With five of Hollywood’s biggest studios announcing in August they have partnered to launch a video-on-demand (VOD) service that will allow consumers to access their vast collections of movies via a broadband Internet connection, it’s a good time to examine the confusing, nascent market for having video delivered to order.
Though little more than a concept to most consumers, VOD has long been seen as the killer application for interactive TV, but expensive set-top box requirements and stratospheric costs per stream have delayed its rollout. Equipment costs, plant upgrades and digital set-top box penetration have finally begun to achieve the critical mass required for successful commercial deployment, and the Yankee Group believes that VOD will generate revenues of more than $65 million by year-end 2001, and will reach $1.98 billion by year-end 2005.
After the announcement by MGM, Sony Pictures, Vivendi Universal, Paramount and Warner Brothers, Forrester Research analysts Eric Scheirer and Josh Bernoff wrote that they believed the initiative won’t make much money. Since most broadband connections are currently connected to PCs with small screens and speakers, it’s very possible that consumers won’t want a degraded viewing experience. But while this attempt may come up short, it hints toward a positive future for the business of delivering video to consumers when they want it.
According to Forrester, the movie industry has learned a lesson from the music industry about combating piracy with strong, legitimate services. It also shows that concerns about security have been pacified, at least for now. The announcement also puts pressure on Disney and Blockbuster Video. The five studios involved in the initiative accounted for more than half of the domestic movie industry box office in 2000, according to Forrester, and now Disney is the only major studio that hasn’t announced an Internet or cable VOD plan. As for Blockbuster, it called off its VOD trial with Enron Broadband Services in March 2001, and it stands to lose when VOD comes to digital cable. According to Forrester, VOD via digital cable could supplant video rentals and generate $13.5 billion by 2006.
In a March 2001 Forrester report, “Movie Distribution’s New Era,” Scheirer predicted that cable TV would win the race to bring VOD services to the mass-market home viewer, beating out the competition from DSL and digital broadcast satellite providers. But the VOD industry will feel its growing pains as it searches for the right pricing model.
By 2006, when more than 25 percent of U.S. households will have digital cable with VOD services, VOD will erode home-video’s market share to 40 percent and lead to a new model of transaction-based release windows. The result will be soaring growth in home-movie viewing — and stronger profit margins for movie studios. The successful transaction-based model will focus on payment type rather than delivery medium. For instance, Forrester believes the industry should offer rent rather than purchase release windows or ad-supported windows versus premium tier ones to replace the medium-dependent model.
“The danger of cannibalization doesn’t come from one media type versus another,” Scheirer said, “it comes from one pricing model versus another. Transaction-based windows will enable innovative distributors to identify the highest price a consumer is willing to pay for viewing a film. But the model also benefits viewers who will gain from a wider array of film choices, viewing options and pricing packages.”
In Europe, the rollout of VOD has been substantially lagging the United States. During the last quarter of 2000, Video Networks launched VOD commercially in Britain, but audiences remain limited. As the price of set-top boxes and the cost of bandwidth technology plummet in Europe, VOD service will become affordable to the average consumer in the mass market.
“VOD, which will be available only to those with access to high levels of bandwidth, is expected to attract more than 8.5 million subscribers across Europe by the year 2006, realizing a revenue potential of $2.5 billion,” said Niamh Spillane, research analyst at Frost & Sullivan. “Interest in the technology will initially expand at a sluggish pace, on a par with the development of subscription levels, but rapid growth will ensue as a result of the expected escalation in the overall subscriber base and average revenue per subscriber. We believe that the number of VOD subscribers will rise in tandem with home broadband access.”
The development of DSL technology and its imminent rollout in most European countries, could bring broadband to the masses, providing a boost for VOD services.
According to Frost & Sullivan, every European country has at least one telco or cable operator with serious plans for VOD deployment within the next two years. VOD services are forecast to be launched in Spain, the Netherlands and Portugal throughout 2002. Germany and Scandinavia will follow in 2003, with France and Belgium deploying the technology in 2004.