COMEBACK OF THE YEAR? VOD: Comeback of the Year?

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Video-on-demand's comeback could accelerate next year, asstrategic and technological issues come to the fore.

That's the refrain from VOD-equipment suppliers -- bothturnkey and full-system vendors -- as well as from cable-system operators that will testVOD services next year.

Most of them described 1999 as an important year for VOD,because equipment costs plummeted over the past few years, making the category instantlymore attractive to operators. Now that the cost hurdle is lower, MSOs want to find outmore about consumer demand and buying patterns.

Turnkey providers and server companies are hoping to usethis week's Western Show in Anaheim, Calif., as a springboard to push VOD to the frontburner.

Turnkey providers like Diva Systems Corp., as well as newerentrants like Intertainer Inc., will discuss product migration and likely sign on more MSOtakers at the show.

Meanwhile, the server community, including SeaChangeInternational Inc. and Concurrent Computer Corp., will be on hand with in-booth systemdemos, as well as prototypes with set-top players like General Instrument Corp. andScientific-Atlanta Inc.

Diva is also expected to show that its technology workswith GI's DCT-series digital line -- a major coup for the provider, because up until now,Diva had to furnish an additional set-top for the already-crowded real estate on top ofthe TV.

"I think that 1999 is definitely a year of VOD, but2000 is a bigger year," said Alan Bushell, president and CEO of Diva.

Diva is already online with its "OnSet" servicein four cable systems, and many more are expected next year.

Lenfest Communications Corp., the first Diva taker, isexpected to extend its contract across all of its systems at the show this week. The MSOis already using the service in the Philadelphia area. Adelphia Communications Corp.,Rifkin & Associates Inc. and Cablevision Systems Corp. are also testing Diva.

The MSOs declined to talk specifics about their Divatrials.

"From our perspective, to some degree, 1998 has been ayear of VOD," Bushell added, referring to the work that Diva has already completed.

Other suppliers were more conservative. SeaChange, which isset to debut its full VOD system at the Western Show, predicted order momentum for thelatter part of the 1999, but not the early months.

"There are still a lot of people trying to push theVOD hype that there will be huge rollouts in '99 ... whereas we think that a lot ofoperators will be watching other operators' VOD work, or testing themselves," saidYvette Gordon, director of interactive technologies for SeaChange.

Instead, Gordon said, VOD vendors -- whether turnkey or not-- and the operators testing them will take the time next year to see how VOD scales up tolarge numbers of customers. Both Time Warner Cable and Rogers Cablesystems gave SeaChangethe nod for VOD tests in 1999.

Plus, 1999 will be a year of development, both technicallyand perceptually. VOD vendors will hammer out workable technical links to digitalset-tops, while MSOs will seek a level of comfort around the VOD category.

One variable remains in the mix: the plans of premiumchannel suppliers, like Home Box Office and Showtime Networks Inc. Sources close to thoseprogrammers said they, too, are interested in developing on-demand-viewing models.

One scenario could include a premium programmer sendingcontent to a series of nationwide servers, owned by the MSOs, to keep the latest titlesfresh for a limited period of time, one source familiar with VOD said.

Regardless, cable operators said, they're much moreinterested in VOD these days than they were four years ago.

"We at Rogers are rather bullish on getting VOD to ourcustomers as soon as it is proven viable from a business and technology perspective,"said Nick Hamilton-Piercy, vice president of engineering for Rogers. That MSO recentlyagreed to deploy SeaChange's VOD technology in Toronto and Vancouver, British Columbia,next year.

Hamilton-Piercy said the Canadian market needs VOD "tomake digital a business success," going so far as to describe VOD as the "anchorinteractive service."

That's because nearly all of Rogers' systems carry between70 and 80 analog-video services, "and there is not much else to offer ... if wederive 100-plus digital channels," Hamilton-Piercy said.

Time Warner thinks that demand is there, too. Although theMSO never released specifics about the VOD portion of its Full Service Network project inOrlando, Fla., the results must have been dramatic.

