HIVE EXCLUSIVE: VOD in the Slow Lane

30 Apr, 2001 By: Joan Villa

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Has the rollout of video-on-demand been set back by the technology stock fallout and a resulting slowdown in the flow of new venture capital into experimental delivery systems?

It depends on who you ask, but more and more industry observers think VOD will be delayed — as much by its own missteps as by the recent stock market downturn.

Even Blockbuster, which spent most of 2000 trying to prove it would be able to transition seamlessly from retail into digital delivery, has now concluded that “the commercial viability of VOD is still a good ways off,” according to c.e.o. John Antioco.

Industry experts disagree on how quickly VOD can be rolled out, but earlier optimistic predictions of substantial penetration in 2001 haveshifted in the face of the hard reality that only about a dozen communities will have VOD services this year.

“It’s becoming increasingly obvious,” Antioco explained on a recent conference call, “that there are significant technical and financial hurdles to rolling out VOD on a widescale basis, not to mention the hugeeconomic issues the major studios are wrestling with.”

Chief among them, Antioco says, is VOD’s possible impact on home video — the cash cow that accounts for well over half of the money that feature films generate for the studios. Combine those concerns with fewer tech start-ups and less venture capital, and most likely a nationwide VOD rollout has been pushed back even further, most expertsagree.

Tom Adams of Adams Media Research projects that all forms of digital delivery, true VOD, subscription VOD, near VOD and pay-per-view, will be a $4.8 billion market 10 years from now, versus $12 billion for home video. Paul Kagan Associates predicts the VOD market will reach morethan $1 billion in 2003 and $5.7 billion in 2009. Forrester Research isa bit more optimistic in recent projections, pegging VOD at $9.3 billion in 2005 compared to $12.77 billion for home video sales and $8.53billion for video rental.

However, in a much more sober assessment of VOD’s potential, research firm Alexander & Associates puts the VOD market at only about $600 million in eight years, virtually the same as what pay-per-view represents today. Further, Bob Alexander estimates that true VODimplementation has been set back by two years by the recent downturn in technology stocks. “We base our assessment on the rate of consumer adoption, the capital investment in companies that have to fund VOD and the economics these people are facing,” he explains. “Probably, but notcertainly, someone will find a business in it, but it will not be what people think.”

Adams says the tech fallout is “not an issue” because cable VOD is funded by large corporations rather than venture capitalists; for Webdelivery there may be “some impact” but those services are primarily backed by the deep pockets of studios.

Reed Hastings, president of online DVD rental service NetFlix, estimates the “time frame for packaged media has been extended by at least five years” due to closures or cutbacks at technology companies.

“The bloom is off the rose,” Hastings says. “Today’s investor wants to know what’s the cost and what’s the return — they’re not willing to invest in grand concepts.” Only services with “proven economics” are getting funded for rollout, he adds, “and VOD doesn’t fall in that category.”

Still, the service is poised to benefit from online delivery, he says, when the problems are overcome.

There are obstacles to making VOD a serious rival to home video, industry experts say.

For one, depending on the delivery system, movie studios have been reluctant to give up content rights, with giants like Disney, Paramount and Columbia refusing to grant a single VOD license, according toBlockbuster’s Antioco. Second, computer downloading won’t be practical until speed and picture quality improve and the issue of how to transfer the downloaded image from the PC to the TV is resolved. Third, no onehas figured out how to make money delivering VOD movies.

Out of some 22 VOD tests in the mid-1990s, “not a single one of them was commercially viable,” Alexander notes. “What that means is theconsumer would order a movie - on-demand and only be charged $2. It was never enough to pay for all the equipment to make the system work.”

While the infrastructure cost has since come down, demand has not risen. The cable companies “built networks and invested in equipment farin advance of consumer demand,” he says. “By the time consumer demand catches up to them, they’re going to have to replace stuff they haven’t even used.”

Antioco says, “Until there’s a clear picture and viable economic model for VOD, [Blockbuster is] not willing to expend or bet huge sums ofcapital on potential technologies to deliver it.”

Even the Enron-Blockbuster alliance that recently disbanded after 10 months and an initial four-city test had just 800 users. According toThe Wall Street Journal, media companies are waiting for a much biggeraudience than the current 6 million residential broadband customers before developing movie delivery services. Without top-notch VOD content, cable and phone companies can’t sell the costly, high-speed lines to deliver greater viewership. “When you’ve got so many players, it’s hard to know whose systems are going to be bankrolled enough” todeliver an audience, notes a studio executive.

Web downloading has been similarly waylaid while working on technological advances in speed, picture quality and how to transfer the image to the TV set. This is despite the advantage of being supported by studios such as Sony, which was due to start streaming movies directly to consumers’ PCs this month with the launch of its Web-based service,MovieFly. As of last Thursday, the site still had the disclaimer, “MovieFly is getting ready to launch.”

Disney has unveiled Movies.com, described on a February analyst call asa site that would “soon…be the place to go on the broadband Internet to buy or rent digitally your favorite movie.” Although Peter Murphy,Disney’s chief strategic officer, went on to promote the concept to Wall Street as a “great alternative to the video store both for the studio and for the consumer,” for this article Disney declined to provide a time frame or an explanation of how digital delivery would be accomplished. The project may have been put on hold, according to a source at another studio who asked not to be identified.

“VOD tests are still in a state of flux,” observes Artisan Home Entertainment president of sales and marketing Jeff Fink. “With thefailures of a lot of these tech stocks there’s not as much cash to develop systems, so that could put a limit on how quickly VOD is developed.”

Public video chains like Movie Gallery aren’t particularly worried. “Home video can absorb small hits for a long time before it becomes a nonviable business, because it is so much larger than the other components,” observes c.f.o. J. Steven Roy.

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