Vongo is closing its virtual doors. What's Vongo, you ask? Good question.

Meet Vongo
Liberty Media (NASDAQ:LINTA) subsidiary Starz started this online video service about two and a half years ago. Vongo's Web site describes the service as "easy, convenient and legal full-length movie downloads," and it contained as many as 1,800 movie titles as of last January. They were viewable on Microsoft (NASDAQ:MSFT) Windows PCs and other Media Center extenders like the Xbox 360, as well as a handful of mobile devices. The list notably excluded any Apple (NASDAQ:AAPL) gadgets, or even Microsoft's own Zune. That seems fairly boneheaded, but it wasn't the biggest problem with Vongo -- more on that later.

Existing customers (all five of them, or thereabouts) are being shuffled over to a similar, 2,500-movie download service from Verizon (NYSE:VZ) by Sept. 30. In the background, you can hear all of the Hollywood studio bigwigs and MPAA representatives exchanging high-fives and patting each other on the back. "We were right all along, guys! Downloaded movies will never fly!"

Don't panic!
Don't sell your Netflix (NASDAQ:NFLX) and Amazon.com (NASDAQ:AMZN) stock just yet, though --  not even if you bought them solely for the promise in their respective movie download services, Watch Now and Unbox. The studios' self-fulfilling prophecy of digital failure is only working out at the moment because Hollywood hard-headedly fails to see the potential profits inherent in this revolution.

Vongo drowned in a sea of sameness, as nearly every legal downloading solution looks very much like the others. Hollywood won't license out its biggest hits under reasonable terms, because there aren't enough users or money in it for them -- and good luck getting subscribers if you don't have good content. Meanwhile, the Pirate Bay and other illegal alternatives have every flick under the sun, as long as you're willing to leave your morals at the door.

Disney (NYSE:DIS) started to realize a couple of years ago that piracy is just another form of competition, one that should be fought with the usual tools of the trade -- price, convenience, selection, and so on. Applying that insight in the real world has not been easy for the Mouse House, though. There are business partners to consider on all sides, including theater chains and first-run movie cable networks like Starz. Stepping on their toes might damage or even destroy decades-old business relationships, in which the money-making models are well understood and about as open to change as the Stauffer Mennonites. So the studios continue to protect the old business model, even if the new one could, should, and in all likelihood would ultimately lead to higher total sales and lower costs.

Where are we going?
Hence all the lawsuits, the painfully slow trickle of tasty flicks into legal digital realms, and paranoia about piracy. Vongo was just caught in the collateral damage from this misguided cleansing action, and it paid the ultimate price, like an innocent bystander at a firefight between the Mafia and the law. In this battle, the law can't win until it starts to treat the enemy like just another competitor -- albeit one using very different methods.

The Apples, Netflixes, and Amazons of the world will eventually pull through this licensing morass and lead consumers into a brand new world of entertainment, where you can see and hear what you want, when you want it, and where you want it. Theaters and Starz will still be there; they'll just be knocked down a couple of links in Hollywood's food chain.

Goodbye, Vongo. We hardly knew ye.

Further familiar Foolishness:

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Fool contributor Anders Bylund owns shares in Disney and Netflix, but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure believes in a brighter future.