It Came From The Internet

Cable World, July 23, 2001 by Richard Cole

Cable's worst nightmare? Hollywood studios may cut operators out of the game, reaping VOD revenues through the Web.

The promise of video-on-demand couldn't be clearer: Jerald Kent, president and CEO of Charter Communications, recently predicted that VOD investments will pay for themselves in as little as three years.

But not as clear is whether cable networks or the Internet will eventually triumph as the vehicle that consumers will end up using to buy on-demand movies and programming.

Hollywood studios, along with a variety of affiliated and independent websites, have thrown down the gauntlet before cable by launching initiatives designed to induce customers to download or stream movies to their personal computers.

The key issue for VOD is cost versus revenue, according to Mel Karmazin, president and COO of Paramount-owner Viacom.

"The margin is not as good as it is in other businesses, so anything that we do in Paramount that would have applications to video on demand would have to create additional revenues and not displace other revenue," he warned at the recent NCTA show.

From the studios' point of view, one key reason their VOD margin isn't as good is the large chunk of revenue cable operators plan to take--and that's what makes Internet VOD so alluring.

"Studios are asking, why get 45% from a VOD title when they can get 100% if they deliver it themselves," says Adi Kishore, an analyst at the Yankee Group.

Sony, Paramount, and Disney have withdrawn their titles from cable distribution while they develop their own, IP-based VOD methods.

Sony Pictures Digital Entertainment's oft-delayed Moviefly website is set for a fall or winter debut, perhaps in partnership with Warner Bros. or Universal. A dummy site is already online, promising "hundreds of hits" that can be downloaded to a PC "when you want, where you want."

Disney-owned Miramax and other studios are experimenting with SightSound Technologies, releasing 20 films a week online, including Eye of the Beholder, Drowning Mona, Bats and Thomas and the Magic Railroad, all currently running on cable networks, as well as episodes of South Park. The site charges $3.95 for a two-day movie rental or $14.95 for a "two-year ownership."

Web-based VOD and near-VOD (NVOD, or time-shifted multichannel video on demand) is for real, and isn't just a negotiating ploy by the studios to shrink cable's cut of each $4 sale, insists Scott Sander, president and CEO of SightSound.

"The studios are absolutely, violently opposed to creation of a middleman in VOD," says Sander. "We have heard this from them for years, and we are allowed only to focus on those technologies that are enabling, and don't put a retailer or any other middleman between them and the consumer."

Which may be the real reason why Blockbuster's deal with overbuilder Enron eventually collapsed, as studios decided they didn't want to hand over the Internet to the Viacom-owned middleman, some analysts say.

"On Moviefly, Sony is in control of how the film is marketed, how it's viewed and how it's sold," says Jim Stroud, an analyst at the Carmel Group. "That's an important consideration for any content provider."

DSL providers anxious for more programming are rapidly tailoring their services for eventual VOD, says Steve Silva, Charter Communications' SVP-corporate development and technology. SBC Communications, for example, is upgrading its network so that 80% of its customers will be able to have a video-friendly 1.5-megabyte connection by the end of 2003. And the telephone giant is introducing broadband provisioning software from BroadJump that will, among other things, allow studios to use its DSL network for VOD.

But even supporters of online VOD admit that streaming movies over the Net is expensive. A full-length movie could cost up to $10 to stream onto a PC at current rates. But streaming VOD over cable is expensive as well when the cost of digital set-top boxes and the infrastructure are thrown in (see charts).

"IP delivery is less expensive than cable delivery at the higher bandwidth, for delivering one film to one viewer, for true video-on-demand," says Curt Mavis, CEO of CinemaNow, a broadband distributor of feature-length films.

And there are technological fixes already available or in the works for Internet VOD.

Storing video on the edge of the network, instead of transmitting it along the backbone, can markedly reduce costs. Add in better file compression and new digital coder-decoders and increased PC processing power, and the price drops markedly. On2 Technologies says it recently streamed the cult hit Sleepaway Camp with "near-DVD-quality" video at bit rates as low as 220 kps. Six months ago, Microsoft demonstrated VHS-quality streaming of Gladiator at 750 kps.

Mavis estimates that Net streaming will be competitive in three to five years. Larry Gerbrandt, COO at Kagan World Media, the media industry newsletter and databook publisher (like CableWorld, a subsidiary of Media Central), says that Internet streaming revenue could match cable if it can reduce its current half-cent-per-megabyte costs by a factor of about seven. J.P Morgan Chase has predicted streaming costs will drop by almost half in four years.