Home Video Warily Eyes Digital Cable

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For years, the home-video industry has viewed pay-per-view
like ants at a picnic -- it really wasn't going to spoil the fun, but you'd better have
some spray around to keep the little buggers at bay.

Those ants have become hornets, and the picnic is getting a
little hairy.

Still, even in the face of increased competition from
digital cable and near-video-on-demand, video retailers are trying to keep a calm facade,
figuring that their equivalent of a few citronella candles will hold off the PPV pests.

But the PPV and cable industries see video retailers'
anxiety levels rising, as evidenced by Blockbuster Video's recent television ads, which
boasted about video's earlier window. Years ago, PPV executives said, the video industry
barely acknowledged PPV. Now, a company as big as Blockbuster is going head-to-head with
the service in its new ads.

Blockbuster, of course, denied the implication that
competition from NVOD is inspiring the spots, but what is true is that video retailers big
and small are gearing up to face NVOD and the perils that it will pose to their businesses
in the not-too-distant future.

As it stands now, according to a recent study from the
Cable and Telecommunications Association for Marketing, almost one-half of consumers who
subscribe to digital cable and use its PPV services said they're going to their local
video stores less often.

"It's clear that in homes that have multichannel NVOD
offerings, there is greater purchase of pay-per-view and less of home video," said
Jim Ramo, president of TVN Entertainment Corp., which is selling an NVOD service to cable
operators.

Clearly, NVOD is a new ball game. Instead of one to three
channels of PPV, operators offer eight to 32, with many films playing every half-hour.

"The convenience factor is very important," Ramo
said.

Digital gives cable the same advantages enjoyed by
direct-broadcast satellite service DirecTV Inc., which boasts buy-rates of eight to 10
times, selection, picture quality and ease of ordering.

"The ordering is now an impulse," said Joe Boyle,
vice president of corporate communications for PPV network Viewer's Choice. "You
simply do it with a remote. It's not an 800-number dial-in, as it is with analog PPV. The
order isn't placed through a customer-service rep. You don't have to leave your house --
you don't even have to leave your couch. And the top titles are never out of stock."

VIDEO'S RESPONSE

What kind of trouble does this pose to video retailers?
Smaller independents are counting on what they believe has always been their strongest
selling point: social interaction.

"Any new technology is going to be a threat,"
said Cindy Cox, owner of Showcase Video Center in Hamilton, Ohio. "But I think that
there are plenty of people who like to get out of the house and look through the boxes.
They like to talk and ask if a movie is good. Video's biggest draw is its personal
service. I don't know if that's true for the big guys like Blockbuster, but it's certainly
true for us."

Not only does Cox know all of her customers' names, she
said, but she also knows what kinds of movies they like, and she adjusts her buys
accordingly. This sentiment is echoed in urban and rural communities alike.

Retailers also pointed out that PPV tends to stay with
popular and mainstream titles, meaning that movie-lovers who like niche films will stay
with video.

"We don't carry mainstream films," said Michael
J. Ferrari, store manager at Kim's Video in Manhattan. "We leave that to
pay-per-view. Our clientele goes for films that you can't get in other places -- the
hard-to-find or experimental titles, the ones that are not necessarily popular. We take
pride in our relationship with our customers and in knowing what they like."

So does Jerry Holmes of Handy Mart Videos in Brookhaven,
Miss. He has seen a lot of his rural customers switch to DBS because some live as far as
25 miles away. Still, it's also because of their isolation that they'll often drive to his
store when looking for entertainment.

"One thing about having a store in a rural environment
is that everyone is your friend," he said. "We cherish that and work on it. The
social experience is important."

COUCH POTATOES

Will those factors be important enough in the future to get
consumers off their couches and into the video store?

Ramo doesn't think so. While he and many other cable
observers believe that there will always be room for both home video and PPV, he's sure
that video will have a tough time competing with NVOD's -- and, eventually, full VOD's --
convenience.

"I don't think that anyone is predicting the end of
video stores," he said. "But personally, I think that the shopping thing is
overvalued. [Retailers] say that customers go to video stores to look for titles that they
hadn't thought about, but I believe that they know ahead of time what they want. In
addition to that, VOD will add a library component to home electronic distribution that
doesn't exist today. That will put additional pressure on video stores."

