Video on Demand: Is It Ready for Prime-time Use In Living Rooms?

MSNBC, February 25, 1998
Forget Internet browsing. Forget high-definition pictures. Forget even e-mail. Video-on-demand, dismissed for years as too expensive and too unwieldy to install for the masses, is probably the most powerful feature on the upcoming digital-television menu. And finally, the entertainment industry is beginning to wake up to its potential.

You're at home lounging on the couch, and nothing good is on the TV schedule. No worry. You simply aim your remote control and switch to a video-on-demand channel. Punch a button and you can immediately start one of about 500 different movies. If a two-hour film seems too long, you can try a sitcom, perhaps that "Mad About You" episode you missed recently.

A video-on-demand system like this, of course, is the nightmare scenario for Blockbuster and other video-rental chains -- the long-forecast, and previously overestimated, catalyst of their extinction. But it may well be the killer app of digital television, the nationwide TV upgrade that's coming soon from a cable operator near you. Imagine no late-night trips to the rental store. And never any late fees.

Too good to be true? It certainly was in the past. Time Warner and others spent hundreds of millions of dollars in the early 1990s trying out technically bulky systems with no grounding in real-life economics. Set-top boxes costing several- thousand dollars each were installed for free in homes, and then connected to giant file servers costing much more than that. The experiments demonstrated healthy demand for certain enhanced TV services, yet yielded no way to justify the costs.

But both the technology and the economics have changed drastically in only a few years. A new generation of digital set-tops costing about $300 each is now beginning to enter the 65 percent of American homes subscribing to cable-TV service. File-servers, used to feed digital programs to users from a central office, are now several times cheaper and more powerful as well. (To indulge in some cable-speak, the cost of installing a single client-server "stream" is plummeting to about $500 from several thousand dollars earlier this decade. That's a significant decrease, considering that $1,000 per stream is widely considered to be the threshold of cost-effectiveness.)

To date, Internet-like services have stolen much of the limelight in the hype over digital TV. With so many millions of people browsing the Web and chatting via e-mail on their computers, it's no wonder that the Internet looms large in interactive-programming plans.

But as implementation dates get closer, entertainment companies increasingly wonder whether people will actually use their television sets like they use their computers. And the companies are also wondering how they're going to make any money with all these new capabilities.

Enter video-on-demand. The market is obvious. Americans spend roughly $8 billion a year renting video tapes from corner stores. They shell out several billion dollars more for other forms of home entertainment, such as purchased video tapes and pay-per-view shows.

So suddenly, video-on-demand is regaining its lost luster. "Video-on-demand has kind of bumped back up the priority list," says Sean Kaldor, analyst with International Data Corp. "They think it's a concept whose time has come."

In Pennsylvania, customers pay $5.95 a month for access to the video-on- demand service, then $3.95 for each new-release movie and $2.95 for each older title. Diva, which bears the cost of installation, pays a fee to Hollywood studios for access to their content, and the company then splits the remainder evenly with the cable operator.

"Clearly," says Bill Wall, chief scientist-subscriber systems for Scientific-Atlanta, "the cable operators see [video-on-demand] as their No. 1 added application beyond broadcast services." Scientific-Atlanta, a maker of equipment for cable companies, is now making and shipping hundreds of thousands of set-top boxes with video-on-demand capabilities.

Meanwhile, video-on-demand trials are now springing up across the country like so many geysers. Two different cable operators in Pennsylvania are testing a service built by Diva Systems, operating under the brand name OnSet.

With the clamor for video-on-demand services rising, new rivalries are quickly emerging. Diva Systems is the industry's granddaddy, having resulted from an RCA Labs project begun some 15 years ago. But snipers are quickly appearing.

One competitor, known as Intertainer, emerged from obscurity just a couple weeks ago. Backed by cable giant Comcast and chip maker Intel, Intertainer can stream a wide variety of movies, games and other programming to anyone with a recent-model computer and a high-bandwidth connection through a cable or DSL modem. The company is developing a TV set-top-box-based delivery system as well.

To Diva and Intertainer, video-on-demand should almost sell itself. "The problem for anyone in the modern age is that the most precious asset is time," asserts Jonathan Taplin, Intertainer's co-chairman. "And TV today doesn't work on your time ... What the Internet has taught us is to get what you want when you want it."

And yet, the sell job is hardly complete. One cable executive, who heads the engineering operations for a large operator, says he still has to be convinced that with video-on-demand he's not cannibalizing his existing revenue streams. In other words, with a jillion movies and hit sitcoms to watch on demand, who is going to sign up for a bunch of premium channels and pay-per-view services?

"My analogy," he says, "is that with video-on-demand, you move money from the left pocket to the right pocket, but you spill some of it along the way."

Indeed. But thanks to the pervasive video-rental habit that's been stoked by the likes of Blockbuster, some new money will be falling from the sky as well.

And for that reason, the fast-approaching digital-TV era is likely to bring video-on-demand into our homes sooner rather than later.