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Analyst: Web, Not VOD Key to Home Video Future

24 Mar, 2006 By: Erik Gruenwedel

Claims that video-on-demand and digital downloading would negate the online movie-rental business model are exaggerated, said a media analyst.

Safa Rashtchy, senior media research analyst with Piper Jaffray in Menlo Park, Calif., said it is premature to pinpoint one delivery channel as the next big thing.

“We are the verge of a new era in the way people will consume electronic entertainment,” said Rashtchy. “We will see a number of new initiatives. Some will gain momentum, some will totally go away and others will stay and become niche services.”

Rashtchy questioned the proliferation of VOD by cable companies considering the percentage of households that have tried the service in relation to the number of VOD-enabled homes, about 25 million.

“What we do know is that over the next five to 10 years, we will get most of our entertainment delivered to us electronically,” said Rashtchy. “Our guess is that most of that will come through the Internet in the form of purchases and rentals — not by VOD.”

He said Internet-based services would have three components: The Netflix or Blockbuster Online rental model that delivers titles via the mail; a rental download option (about two years away) and a download-to-own service (five to seven years), similar to what Universal Pictures announced for the United Kingdom next month.

“I'm trying to bring down the [VOD] expectations,” Rashtchy said.

He said the success of VOD is tempered in part by the fact cable companies dominate the format and they are primarily interested in raising the average revenue per user (or ARPU). Just five or six years ago basic-cable consumers were paying $20 per month, and now they are paying $50 to $60 for essentially the same content.

“Now they want to raise that profitability even higher,” Rashtchy said. “They are not going to divert my attention from that by selling me $4 movies (which they keep about 30%). They will use that as bait to get me to pay for more and more services.”

Rashtchy envisioned his $70 monthly Comcast bill increasing to $85 just so he could get 20 movie download options and other selections at a discount.

“[VOD] is not going to become my main movie watching option when there are 500 new titles released every year and over 15,000 titles out in circulation,” he said. “I don't see the TV as the primary medium to choose movies. The interface isn't there.”

He recalled a conspiracy theory a few years back when Comcast was trying to acquire Disney that content creators and distributors would merge and it would be the end of online movie rentals.

“That's not going to happen,” Rashtchy said.

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