UPDATE 2-Blockbuster buys movie download service Movielink

(Recasts first paragraph, adds details)

By Sue Zeidler

LOS ANGELES, Aug 8 (Reuters) - U.S. movie rental chain Blockbuster Inc (BBI.N) said on Wednesday it has bought film download service Movielink for undisclosed terms, giving it a stronger hold in an area where rival Netflix Inc (NFLX.O) is also staking a claim.

Blockbuster has been in talks to buy Movielink since at least March, when sources familiar with the situation put the price tag at under $50 million in cash and stock. A different source said on Wednesday the terms had changed, that it was an all-cash deal with a substantially lower purchase price, but declined to elaborate further.

While the market for legal movie downloads is still small, Hollywood and the movie rental industry are backing the sector in hopes it will take off and they can avoid the kind of losses the music industry suffered through wide-scale unauthorized downloading of copyrighted content.

The acquisition marks Blockbuster's latest effort to expand beyond the store-based movie-rental market.

Chief Executive Jim Keyes, who recently succeeded John Antioco, told Reuters that Blockbuster will operate Movielink independently and eventually make elements of the service, with more than 3,300 titles available to download, available through blockbuster.com.

In addition to Netflix's 4,000-title movie-streaming service launched this year, Movielink competes with a handful of competitors such as Vongo and CinemaNow offering a fraction of the 70,000 titles available on DVD. Blockbuster also has a stake in CinemaNow.

Movielink was launched in 2002 by major studios including Metro-Goldwyn-Mayer Studios, Viacom Inc.'s (VIA.N) Paramount Pictures, Sony Corp.'s (6758.T) Sony Pictures Entertainment, Time Warner Inc.'s (TWX.N) Warner Bros., and Universal Studios, operated by General Electric Co (GE.N) unit NBC Universal.

Industry watchers note Movielink has struggled to gain traction in the nascent market, but Keyes said the challenges were common to all members of the sector, and mainly consisted of raising consumer awareness and providing ease of use.

"It's an emerging market and all the players are trying to find the right formula. It's not a unique challenge for Movielink," he said.

Revenue from downloaded videos grew from $11 million in 2005 to $111 million last year, but the figure pales in comparison to the $25 billion in DVD and video consumption in 2006, according to Adams Media Research. (Additional reporting by Gina Keating)