Will VOD be the next killer iTV application?

SAN FRANCISCO: It's been the Next Big Thing for a decade -- but video on

demand finally appears to be living up to at least some of its promise.

An idea that has been hyped for years, video on demand -- the ability to call

up a film or some other type of content through your television when you want

and stop and start it -- is only now really starting to gain momentum, analysts

said.

It's happening, though, without much fanfare. Much of this progress arises

from $50 billion in investments by cable companies to upgraded cable

infrastructure in the United States during the last five years.

These upgraded cable systems allow for digital cable, which lets cable

operators compress the content and deliver many more channels into a consumer's

home. And video on demand builds on the digital cable infrastructure now out

there.

"The roll-out's been pretty good this year in light of everything that's

happened," said Lydia Loizides, an analyst with Jupiter Media Metrix, who

expects video-on-demand to be in about 5.5 million homes this year and digital

cable systems in about 15 million homes by the end of 2001.

Video on demand, or VOD, is expected to be the first element of interactive

television, or iTV as it's known, that is both adopted by millions of consumers

and can generate big sales for cable operators, movie studios and the high-tech

companies that build the equipment to stream the content out to consumers when

they want it, on their own schedule.

Killer application



"We believe VOD will be the next killer iTV application," wrote
analysts Thomas Blakey and Michael Cristinziano of Gerard Klauer Mattison in a

recent report.

Gerard Klauer Mattison forecasts that the number of video-on-demand-enabled

subscribers in the United States will exceed 39 million in 2005, up from about 1

million today.

Video on demand will follow the first iTV application to be rolled out, the

interactive program guide. Gemstar-TV Guide has this programming service up and

running for 15 million households in North America to date with a goal of

reaching 20 million by the beginning of 2002.

While video on demand ultimately will likely include movies, news stories,

children's shows, situation comedies, old sporting events, adult films and the

like, most analysts expect initial deployments to be the simple streaming

full-length feature films to consumers.

Already, there are more than 800,000 digital cable subscribers in the United

states now using such services commercially, Gerard Klauer Mattison estimates.

Of course, video on demand also begs the question, do we really need more

content on our televisions? Some providers of digital cable service boast more

than 200 channels and premium movie channels such as HBO and Showtime already

have four or five separate channels each on certain digital cable systems.

But cable providers such as Comcast Corp., AOL-Time Warner Inc, Cox and

others clearly think consumers do want more content and that they're willing to

pay for it. Microsoft Corp., the world's largest software maker, has also made

big bets on cable, figuring it's one of the easiest and cost-effective ways to

broadening its reach, into consumers' homes via television.

'Sticker shock'



Paying for video on demand could take any number of forms. One way is
pay-per-view, which has been around for 10 years or more in cable television and

never really took off as its backers had initially imagined, Blake and

Cristinziano said. Another way is as a subscription model, with consumers paying

a monthly fee to access a service and they can then flip it on whenever they

want.

There are, though, drawbacks to the pay-per-view model.

"When someone receives their cable bill and there's an extra $15, $20 or

$25 on there (in video on demand pay-per-view fees), that's called sticker

shock," Loizides said. "Subscription video on demand is very

different, you would pay an extra amount for a channel so it's an all you can

eat proposition."

Moreover, video on demand will most likely threaten pay-per-view services and

not video rentals or the movie theater business, according to Jupiter Media

Metrix. Pay per view is not true video on demand, because it includes only a

limited selection of scheduled programs that a viewer can pre-set times. With

on-demand video, consumers choose the time when they want to view a program.

Jupiter Media Metrix said the bulk of revenues for the US VOD market will

come from the pay-per-view audience and is expected to grow to $640 million

dollars by 2006.

Loizides said studios should work directly with cable and satellite

operators, as well as potential video on demand content distributors such as

iNDemand, Starz Encore and Intertainer to capitalize on these trends. "The

greatest value lies in shifting the pay-per-view audience to VOD and generating

incremental revenues," said Loizides.

Jupiter analysts believe that, although pay-per-view will be most closely

aligned with VOD in consumers' minds for the near term, VOD's ease of use,

coupled with deployment of services, pricing and marketing will lead to greater

usage over the long term.

That said, don't expect VOD to put video rental out of business. "It's

not going to obliterate Blockbuster no matter how hard somebody tries to

convince me of that," Loizides said.

(C) Reuters Limited.