VOD

	Video on Demand
Video On Demand: Pause, Rewind, Play December 2001 - January 2002 By Ben Berkowitz

Push a button. Watch a movie. Pause. Rewind. No cassette or disk required.

And not just any film that happens to be on HBO, but the movie you really want to see, old or new, studio blockbuster or arty independent. For over 20 years, this has been the Holy Grail of visual entertainment. Time Warner once called it the Full Service Network. Bell Atlantic (now Verizon) tagged it Stargazer.

Those services and others like them, all ambitious, all defunct, spent hundreds of millions of dollars in vain pursuit of what is now called 'video on demand', movies that come to you when you want them. Now, as the digital age moves ahead, a new wave of ventures is throwing money at this tantalising dream. And in many ways it seems closer than ever to being realised. Major cable operators in the US are deep in plans, trials and initial rollouts for VOD. AOL Time Warner's cable unit is experimenting with a digital cable version in select cities. VOD service provider Intertainer, backed by Sony and Qwest, has launched trials via cable and DSL. Verizon, one of the biggest local telcos in the country, held meetings with all the major Hollywood studios last week about its own prospective DSL service.

The technology exists. The carriers and infrastructure exist. The few customers who have it seem hooked. Indeed, the general consensus in the industry, derived from years of testing, is that people with VOD spend significantly more money they otherwise would watching movies - which, in theory at least, means more revenue for Hollywood's studios. And yet VOD is stuck in perpetual pause.

Why? Because Hollywood, which controls the movie supply, doesn't want it yet, or at least doesn't want it delivered in the same way that cable operators and other would-be providers do. And without access to new, top-tier movies, even high-profile VOD endeavours - like the joint venture of Blockbuster and energy giant Enron - can't work. That venture, announced with a 20-year life span, lasted all of seven months before dissolving in acrimony, in large part because of the lack of movies available on the service.

True, studio heads are busy haggling with the actors and writers guilds over residual fees for films shown in this new medium, while the Motion Picture Association of America's Jack Valenti fulminates about the urgent need for ever-better piracy protection. But the simple truth is that moviedom is dragging its feet, not because customers wouldn't love VOD, but because they might love it a little too much, and too soon. That would disrupt the delicate system under which Americans will pay the studios $15 billion this year - only five per cent of that coming from all forms of pay-per-view, including VOD - for the privilege of watching movies at home, largely via cassette, DVDs, satellite and conventional cable. While movie studios desperately want new revenue streams and recognise that VOD is among the more promising sources for them, they're also scared of losing control of their product to hackers and Napster-like services, and of having to share too much of the pie with cable operators and other intermediaries.

WAR OVER RELEASE DATES

Critics say Hollywood is resisting the new technology at its own risk. "It is always a huge mistake for content businesses to try and make it difficult for consumers to get their content," says a high-level cable executive.

"Witness the music business." Most studio executives have been extremely reluctant to discuss the industry's game plan for VOD. But one senior studio executive makes clear that the new medium will arrive only on the studios' terms - and those terms will be tough. "We would like to try to eliminate the middleman and most of all, Blockbuster, which already has too much power in the video business," says the executive, who spoke on condition of anonymity.

To date, Hollywood has effectively stonewalled video on demand, either by withholding films altogether, or by delaying their release via VOD until well after that of videos and DVDs. The typical studio film is released first in US theatres, then moves to VHS and DVDs around four to six months later. A few months later it becomes available to pay-per-view operators.

Only then does it go to regular cable networks like HBO and, eventually, to broadcast TV.

Video-on-demand operators such as Time Warner Cable and Intertainer, when they have been able to obtain any licenses at all, have been squeezed into the pay-per-view window, behind cassettes. But many are pushing for a shot at parity with VHS, arguing that instant availability of films (without a trip to the video store) will increase viewing revenue, easily offsetting the loss of cassette sales and rentals. "None of the studios seem to agree on this," says James Dolan, Chief Executive of Cablevision Systems, a New York-area cable operator that will launch VOD later this year. But, he adds, "We think that we can prove out the model to the major suppliers, the studios." If operators are to win the war over release dates, they'll first have to resolve yet another raging battle with studios: the revenue split. Current pay-per-view practice has operators paying studios 50 cents of each consumer dollar. But the studios are looking for more, and Forrester Research analyst Eric Scheirer believes that VOD deals done in the near-term will favour the studios 60-40, or even 65-35. Terms that steep create an obvious disincentive to any operator who might be tempted to invest in a VOD system.

THE BLOCKBUSTER DEBACLE

Which may be the idea, at least for some in Hollywood. Sony and Disney, for example, are experimenting with their own Web-based systems for delivering films sans middleman. Such moves, however, could run afoul of the famous 1948 Paramount consent decree, which stripped studios of their own theatres.

