USA TODAY::::Movies soon could be just a click away
Billions at stake in home entertainment tug of war
NEW YORK - Slowly and quietly, a battle is starting to build that could revolutionize the way millions of consumers approach home entertainment - and spend billions of dollars.
After years of false starts, several cable operators are making serious plans to offer video on demand. Subscribers will be able to use their remote controls to choose the movies they want, watch them whenever they want, and enjoy the same flexibility they have with videotapes to pause, rewind and fast-forward.
That's tantamount to a declaration of war on 28,000 video stores.
"The threat to Blockbuster is starting to take hold," Salomon Smith Barney analyst Spencer Grimes says.
There's a lot at stake. More than 83 million families own VCRs. They will spend about $8 billion this year to rent videos, and an additional $9 billion to buy them. Video sales account for about 57% of the revenue that Hollywood studios make from their films.
But cable operators and allied technology companies say that video on demand can crash that party.
"By the end of 2000 this should become something that the majority of U.S. homes will have access to," DIVA Systems President Alan Bushell says.
His technology company is first out of the gate, offering about 250 video on demand movies to 1,000 cable subscribers outside of Philadelphia. It reports that each customer orders, on average, more than four movies a month. (Most video renters pay for about three per month.)
What's more, video on demand users often "drastically cut, if not totally eliminate, their use of video stores," Bushell says.
That possibility frightens home-video retailers. But they say movie studios will help them stop cable from taking over.
"Hollywood would be a ghost town if it weren't for the video industry," Video Software Dealers Association President Jeffrey Eves says.
Cable executives counter that Tinseltown's love affair with video stores will cool once moguls see consumers using cable's Godzilla variant of today's pay-per-view service.
Fast-forward to the future
Video on demand (VOD) offers several advantages over rental stores. Advertised films are never out of stock. The pictures and sound can be as clear as a signal from a satellite, which is much sharper than a tape. And there are no late-return fees, because there's nothing to return.
Video on demand was one of the few success stories from Time Warner's interactive Full Service Network in Orlando, Fla., which lasted from 1995 to 1997. Although Time Warner won't disclose specific results, consumers there are said to have ordered as many as seven movies a month.
"Orlando was a time machine," Jim Chiddix, Time Warner Cable's chief technical officer, says. "It gave us a window on what consumers would do with technology that would become cheaper in the future."
That future is here. DIVA's service outside Philadelphia has been running since September. Customers pay a $5.95 monthly charge, and about $3.95 for a recent movie - on top of their usual cable bill.
Although the average videotape rental costs less, at $2.67 a shot, the convenience of video on demand makes it worthwhile says Joseph O'Brien, who has used the DIVA system since March. He has stopped visiting the video store, where he used to rent several movies a month.
"This way I sit back in my recliner and push some buttons," says O'Brien, 68, a retiree who used to work as a machine operator for Scott Paper. "Like anything, you pay for convenience. If I were to get (the video on demand system) taken out, my grandkids would force me out."
Over the next year, operators such as Time Warner, Cox, Comcast, Cablevision Systems and Adelphia are expected to either deploy or test video on demand in about 50 cities, including Austin, Texas; Baltimore; and San Diego.
Video on demand is possible now because cable operators are starting to give consumers the new generation of digital cable boxes. Tele-Communications Inc. CEO John Malone says the devices could be nearly ubiquitous among cable's 65 million subscribers by 2001. Wall Street analysts are more conservative, envisioning about 15 million digital cable homes by then.
Meanwhile, the cost of providing video on demand to the home has plummeted. Cable operators store movies on hard drives in computer file servers. When a subscriber orders a flick, the system transmits the video and audio through the cable as a stream of digital information. "The (equipment) cost three years ago per stream was in the thousands," says Yvette Gordon, director of interactive technologies for SeaChange International. "Now it's under $100."
Upcoming tests will determine the mix of prices and services that inspire consumers to dig deepest into their wallets.
"They really don't know how to market VOD," says Scientific-Atlanta's H. Allen Ecker, who's president of the technology company's subscriber systems. "Do you charge $4 per movie, or (a flat rate of) $20 per month? They need trials."
Enthusiasts say video on demand will lure consumers into a bigger world of impulse buying. For example, viewers who settle in for a movie might also buy a pizza via cable TV. When Time Warner and Pizza Hut offered this service in Orlando, they discovered that video on demand customers tended to order more toppings than did phone callers.
Naysayers weigh in
Some operators, including TCI, aren't ready to take the plunge. They believe they can attract nearly as many movie fans by offering dozens of pay-per-view channels and giving viewers lots of different start times for new films.
"We are pushing hot and heavy on near-video-on-demand," says TCI's Tony Werner, executive vice president for engineering and technical operations. He adds that once subscribers have digital boxes it will be simple for TCI to switch to full video on demand when it proves profitable.
The most passionate cheerleader for video on demand, Time Warner, is leaving little to chance. Some of its cable systems won't accept ads from video stores, since that would help a competitor. That policy has hurt Video Hut, a 10-store chain based in Fayetteville, N.C. Time Warner's cable system covers about 85% of Video Hut's market.
Time Warner is "panicking and scared," Video Hut President Thomas Warren says. "They clearly say, you're a competitor of ours so we're not going to sell you these ads."
Time Warner Cable spokesman Mike Luftman says the company does not have a national policy on video retailers' ads, but its local systems have "the right to accept or reject any advertising without an explanation."
Video retailers say that they're unfazed by cable's tough talk about video on demand. After all, they note, VCRs are in 85% of all homes - people won't want that investment to go to waste - and cable's track record with pay per view is unimpressive.
About 32 million subscribers have set-top cable boxes capable of delivering pay per view (PPV). People in those homes are expected to spend a mere $500 million in 1998 - about $1.30 per home per month - for movies and events.
That anemic performance is partly due to Hollywood's decision to let video stores offer new releases exclusively for about 53 days before they migrate to pay per view.
The video advantage
Video stores covet that advantage - and they are maneuvering to protect it. Major chains, including Blockbuster and Hollywood Video, have strengthened their ties to studios by scrapping the system in which stores simply bought videos and kept all of the rental revenue. Studios now give stores extra copies of new releases, and collect as much as 45% of the cash consumers spend on rentals. "We've doubled the number of new releases on our shelves," Blockbuster's Karen Raskopf says.
Since studios have a stake in a video's rental performance, some are spending more to promote them. MGM/UA, for example, bought time in the last episode of Seinfeld to push the video of its James Bond flick, Tomorrow Never Dies.
Retailers also play to Hollywood's fear that cable customers might crack video on demand encryption codes, make perfect digital copies of films, and sell them on the black market.
"In some parts of the country, you can pay the cable installer a few hundred bucks, and he'll give you the technology you need. It's a serious problem," Eves says. "You're already talking north of $8 billion per year in losses to the cable companies from signal theft. And in some pay-per-view events, such as boxing matches, the (theft) rate can be 50%."
Supporters of video on demand say that is a red herring. If someone cracks a digital encryption code "you just download a new algorithm," SeaChange's Gordon says.
Still, Hollywood seems uninterested in giving video on demand a break at the expense of video retailers - for example by shortening the lead time when a movie will only be available in stores.
"I look at VOD as an enhanced PPV, so I see it as the same window as PPV," says Mitch Koch, who oversees Disney's video distribution in North America. "If consumers want to see a movie first (after the theaters), they'll go to a video store."
All of these uncertainties give forecasters pause in predicting when, or whether, video on demand will create havoc for video stores. "To say the jury is still out is being polite," says Sanford C. Bernstein analyst Tom Wolzien.
By David Lieberman, USA TODAY
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