Time Warner engineers consistently discuss VOD as one ofthe more enticing applications coming soon to digital set-tops. And SeaChange is alreadypoised to supply Time Warner for a test next year, in an as-yet-undisclosed location.

"We've not kept it a secret that the killer app comingout of the Full Service Network was video-on-demand," said Jim Chiddix, chieftechnical officer for the MSO, adding, "It's a favorite topic around here."

Time Warner is planning massive, simultaneous digital-videolaunches in 1999, Chiddix said. VOD figures into that, but Chiddix is also part of thecamp that views 1999 as a prove-in year.

"I don't think that anybody will have VOD in front ofmillions of homes in '99," Chiddix said, adding that tests next year will includelinking video servers made by SeaChange and its competitor, Concurrent, with S-A's digitalset-tops.

"They need to show us that it's primetime,"Chiddix said. "The pricing sounds right, and the economics sound right."

VOD, a sort of digital pay-per-view, lets MSOs offer theircustomers a way to watch films and other content when and how they wish. Unlike"near-video-on-demand," content start times aren't assigned in half-hourincrements. Nor are viewing features -- like fast-forward, pause and rewind -- repressed.

VOD is the real deal, vendors and operators said. Andthat's what makes it a tricky strategic move, as operators wonder whether it willcannibalize existing sales of premium channels and PPV programs.

"Let's face it: The pricing is fairly similar to whatyou buy on PPV," said Pete Smith, senior vice president of engineering for Rifkin."Obviously, VOD is compelling. You can buy when you want, and it's substantially moreconvenient."

But will customers slip into the habit of buying contentfrom the TV screen, instead of at the video store? After all, PPV movies have been a majorbust, so far.

They already have, according to Diva. "Averagebuy-rates are running at about four buys per month, per home," Bushell said. And it'snot just top-10 titles, he added, building the case for breadth of content beyond justpopular films.

SeaChange believes that at buy-rates of 3.5 titles perhouse, per month, operators can recoup their investments in less than two years.

In a comprehensive model that was developed to shedrealistic light on VOD revenues and costs, SeaChange built a scenario based on a200,000-home cable system with 80 percent penetration (160,000 customers) and 20 percentdigital penetration (32,000 potential VOD customers).

Also in the assumption mix was a cable network configuredto handle a peak streaming rate of 10 percent -- meaning that servers are set up to spitout 3,200 simultaneous video streams.

On the revenue side, SeaChange posed an adult-title chargeof $5.95 and nonadult content at $3.95 per title, for an average per-title charge of$4.25.

For one year, using a model where 32,000 customers bought3.5 programs per month at $4.25, operators could haul in $5.7 million in revenues, Gordonsaid.

Subtract server cost per stream, revenue splits withstudios, expenses to receive digitally encoded material, bad debt, equipment and staffing,and cable operators wind up with an investment payback of 22 months, based on an estimatedannual cash flow of $1.8 million, she said.

The SeaChange scenario assumes that operators purchasetheir own equipment.

Diva's model, as a turnkey provider, includes all capitalexpenditures. Diva also asks for a split with operators of all on-demand revenues -- atactic not widely embraced by MSOs historically.

Chiddix said Time Warner will likely not pursue aturnkey-VOD model, such as what Diva offers, because the MSO is simply "not afan" of the leased-channel model, where turnkey providers take a cut of a service,whatever it may be. As a sister company to a major studio, Time Warner knows its wayaround the business, the company feels.

"It's not the right business model for us,"Chiddix said. "We don't need anyone to make capital investments for us, or, in thecase of VOD, to book movies for us."

But Bushell said top-rated studio movies of the type thatTime Warner is comfortable with aren't the biggest VOD draws.

In its Lenfest deployment -- where nearly 500 titles areavailable for customers to view at any time -- "the top 10 titles only generate about25 percent of the traffic," Bushell added.

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