There’s a problem brewing in our digital-cable television household. Our 12-year-old has found the tantalizing 999 channel that offers but doesn’t yet deliver video-on-demand.
The kid wants it. Who wouldn’t? With a click of the remote control, we’re promised the opportunity to rent movies or other video programming any time of day, with the added advantage of pausing, rewinding or fast-forwarding as if we’d rented a videocassette.
Almost 500,000 homes already have access to video-on-demand. AT & T; Corp., AOL Time Warner Inc., Charter Communications Inc. and Insight Communications Co. all have initiated VOD in at least one of their cable-television markets.
Our house could be next. But this Hollywood correspondent dreads the moment when her son learns that major studios are withholding their freshest films from the VOD market.
Major film companies and cable-TV operators are squabbling over how they’ll divvy the anticipated revenues from this nascent business. Until the terms are resolved, big Hollywood companies refuse to sign multiyear deals to license recent movies to video-on-demand services.
If my son owned media stocks or bonds, he might appreciate the off-screen stakes. VOD revenues are projected to grow from $65 million this year to $1.98 billion by the end of 2005, according to Yankee Group, a market research firm in Boston.
Who wins?
Hollywood studios want to shape the VOD business to their advantage. They’re still smarting over mistakes made 20 years ago in the pay-TV business, when Home Box Office Inc., now part of AOL, gained so much power that it could practically dictate terms.
Among the studios’ objectives: take the lion’s share of VOD revenue, and avoid cannibalizing the home video market, which currently has first dibs on movies following their theatrical run. Video Business, a trade publication, reported that studios are asking for as much as 70 percent to 80 percent of the VOD revenue.
Privately, some studio and cable executives say that the revenue split could settle around 60/40. Sweeter terms could be offered to studios if they agreed to shorten the interval between a movie’s home video release and video-on-demand. “The shorter the window, the higher the split,” explains one cable executive.
Certainly, cable operators want popular movies as early as possible. Video-on-demand is considered one of the “killer applications” of digital cable, giving cable operators an advantage over satellite-TV companies that can’t readily provide two-way interactive services like VOD.
For now, cable companies are deploying VOD service with movies obtained on a trial basis or from middlemen like Diva Systems Corp. of Redwood City, which made deals with studios a few years ago.
“For the next year, we’ll be getting the architecture in place and we have plenty of product,” says Stephen Burke, the cable division president of Comcast Corp. By year-end, Burke says he expects VOD to be available to 2 million of Comcast’s 8.4 million subscribers.
Comcast and partners AT & T;, AOL and Cox Communications Inc. own In Demand, a pay-per-view company that is working hard to obtain VOD rights. In Demand has secured VOD rights to some television programming and sports events, but has only one deal with a feature-film company: independent Artisan Entertainment, best known for “The Blair Witch Project.”
That’s not sufficient for AT & T;, which has turned to Diva to supply the programming for its first VOD service, in the Atlanta market, despite AT & T;’s 44 percent In Demand stake. “We would love to see In Demand get some content,” says AT & T; spokeswoman Tracy Baumgartner.
Diva’s predicament
For Diva, the burst of attention from cable operators is welcome, but late. Since its organization in 1995, Diva incurred losses of $419 million through March 31 and is low on cash.
In its March 31 quarterly report, Diva said its cash was sufficient through Sept. 30. The company said it had fired 15 percent of its workforce and suggested that bondholders organize into a group “to facilitate a dialogue.”
Diva’s 12.625 percent senior discount notes trade at about 15 cents on the dollar, down from about 55 cents a year ago.
Diva’s original business plan called for the company to retain ownership of its proprietary equipment and collect an almost-equal share of subscriber revenue as the cable operator. But there were no takers, so Diva switched to an “a la carte” approach.
In Demand’s four owners together serve 42.7 million subscribers, or 62 percent of the nation’s cable-TV households. Hollywood doesn’t much like the concentrated buying power posed by In Demand.
Some film studios are working to develop an Internet-based alternative to deliver movies directly to the home. “MovieFly,” a venture backed by Sony Corp., is due for launch later this year.
Still, studio executives involved with “MovieFly” take pains to note that it isn’t an exclusive arrangement. No one wants to leave money on the table. Before he’s college-bound, my son will surely watch the latest movies with video-on-demand. We just don’t know the price.
Kathryn Harris is a columnist for Bloomberg News.
