Cable industry faces chicken, egg dilemma with video on demand

NEW YORK -- Fed up with driving to the video store in the cold of winter, Beverly Boyarsky thought she had found the perfect solution: video on demand.

For about $80 a month, the Huntington Station, N.Y., woman could order movies and premium programming over digital cable. She figured she'd be able to watch whatever she wanted, whenever she wanted.

Two months later, Boyarsky's enthusiasm is gone.

"There are movies that are four, five, six years old that are shown on regular TV and I don't feel a need to pay for," she said. "If they're going to offer movies they should show movies that are more recent."

Boyarsky's frustrations stem from the concerns of media companies, who are afraid the combination of digital and on-demand technology will make their movies and TV shows vulnerable to piracy and render them less lucrative platforms for advertising.

"For the most part content providers are not licensing their content," said Yankee Group analyst Aditya Kishore. "There's a lot of risk for them, and most of them aren't in a rush to do this."

The cautious approach may work as long as the number of digital and video-on-demand, or VOD, customers remains low.

Pressure building

Some 19 million of the 72 million total cable subscribers in the United States have digital cable, Kishore estimates. Video on demand is available to about 7 million of the digital cable subscribers -- only 20 to 25 percent of whom actually use it.

But the pressure to add more VOD programming is accelerating.

Cable operators, who have spent billions upgrading to digital services, need to attract consumers to the new service. They also view VOD offerings as crucial to deflecting competition from satellite operators who lack the technology to offer VOD.

But first, cable operators will have to convince Hollywood that video on demand doesn't make their products more prone to being captured on personal video recorders, traded illegally over the Internet and burned onto DVDs for sale.

Some in the entertainment industry want to encrypt movies to prevent duplication. Others want the electronics industry to build anti-piracy technology into receivers. The subject is under debate in Washington, but few expect legislation to solve the problem. Typically, technologies are eventually developed that circumvent such copy-protection measures.

Another crucial issue is whether VOD will end up helping or hurting entertainment industry profits.

TV networks and studios make money by selling shows first in prime time, then as reruns and maybe video, with broadcasters making money from commercials.

A similar business model exists for movies, with studios counting on revenues first from the theatrical debut, followed by overseas, video rental, cable and network TV releases. As a result, there is usually at least a 50-day lag between the time a movie appears at a video store and when it comes to cable and VOD.

Consequently, many content producers are hesitant to make their products available on-demand for fear it will cut into their profits. Those that have are often owned by conglomerates that also own cable systems.

'They love it'

HBO, a unit of AOL Time Warner Inc., has aggressively rolled out its HBO on Demand service to digital cable customers in the last year. The service, which allows consumers to access hit shows like "Sex and the City" at their convenience, was available on three cable systems in 2001. Today, about 50 cable systems offer the service, including 32 of the 34 divisions of Time Warner Cable, another unit of AOL Time Warner.

"Once consumers are aware of the product and aware of the model, they love it," said Sarah Cotsen, senior vice president of HBO interactive ventures. HBO on Demand costs between $4 and $10 a month, depending on the market.

Viacom has also launched Showtime on Demand, even though its Blockbuster movie rental business stands to lose if consumers pick VOD over video rental.

"Video on demand is the kind of opportunity that comes along only once in a great while. So let's be sure we get it right," Mark Greenberg, Showtime executive vice president, told a VOD conference last year. "With an opportunity this great, early missteps can lead to a multibillion-dollar pratfall later on."

Hollywood is also eyeing the Internet as an on-demand conduit. Movielink, an online joint venture of five Hollywood studios, launched in November. It won't disclose subscriber numbers.

"People are downloading movies. We haven't been hacked yet," Barry Meyer, chairman and chief executive of Warner Brothers, told analysts recently.

A similar venture from RealNetworks Inc. and cable movie channel company Starz Encore Group is due out this spring.

Sudden freeze-ups

In the meantime, cable companies have plenty to keep them busy. Digital feeds still suffer from sudden freeze-ups or delays. An AP review of Movielink found inconsistent picture quality.

Fees are another issue. Some cable customers can buy shows or movies on-demand, as they use them. Others must buy subscriptions that allow unlimited access.

Ultimately, consumers will have the final say.

"We use the video-on-demand a fair amount, probably once a month. It saves trips to the video store," said Joe Blumenfeld of Natick, Mass., who subscribes to digital cable and owns a TiVo personal video recorder. "I can watch whatever I want, when I want, and I can't do that with the cable."