deals that involve advertising, YouTube is likely to give partners the majority of the revenue, as it has done with other partners in the past. Some deals may also guarantee the studio a minimum fee per title viewed, in some cases just under $3, according to people familiar with the matter.

YouTube is pressing studios to allow the movies to be streamed on mobile devices, but some of the studios are resisting, even though that is currently allowed under other online rental services such as iTunes.

Under current plans, 10,000 Google employees will test the service for a period of three months, people familiar with the matter said. The trial was supposed to start at the beginning of September, but was pushed back as studio negotiations dragged on.
 
 
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Hollywood is fighting to stop an exodus of filmmakers who are being lured from Southern California by subsidies and tax breaks.

Labour unions, studios and independent producers are urging California lawmakers to support tax credits for local production, after a bill sponsored last year by Assembly Speaker Fabian Nzqez failed to pass the state legislature.

The group wants California to match incentives being offered by more than 20 other states. Countries from Iceland to Chile also are chipping away at Los Angeles film and television production, the county's third-largest industry. Feature shoots have fallen 32 percent since 1996, according to Film L.A., a non-profit group that arranges local film permits.

Until recently, Los Angeles unions and politicians focused their concern on Canada, where a favourable exchange rate and government incentives helped attract scores of movie projects. As the Canadian dollar has risen and made location shoots less of a bargain, filmmakers have turned to other sites.

"Just as New York would never let Wall Street leave the city, we can't let the film industry leave Los Angeles," said Los Angeles City Councilwoman Wendy Greuel, 44, who is seeking to eliminate fees for filming on city property.

It's a big target for other states. Spending on film-industry payroll and purchases in California was $34.3-billion (U.S.) in 2002, 60 percent of the U.S. total of $56.6-billion, in the most recent figures from the Washington-based Motion Picture Association of America.

The number of days spent shooting movies, television shows and commercials in Los Angeles rose 4 percent last year, according to Film L.A. That compares with a 35 percent increase in New York City, after passage of laws in 2004 that refund filmmakers as much as 15 percent of production costs for crew and equipment. The city also offers free permits, parking and police on location.

Cities including New York, where Warner Bros. this year filmed the pilot TV episode of The Traveler, are courting producers more aggressively.

"It wouldn't have been worth it" two years ago, said Lisa Rawlins, vice-president of studio and production affairs at the Warner unit of New York-based Time Warner Inc., the world's biggest media company. "Pilots are always shot economically."

One challenge for the industry is to convince legislators from other parts of California that subsidies aren't a handout. Retaining production will provide economic benefits to the entire state, said Amy Lemisch, director of the California Film Commission, a state agency spearheading the lobbying.

A feature film with a $17-million budget generates about $1.8-million in sales and income tax for the state, the Los Angeles County Economic Development Corp. estimates.Film, TV and commercial production provides jobs for 241,000 people in Los Angeles County, including camera operators, drivers, carpenters and makeup artists. The industry trails only tourism and international trade, according to Los Angeles County Economic Development. Including music, the county has about 30 percent of all U.S. entertainment employment, with New York second at 10 percent.

New Mexico offered tax breaks, cheap hotel rates and a $7-million loan to lure the 2004 romantic comedy Elvis Has Left the Building, said Bob Darwell, 42, a Los Angeles entertainment lawyer who helped Capitol Films arrange the financing.Louisiana offers a transferable 25 percent tax credit on money spent in the state. As most filmmakers aren't based there, they sell the credit to a broker who resells it to a Louisiana company. The state also offers a 10 percent credit on salaries paid to Louisiana residents and a 4 percent sales- and use-tax exclusion that reduces the cost of equipment purchases.

"We have a very simple incentive package that can save 12 percent of the production's cost, we have trained crews that speak English, and if we don't have a piece of equipment, we guarantee that it'll be there in 24 hours," said Einar Tomasson, project manager of the Film in Iceland Agency, in an interview this month at a conference in Santa Monica, California, that also drew film commissioners from as far away as Chile and Australia.

The California Senate last year failed to vote on a bill by Nzqez, a Democrat representing central Los Angeles that would have provided tax incentives for local movie production.

Rather than trying to get the incentives passed as a standalone bill, Nzqez will seek to include them in next year's budget, said his spokesman, Richard Stapler. Budget negotiations for the fiscal year starting July 1 will begin next month.

"We get a lot of input from groups and individuals in the industry to keep this a front-burner issue for us," Stapler said.