Online DVD rental service Netflix Inc. (NFLX) and digital video recorder maker TiVo Inc. (TIVO) on Thursday said they would jointly develop a product to download movies over the Internet, a deal uniting two of the fastest growing brands in home entertainment.

Shares of TiVo (search) jumped 7 percent and shares of Netflix rose 5 percent in after-hours trade on the widely anticipated announcement for a set-top box that represents a kind of technological Holy Grail for the entertainment industry.

Netflix spokeswoman Shernaz Daver said they targeted a 2005 debut for a product that would let consumers download movies onto their TiVos through high-speed Web connections and watch films at their leisure.

But the plan faces the daunting challenges of winning cooperation from Hollywood, which has hesitated to release its movies on the Web without rock-solid security, fearing it could lose control of its products like music industry labels did.

Bigger competitors are also already trying to take business from the two young technology firms, which have about 2 million subscribers each.

TiVo and Netflix, both of which had been Wall Street high-flyers because of their cutting edge technology for home movie and television viewing, have seen their shares fall by about half over the last year in the face of rising competition.

Netflix has seen threats to its market as Wal-Mart Stores Inc.(WMT) entered the DVD-by-mail business, while TiVo is under pressure from cable companies that offer personal video recorders that, like TiVo, store TV shows on a computer hard drive. Cable companies also offer video on demand and pay-per-view movies, products which compete with the new plan.

Despite the potential for the new technology, Netflix expects its traditional DVD business to be even more dominant five years from now, Daver said.

She said her company was speaking with studios and expected to sign unique licensing agreements with each.

Those deals could be difficult to craft, American Technology Research (search) analyst Rob Sanderson said.

"There is going to be a lot of excitement about a potential service, but it is going to come down to licensing and distribution rights, which may be more of a challenge than many people on Wall Street really understand," he said.

The movie industry has been extremely cautious about online distribution of its products, fearing that a false step could lead to the widespread piracy that has hurt the music industry.

TiVo last month won U.S. regulatory approval for technology that would permit users to send copies of digital broadcast shows over the Internet to a limited number of friends, despite concerns by the Motion Picture Association of America (search) and the National Football League (search) about the risks of unfettered distribution of copyrighted shows and airing regional games outside of their markets.

TiVo Chief Executive Mike Ramsay, who resigned from the Netflix board, said that no merger or acquisition was in the works between the two companies.

"We have an interest in tapping into broadband as a distribution mechanism for content. Its a natural for us because we have all these units out there, and we think its a natural for the consumer because this content can be made available in a form that probably won't find its way to broadcast," he told Reuters.

Ramsay said the plans would not have a near-term material impact on financial results at TiVo.