Hole in Adobe software allows free movie downloads

"It's the traditional trade-off, convenience on the one hand and security on the other," said Ray Valdes, analyst at research group Gartner.

However, even if a user doesn't pay, the stream still sends the movie to the video catching software, but not the browser.

Amazon's Video On Demand is the Web retailer's answer to declining sales of packaged movies and TV shows and the growth in demand for digital content that can be viewed and stored on the Internet.

Unlike Amazon, videos from Hulu.com, NBC.com and CBS.com are already free although the TV programs are interrupted by commercials. However, the stream catching software separates the commercials and the program into two separate folders, so people can keep the programs without the advertising.

Hulu.com, a video Web site owned by News Corp's NWSa.N Fox network and General Electric's (GE.N) NBC Universal, was the big networks' answer to YouTube, the popular video-sharing Web site where many users began uploading TV shows and other content owned by media companies.

The networks scrambled to post videos on their own sites in a bid to capture another stream of advertising revenue from a growing audience, but they have struggled with how best to show commercials which fund the programing when played on the Web.

YouTube, which started the online video boom before being bought by Google Inc (GOOG.O) for $1.65 billion in November 2006, has also struggled to cash in on its popularity even though its user base continues to mushroom.

DESTROYING BUSINESS MODELS

One possible solution would be to protect the video with a digital rights management (DRM) system. A Seattle-based company called Widevine Technologies has a DRM system that can encrypt online videos using Flash.

"The fundamental problem here is that Adobe's lack of technology is not allowing the business models to be preserved," said Widevine Chief Executive Brian Baker.

The lack of content protection, according to Baker, threatens all the business models used today to fund video on the Web.

Apple Inc (AAPL.O), which sells movies and television shows at its online iTunes store, uses its own DRM technology called FairPlay, but it only works for video bought on iTunes.

Forrester analyst James McQuivey said he doesn't believe the video stream catching technology will entirely derail the advertising-supported business model used by the networks for online video.

"It's too complicated for most users," said McQuivey, noting that file-sharing services like BitTorrent already exist but only a small percentage of people use them.

"People want something easy to find and easy to use."

(Editing by Peter Henderson, Richard Chang)