THE NEXT BIG THING: VIDEO ON DEMAND
July 26, 1999
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Electronic Media via NewsEdge Corporation : Video on demand will help drive a ninefold increase in pay-per-view revenue for the cable industry over the next 10 years. A study by Paul Kagan Associates projects the average subscriber will spend $7.26 each month for PPV in 2008, up from about 80 cents last year.
Cable operators will benefit most from the move toward true video on demand, experts believe, with satellite providers struggling to keep up.
The Kagan study projects that buy rates for true video on demand will be two to three times higher than today's scheduled PPV services, or so-called ''near video on demand,'' which offer programming such as movies at staggered starting times.
Cable has the edge, experts say, because its design is local in nature and because cable systems are rapidly moving toward two-way capability.
''We can divide and get incremental bandwidth more easily at the node level,'' explained Judi Allen, senior vice president, video services at MediaOne Group, which plans a limited test of a video-on-demand service later this year.
''The fact that you can work it with the digital set-top and you don't need another box is an extremely important turn of events,'' said Bill Bresnan, CEO of Bresnan Communications. ''At the same time, digital compression makes it possible to provide a lot of choice in terms of titles. It makes for an extremely attractive product.''
Video on demand has often been called the ''Holy Grail'' of TV entertainment. The ability for viewers to watch what they want, when they want has long been a goal of video visionaries.
''There's certainly been no shortage of pent-up demand for VOD in the home,'' said Brian Steel, president and chief operating officer of On Command, which offers video on demand in 900,000 hotel rooms worldwide. ''A shortage of components and lack of an economic model have made it unfeasible until now.''
Only recently has the confluence of factors made true video on demand possible. Cable operators have spent billions to upgrade their systems to high- bandwidth, two-way capability.
The cost of storing massive amounts of data -- a full-length motion picture requires about two gigabytes of disk space -- has become much more reasonable.
Four years ago, storage cost about $1 per megabyte, so a two gigabyte data drive would have cost about $2,000. Today, larger servers can store data for about 3 cents to 8 cents per gigabyte.
Finally, the long-awaited digital set-top with its relatively massive computer processing power presents video providers the ability to deliver the ultimate couch potato's dream.
Will the consumer bite?
In spite of the promise, there is no assurance that true video on demand will actually drive the kinds of buy rates to which cable operators aspire.
''Consumers have been hearing about this wonderful thing for many years, but do they really want and need it?'' asks Jeff Crosby, senior vice president, engineering, at DirecTV, the nation's largest direct broadcast satellite service.
Limited somewhat by bandwidth considerations and hampered by a national footprint that makes it more difficult to customize program delivery, the DBS providers have chosen the near video-on-demand route.
DirecTV, for example, offers about 60 PPV channels and staggers the start times of its movies so that they are available every 15 to 30 minutes.
''The need of a consumer to watch a chosen movie at 7:53 p.m. is not a big concern if they can watch it at 8 p.m.,'' Mr. Crosby said.
Paul Kagan Associates estimates that satellite PPV, which is mostly near video on demand, revenue will top $400 million this year, up from $302 million in 1997.
DirecTV will try to get around the ''on demand'' dilemma through its partnership with TiVo, a service that automatically records programs the viewer wants to see so that they can be played back at the viewer's convenience.
''There is a happy medium between what we have now with NVOD and the ultimate VOD nirvana that makes good business sense for us,'' Mr. Crosby said.
Obstacle course
The video-on-demand promise notwithstanding, there are still obstacles to overcome, not the least of which are competing technologies.
The Internet, for example, already permits users with broadband connections to download near full-motion video clips and high-quality audio. Advances in video streaming will only improve that capability.
Video retailers, already facing the challenge from PPV, will fight harder to retain their share of the market and will resist any effort to shorten the window during which they have exclusive rights to top movie titles.
Digital video recorders and personal video servers, such as those offered by Diva Systems, Menlo Park, Calif., let consumers download programs from a variety of sources. Diva has struck programming agreements with many program providers and offers its service through five cable systems.
The issue of copyright protection remains unresolved. Production studios want assurances that consumers won't be able to duplicate digitized copies of movies and other programs.
Costs add up
And even though cable operators have spent a lot to make their systems video on demand-ready, they'll have to shell out even more for additional headend equipment.
''Based on the amount of memory, how many titles you have, the number of simultaneous video streams you want to run, those things add up,'' said Jim Ramo, president of TVN, which delivers 35 channels of near video-on-demand programming to cable operators.
The rule of thumb dictates that operators build their systems with sufficient video streams to permit 10 percent of their customers to view simultaneous feeds. A 10,000-subscriber cable system, for example, would need 1,000 separate video streams, at a cost of about $400 per stream.
Offering more titles requires more memory, which can run the price up. ''You can pretty quickly get up to $1 million per headend,'' Mr. Ramo said.
That kind of expense will likely force operators to look for more than just movie revenue to make their investment pay off.
''When you start to dedicate several channels, you can't expect the payback to be on movies only,'' said Caroline Beck, chief operating officer, Intertainer, which offers movies, music videos, children's programming and electronic commerce over high-speed data lines. The company is owned in part by Comcast Corp., US West, Sony Corp., Intel Corp. and NBC.
''Movies is one of the primary drivers, but if you think about what it's going to take to pay back a cable operator's investment, he's got to look at multiple revenue streams,'' Ms. Beck said.
It remains to be seen whether consumers can really afford all the video-on- demand service they claim to want.
''When you buy all this stuff, it shows up on your bill,'' said On Command's Mr. Steel. ''You get the sticker shock thing, and you may find yourself hesitating a bit the next time because you have this consciousness that you never had before.''
<<Electronic Media -- 07-19-99, p. 1>>
[Copyright 1999, Crain Communications]
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