(FORTUNE Magazine) – Every time a new technology comes along, it challenges some group of incumbent businesses. The telephone challenged the telegraph companies; PCs challenged the mainframe makers; digital music challenged the record labels. And every time incumbents get pushed, they tend to forget everything they learned about their business and about their customers. They start acting irrationally.

That's what is going on right now in Hollywood. The movie studios, managed as they are by reasonably bright people, have decided that they don't want to see happen to movies what happened to music. In the past 18 months retail sales of CDs have tanked, and many blame the Internet, which makes it easy for listeners to share digital copies of music. The studio executives would rather not be the next to be Napstered. The problem is that while these people are reasonably bright about how to make and sell movies, they don't know squat about the Internet or personal technology. And so they've come up with something called MovieLink--an attempt by five major studios to create an Internet-based service that lets users rent and download movies to a PC.

I came to MovieLink with thoughts of video-on-demand, one of the long-dreamed-about killer apps for the broadband Internet. The idea behind video-on-demand is that you can sit cuddled up with your remote control in your living room and watch anything you want whenever you want. Feel like seeing Braveheart? Simply punch in a request on your advanced TV, confirm the price, then prepare the popcorn. A digitized version of the movie stored on a server somewhere will pipe the flick to your house and your house only.

Great vision, huh? When I heard that the Hollywood heavyweights were going to offer a service to make it easy to watch movies on a computer, I had that idea dancing in my head. Of course, everyone's first reaction is that people don't want to watch movies on their computers. That's right, but visions have to start somewhere!

MovieLink boasts some 200 movies for rent. I chose Braveheart, which for some reason was much cheaper at $1.99 than most other selections, which were $3.99 to $5.45. I did get to watch the movie on my computer. But it was a struggle, and in that struggle one question kept nagging at me: Why the heck do the studios think they know how to provide me with a service like this?

MovieLink's user interface for choosing movies is a mess. It's modeled after the e-commerce systems pioneered by companies like Amazon.com. That means everything is presented in a hierarchy of categories: action, romance, Western, etc. There's no method for searching actors, directors, or--oddly--even studios.

Worse, though, is the service. The data files are huge. At 952 megabytes, Braveheart took just less than five hours to download using our DSL line at home. Video-on-demand? Hardly. In the same time we could have made 20 roundtrips to our neighborhood Blockbuster. Then there's the fact that MovieLink requires you to watch the movie within 24 hours of starting to play it or have it expire. Blockbuster lets you keep a movie for three to four days. Both, however, feature equally unfriendly help. As soon as I clicked the play button on my movie, MovieLink offered this: "Do you want to play Braveheart now? If you play Braveheart now, you must finish viewing it by Tuesday, 11/19/2002 2:56 P.M."

It's clear that the studios' motivation in designing MovieLink is fear of piracy. But they forgot to make the service usable, appealing, or compelling. So MovieLink will fail, people will argue that you can't sell digital content on the Internet--and the studios will have proved nothing.

Seems to me that the right way to approach this problem is to remember what your business is: Movie studios make and market movies. Theaters show movies, and retail chains rent or sell them. Wouldn't it make sense for the studios to partner with a company that knows how to do a Net-based version of what theaters and retail stores do?

But the studios won't listen to me. Perhaps they will listen to Mel Gibson, who in Braveheart dismisses some infighting Scotsmen with this withering line: "You're so concerned with squabbling for the scraps from Longshank's table that you've missed your God-given right to something better."

STEWART ALSOP is a partner with New Enterprise Associates, a venture capital firm. Except as noted, neither he nor his partnership has a financial interest in the companies mentioned. He can be reached at alsop_infotech@fortunemail.com. His column may be bookmarked online at www.fortune.com/technology/alsop.