Video chains are trying to keep up with technology

Industry magazine Daily Variety reports the system should be up and running in the US by the end of 2000.

The deal will mean that as high-speed internet connections become more widespread, film fans will be able to stay at home and download films rather than venturing out to rental chains such as Blockbuster.

To protect their businesses, video chains are competing to develop their own video-on-demand and e-commerce systems.

Other studios are expected to announce similar deals, while Time Warner - which announced its merger with internet giant AOL last week - is developing its own service.

Studios benefit from these deals as they no longer have to pay to produce cassettes and discs themselves, and nor will they have to work out what to do with warehouses full of unwanted tapes when demand falls.

MGM Home Entertainment president David Bishop said the studio was "excited to be at the forefront of technology" while Blockbuster chief executive John Antioco called it "an exciting announcement for movie lovers".