DVD's Shining Model for the VOD Future

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As a contingent of cable-TV executives meanders around this week's Consumer Electronics Show in Las Vegas, it should keep an eye on DVD as well as high-definition TV, WiFi, retail cable modems and the other gizmos that have obvious, immediate impact on cable operations — and especially cable's video-on-demand dreams.

DVD has become the consumer-electronics phenomenon of this young century. Its explosive growth has countless ramifications on near-term broadband viewing.

As the new year begins, 35 percent of U.S. homes own at least one DVD player — up from 25 percent a year ago, and just 15 percent two years ago, according to Consumer Electronics Association tallies.

DVD penetration will cross the 80 percent plateau by 2006, spurred by the emergence of low-priced DVD recorders about two years from now, according to forecaster In-Stat/MDR. By that time, integrated DVD-plus RW (read/write) devices will vie for the role of home-network controller. Presumably, some cable operators believe that function was destined to be the exclusive domain of the set-top box. Maybe not Moxi, but Digeo, anyone?

CES will dish up a variety of DVD-based networking tools, such as SonicBlue Inc.'s GoVideo, a $250 box that includes the PC-networking capability of the company's controversial ReplayTV Internet-protocol distribution system. Sony Corp. and others will introduce similar devices to enlarge the opportunity for a home server that can deliver on-demand video to any display device in the house.

Plummeting prices

For now, however, the largest DVD market is far less complex: low-priced players (some under $100) that deliver what customers want — movies. DVD players, introduced just six years ago, are expected to become nearly ubiquitous by 2009. That's less than half the time it took for VCRs to achieve a similar penetration level.

Of course, DVD sales are fueled by rapidly dropping prices. Although the lowest-priced players usually don't allow viewers to take advantage of the enhanced programs (alternative endings, directors' comments and production videos), they do introduce viewers to a new way of buying video entertainment.

Admittedly, videocassettes have been available for sale for two decades, but the rental model was the one that worked — for viewers and for the studios.

DVDs have reminded viewers that they can buy the shows they want, often for the price of two movie tickets or a few pay-per-view screenings. Although this revives the debate as to whether families truly want to own movies, it also puts the spotlight on customers and their willingness to buy, trade or swap a physical product if it lets them see what they want, when they want.

The priced-to-sell approach to DVD programming has its own controversial aspects. It is the reason, according to some Hollywood wags, that Warren Lieberfarb, "the father of DVD," was fired last month as head of Warner Home Video.

Aside from his own unfulfilled corporate aspirations, Lieberfarb had pushed hard for the DVD-sales model, one not universally appreciated in Hollywood. Foes fear that the process upsets the familiar economics of video rental, making it too easy to put digital copies (even of copy-protected films) into the hands of corrupt thieves — sometimes known as "customers."

As tens of millions of homes buy DVD equipment, will they opt to buy (or rent) movies, rather than order them via on-demand cable or satellite providers? One viewpoint holds that DVDs will create a new audience of movie customers, who will relish the convenience of VOD when it is offered to them.

Moreover, as DVD equipment drops into the $100 range, it becomes just another home device — not a special high-priced unit that requires constant feeding (i.e. buying more movies to watch).

VOD distraction

The bigger challenge for cable VOD hopefuls, however, is the immediate distraction that DVD holds. Will it divert home-entertainment spending from VOD?

In the longer term, the DVD-centric server raises questions about customers' appetites for cable-delivered services. DVDs are also at the heart of another immensely popular TV-set attachment: the rug-top boxes, such as Microsoft Corp.'s Xbox and Sony's PlayStation2. Those game consoles are also built with broadband aspirations that aren't always compatible with cable's revenue opportunities.

Microsoft's eHome initiatives — a centerpiece of last year's CES — offer yet another reminder that storage, whether on a hard drive or DVD, is still a big part of the video equation.

Cable's real-time reply to the DVD avalanche should include broadband program and service offerings that go beyond the simple playback of movies. It's worth watching how the enhanced and specialty-video features of DVDs are used to determine if or when there will be a market for such services.

On a more fundamental level, the appeal of DVDs brings another box into the house. Most of them will replace the VCR, which will be junked or relegated to the basement TV set. The looming arrival of DVD recorders will further change the landscape, but initially on the desktop, rather than at the TV set (although the networking feature renders moot the territorial issue).

Alternative game plans

Cable's best defensive plan may lie in the non-movie realm. Although feature films remain the mainstay of the VOD vision, alternative programming — like Rainbow Media Corp's MagRack suite and other short-form, timely content that DVD cannot provide — offer an obvious anti-disc strategy.

That's the kind of product-thinking that should be part of cable's perspective at CES. It means looking at and beyond DVDs.

The answer won't be delivered on a silver platter.

Contributing curmudgeon Gary Arlen mans the I-Way Patrol for Broadband Week.