Video on Demand’s Future as Business Called Doubtful
By CHRISTOPHER KEOUGH and DARRELL SATZMAN
Staff Reporters
The promise of delivering movies, concerts and other programming to consumers wherever and whenever they want has proven too tempting to ignore for film studios, cable companies and a handful of Internet entrepreneurs, many of them based in Los Angeles.
But despite vast outlays of cash, few if any companies are making any money from video on demand and industry watchers say it remains doubtful if a viable VOD business will ever exist.
“VOD is a gamble,” said Sean Badding, senior analyst for The Carmel Group, a media research firm. “You can build it, but you don’t know if you can make it pay.”
Part of the problem with VOD, as with interactive television services in general, is the continued confusion about what the term means. In addition to cable and Internet delivery, other players are angling to provide movies via satellite and wireless devices.
“The most popular is going to be ‘true’ VOD, where it’s what you want, when you want, on what device you want,” said P.J. McNealy, a senior analyst at GartnerG2, the research arm of Gartner Inc.
Worth the risk
GartnerG2 recently released a report that concluded the future of VOD is several years away, if at all.
In “Coming Not-So-Soon: Online, On-Demand Movies,” Gartner reported that 10 percent of the 106 million homes in the United States have the broadband access needed to make VOD a realistic alternative to video rentals. Of Internet-using adults in the United States, only 2 percent had watched a movie over the Internet or downloaded a movie to their PC. And 75 percent of those who hadn’t said they weren’t very interested in doing so, according to the report.
The user rates on cable are better, but access in that realm is limited to households that have a digital connection. So far, digital cable is available in only 35 cities, and not in every household in those cities.
Nevertheless, there continues to be a push to introduce VOD to a wider segment of the public.
Two ventures by the studios, Movielink (a joint venture of Sony Corp., Vivendi Universal, Metro-Goldwyn-Mayer Inc. and Warner Bros.) and Movies.com (Walt Disney Co. and 20th Century Fox) are in the works to deliver movies via the Internet. The studio enterprises face scrutiny by the Justice Department to ensure that they don’t use price exclusivity to monopolize the VOD market.
The Internet isn’t the only means to distribute VOD, and cable and satellite television providers are trying to get into the act, as well. Intertainer Inc. of Culver City, which streams movie and television programming from major studios and concerts, music videos and children’s programming on the Internet, also reaches 300,000 homes through deals with Adelphia Communications and Comcast Corp.
CinemaNow Inc. of Marina del Rey is mainly an Internet distributor for independent studio Lions Gate Entertainment. The company has a library of 1,500 films to choose from, mostly from Lion’s Gate.
McNealy said satellite, with its ability to beam tens of gigabytes of data to set-top boxes while consumers sleep, might be the most promising medium. Whereas pay-per-view services offer movies starting every hour or half hour, McNealy said “true VOD” likely will manifest itself in the form of local storage, meaning the movies will physically exist on a hard drive in consumers homes for access any time.
Limited access, limited demand
Larry Namer, founder of E! Entertainment and now a consultant with Comspan Communications Inc. in Santa Monica, said VOD, at least Internet-based, might find an audience, but it’s not the next big thing many are promising. “I think it’ll be a pretty reasonable business, but I just don’t think it’s that killer,” he said.
Namer said the experience of DirecTV shows there’s not a great audience for a wide selection of movies on demand. “DirecTV says 95 percent of the movies watched are the top five,” Namer said. “That really says to me the demand for other movies is not that great.”
None of the Internet-based VOD companies are profitable, but officials of all three said they are funded for the foreseeable future with no need to raise more money.
Ultimately economic considerations and the availability of broadband Internet will tell the story of whether VOD can be successful, Badding said. He noted that it costs around $1 million for a cable company to install the equipment needed to provide interactive services to just a few hundred homes.
“Companies that are aggressively doing this, Charter (Communications), Comcast, AOL Time Warner, are not telling the whole tale,” Badding said. “They are spending all this money in VOD and nothing is really happening.”
Chris Castro, vice president of communications at Disney, said the broadband numbers are still too low for a VOD enterprise too be profitable. “We are very bullish on the Internet, but the fact is broadband connections are limited,” Castro said. “We think the Internet will be there eventually.”