More than one VOD operator who spoke with INSIDE said that antitrust enforcers probably would not allow studios to become exclusive retailers of their own VOD products. And if the government doesn't nix such plans, consumers may reject them anyway. Will viewers really bother with a site that offers only Disney films? Still, consumers may not see "all movies, all the time" anytime soon. The sudden collapse in early March of the Blockbuster-Enron deal suggests that Hollywood's reluctance to deliver its movies to the biggest of middlemen may threaten the grandiose plans of an entire generation of would-be VOD operators. According to Greg DePrez, vice president for VOD with Starz Encore Group, which offers cable companies a subscription VOD package, the Blockbuster debacle casts doubt on the entire notion of delivering movies over a dedicated networklike DSL as opposed to an existing cable system.

"Cable, I think, can be pretty comfortable that this VOD-exclusive network scenario is not a good business model," he says.

Blockbuster appears to agree. On March 9, when its Enron deal disintegrated, the company's spokesperson said: "VOD is not a commercial reality today." Piracy concerns played a role in the partnership's demise.

Nonetheless, Verizon, which has already tested a DSL VOD service in Washington, D.C., is actively pushing now to set up a nationwide service in markets it serves. Video Business reported earlier this month that Verizon was so eager to get into VOD, it was willing to eat all of the costs of the service while at the same time giving studios all of the revenues from the films shown. Not surprisingly, Video Business said that a number of studios were ready to jump on board. What is less clear, though, is just how much they will be comfortable offering.

In general, studios worry that a pirate could somehow intercept a digital VOD stream into a home, make a file out of it and post it on a movie exchange, using compression technology to make the file size more manageable. As a result, they've pressed for digital rights management software on VOD systems.

But such fears were only part of the Blockbuster problem. One executive at a competing VOD operation says Hollywood is against Blockbuster because it is controlled by Viacom, the corporate parent of Paramount and CBS: "Most of the studios were not interested in giving Viacom chairman Sumner Redstone a leg up in a new space." At a March industry conference, Warren Lieberfarb, president of Warner Home Video, said a new quasi-VOD service (providing movies anytime, but without VCR-like controls like rewind and pause) to be launched later this year on DirecTV and branded with the Blockbuster name, should push the cable industry to come up with its own competing national video-on-demand initiative.

According to Forrester's Scheirer, cable operators are even hungrier than Blockbuster for a video-on-demand rapprochement with the studios. This is largely because digital systems' "churn rate" -- the rate at which subscribers cancel their service -- is an unsustainable 5 percent a month without video on demand, but less than 1 percent when VOD is included in the package. Almost universally, Starz Encore's DePrez says, the few digital cable operators with VOD systems are hitting their revenue projections, which he says are generally $7 to $10 a month per customer.

VOD'S MOMENT?

"Customers love VOD, they simply love it," says John Hildebrand, a vice president at Cox Communications. The cable company has launched VOD in San Diego with 2,000 customers and will soon extend it to the 100,000-plus digital customers there; Phoenix will be added this year. "Everything in my past experience in the industry says people are going to buy three to four movies a month," he says, echoing the sentiment of other operators. That figure is vastly superior to pay-per-view rates and compares favorably to home video rental stats, too. Comcast is also currently in VOD trials, and may roll VOD to all of its major markets by yearend. AT&T Broadband has trials running in Atlanta and Culver City, Calif. And Time Warner Cable is testing a system called iControl in Tampa Bay, Austin and Honolulu that gives any customer with digital cable access to a library of over 100 movies.

As for what these cable operators are actually showing, many have struck limited deals with studios for library titles and simultaneous pay-per-view releases. Most operators are using iN Demand, the industry pay-per-view consortium, to get films, according to the company's CEO, Steve Brenner.

But all movie arrangements ultimately lead back to one main source: Hollywood, which once feared the VCR and is now terrified of losing the home video market. Brenner thinks such concerns are overblown: "While there may be some cannibalisation," he says, over time the studios will be able to generate more money by just bringing the release window for video on demand closer to the home video window. Warner's Lieberfarb, at least to some extent, agrees: "The opportunity for growth in Hollywood, in my opinion, is the aggregation of VOD and DVD." Lieberfarb says cable operators should deploy video on demand now, even if critical issues like release schedules are far from resolved.

But few in Hollywood share this sense of urgency. Everyone agrees VOD is easy to use. Everyone agrees it is easy to implement. Virtually everyone also agrees that consumers will spend, relative to current pay-per-view numbers, a significant amount of money on it every month. As iN Demand's Brenner says, "I can't imagine how it's going to miss." Tell it to the studios.


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