500 CHANNELS AND NOTHING ON? NOT ANYMORE
With video on demand, you're the programmer

By Jeff May,
Star-Ledger, August 22, 1999
Chuck Walsh has been laid up with a bad back, which a year or so ago would have consigned him to a peculiarly American form of purgatory: channel-surfing for something, anything, to watch on the tube.

"Daytime TV's horrible," said Walsh, a United Parcel Service worker who lives in Jenkitown, PA. "Jenny Jones is horrible."

But Walsh isn't complaining about being parked on the couch these days. He and his family are among the first in the nation to test "video on demand," a system that allows them to choose movies, music videos and other programming from their cable operator whenever the whim strikes. Using a service called Intertainer, Walsh can click his remote to rewind or fast-forward a film, just like a VCR, and pause it if the phone rings.

"It's like having Blockbuster in your living room," he said. "It's pretty cool."

Cable companies are spending millions on what they hope is a better mousetrap - two-way, digital networks that can deliver every conceivable snippet of information, entertainment and mode of communication to the home. So far, the cheese set out for customers has been high-speed Internet access or extra cable channels. But adding video on-demand, which frees consumers from the tyranny of network programmers, could prove to be the most potent lure of all.

Today the technology is limited to market trials and small-scale systems, such as private networks in hotels. But costs are dropping, and cable operators are slowly working out the kinks. Forrester Research, a consultancy in Cambridge, Mass., expects the business to go from $38 million in sales this year to $3.1 billion by 2005.

"For the 12 million subscribers using VOD over cable in 2005, renting videos will be a thing of the past," Forrester analyst Jeremy Schwartz wrote in a recent report. "Since VOD users will be past heavy video renters, Forrester expects 15 percent cannibalization of the video market by 2005."

Five years is still a long way off, and service availability will be a patchwork until then. Time Warner, which many analysts believe is most committed to video on-demand plans to test hardware and software systems in Texas and Florida by the end of the year. Comcast is running a modest trial that Walsh is part of in suburban Philadelphia, but has nothing similar in New Jersey.

Cablevision, the No.1 system in the Garden State, is testing a different service, Diva Systems, in Monmouth County. It plans to begin rolling out video on-demand next year as part of a larger package of new offerings.

Suburban Cable, which AT&T is buying out, was one of the first systems to launch a commercial trial of video on-demand. It offers Diva to 600 customers in Pennsylvania's Delaware Valley, and agreed last year to extend the system to New Jersey and Delaware.

"We're not aggressively marketing it," said Suburban spokesman Tom Galley. "Where we're at now is a watch-and-learn mode."

AT&T is making a big splash in video on-demand for hotels in Chicago. But despite its planned takeover of Suburban Cable, it is moving ahead far more cautiously with residential systems.

Just last week it said it would be using technology from Excite@Home, a cable based Internet service provider, to help speed the delivery of interactive television.

"They would not be ranked among the most enthusiastic endorsers right now," said Stewart Schley, an analyst for Kagan Associates, a market research firm for the cable industry. "Plant condition is a big part of it. They're simply not as technically advanced as Time Warner or Comcast."

Schley said the video on-demand business as a whole has significant problems to overcome. Movie studios currently release hit titles for pay-per-view use 45 to 60 days after they land in video rental stores, a lifetime for impatient viewers. Building an on-demand library that can compete - or surpass - a well-stocked video store with thousands of older films won't happen overnight, either.

Schley said he expects most cable operators to offer only 20 to 30 titles when they start out.

"The truth is this will be, in the opening two or three years, a hit-movie business," he said.

Yet marketing trials suggest that, even with limitations, video on-demand can be immensely popular with time-pressed families.

Walsh, his wife and three daughters were on of the first 10 families chosen by Comcast to test Intertainer more than a year ago.

"I had no clue what it was," he said. "To tell you the truth, we didn't know what to expect."

The cable company installed a Gateway computer system with a 31-inch monitor to the Walshes' living room. Movies and other programming are displayed on the PC, although systems are eventually expected to run on ordinary televisions with the advent of new digital set-top boxes.

Walsh said his family rents movies two or three times a week for $3.95 a shot. But it's the extras that wow them.

During the pro football playoffs last year, Walsh was able to watch two games on a split screen. His daughters can listen to a Limp Bizkit or Kid Rock video, then click through to order the CD. A new home shopping section allows Walsh to order blue jeans directly from The Gap or a bottle of sauvignon blanc.

"You can become a couch potato, never leave the house," he said.

Jonathan Taplin, the founder and co-chairman of Intertainer, said customers in the Comcast trial average 3.8 to 4.6 purchases a month, depending on the popularity of movies released during that time. The industry average for regular pay-per-view is one purchase per month.

One unanticipated bump is the popularity of National Geographic and PBS documentaries in Intertainer's Library. The company typically charges 50 cents to $1 an hour for older archival material, Taplin said. "People like to watch that stuff on-demand," he said. "We're quite surprised by the demand for it."

Intertainer uses a flexible billing system that allows parents to set up sub-accounts for children, with preset limits and screening for adult-oriented material. Walsh said even previews for age-inappropriate material could be blocked.

"It's kind of parent friendly," he said. On more than one level - both Walsh and his wife work, and don't want to spend their time running errands.

Couch bound or not, Walsh isn't concerned about the lost exercise from dropping off videos. If interactive television really catches on, he stands to make it up on the job.

"I work at UPS," he said. "The more people order online, the more work I get."