MovieBeam, a spin-off from Disney that became one of the first movie download services, has been acquired by Hollywood Video owner Movie Gallery for under $10 million. That number is a fraction of the $50 million it was recapitalized with last year after Disney spent a reported $70 million on the project.

Much of MovieBeam's struggle to establish itself can be blamed on its architecture. Instead of relying on broadband to deliver movies on demand over the Internet, MovieBeam receives the content over the air with an antenna connected to a set-top box. A phone line is also required for billing and ordering purposes.

The service isn't cheap either: customers have to shell out $250 for the set-top box (although pricing has dropped to $100 with promotions) and pay a $30 activation fee. Pricing for movies ranges from $3.99 to $1.99 USD, with a $1 surcharge for high-definition content.

Because it doesn't use the Internet, MovieBeam is only available in 31 metropolitan areas, further limiting its potential customer-base. In announcing the purchase, Movie Gallery indicated it will change that, using MovieBeam's backend infrastructure along with new delivery mechanisms, such as broadband.

"Our acquisition of MovieBeam is the first phase of our long-term strategic plan to provide digital content to consumers. We will begin merchandising the MovieBeam service in our Hollywood Video and Movie Gallery stores and on our websites in the near future and we have exciting plans to build upon the existing content digitization and broadcast platforms," said Movie Gallery CEO Joe Malugen.

Although the company did not specify how much it paid for MovieBeam, Movie Gallery said the acquisition and any ongoing development costs through 2007 would remain less than $10 million. It is unclear how the purchase will affect existing MovieBeam subscribers.