Charles Annable of Campus Video in Oberlin, Ohio, was
unfazed. "Those into entertainment seek it out in all forms," he said. "In
fact, those who have cable are my best rental customers. They'll go to first-run theaters,
and they'll also hang out on the Internet. I actually encourage these things."

WINDOWS '99

Many retailers said that when movie titles are advertised
on cable, they'll see a boost in rentals of that particular video. Yet the reverse can be
true, as well. When the video window closes on a new hit release, video rentals can drop,
sometimes dramatically.

Annable was realistic about the value of his window.
"We get a title 30 to 90 days before cable, and this is critical for many
stores," he said, "including us. We definitely see a decline in rentals when a
title goes to cable."

Windows are so important, retailers said, that many
customers of the mom-and-pop video stores know the day and date of a title's arrival. They
know, too, that when a movie is advertised as a coming attraction on PPV, it's already
available at their local video store.

"Our new releases go out immediately," said
Barbara Rodgers of Great American Video in Tuckahoe, N.Y. "Windows are a big factor
in our success. Our customers are here every Tuesday, looking for the new releases. In
fact, I even have a waiting list for next Tuesday. People are getting smarter now."

BLOCKBUSTER'S STRATEGY

Smaller dealers said their customers' awareness of windows
was in place long before Blockbuster's commercials, which perhaps proves their claim that
they indeed are more in touch with their customers than the larger chains. Blockbuster's
research, in contrast, indicated that one-half of its customers did not know that video
stores had the window first.

Blockbuster spokeswoman Karen Raskopf said its commercials
were created to enlighten these consumers.

"We simply want consumers to know the advantage of
coming to Blockbuster," she said. "There is a lot of competition for people's
leisure time, and our whole mission has been to give consumers a reason to keep coming
back. They want movies in stock, and they want a greater selection. That's what we've been
delivering. By focusing on what consumers want today, that's the best way to
compete."

Raskopf said the company "isn't sticking its head in
the sand" in regards to NVOD or VOD, but she doesn't see either as much of a threat
anytime soon -- particularly VOD, which she believes has a long way to go before becoming
a reality.

VOD: DON'T WAIT UP

In fact, nearly all observers said that because of cable's
history of slow rollouts of new technology, VOD isn't going to be a threat to anyone
anytime soon.

"I don't find much intensive development [of VOD]
coming from cable," said Ed Bleier, president of Warner Bros. Domestic Pay-TV, Cable
and Network Features. "[VOD] is technologically feasible, but how many systems are
now equipped for it? In the best-case scenarios, cable has been very slow to roll out
technological advances. If VOD is a threat, it's a theoretical threat. It's still a ways
down the road."

VOD requires two-way cable plant, which many operators are
building for cable modems and to prepare for telephony. But even those that can
technically employ VOD may choose to focus on other technologies.

"All are jobs unto themselves, and an operator may
choose to market cable modems and telephony first. In that case, NVOD with a digital
upgrade is a great placeholder for VOD in two-way plant," Ramo said.

VOD services from companies like Diva Systems Corp.,
SeaChange International Inc., TiVo Inc. and Replay Networks Inc. expect to get rolling
next year. A handful of cable operators have already installed Diva's system, and one
unidentified MSO is testing SeaChange's, as well. Still, it's hard to say when cable
operators will begin to launch full VOD en masse.

PIRACY CONCERNS

Security issues are also involved in just how quickly
digital product will roll out. Studio executives said that because video earns them so
much money, there's going to be caution about any new technology that somehow threatens
that revenue.

For example, if a consumer can watch something via VOD and
make a perfect digital copy on digital tape, there are going to be reverberating
consequences on a number of levels.

"You're risking high piracy," one executive said.
"With VOD, pirates will be able to get a perfect digital copy of a title six months
before it goes to Thailand. You're also risking your windows, which is our whole way of
life -- who gets it and how long exclusively. If you make it easy for the average consumer
to get a great copy, maybe NBC won't want to pay for broadcast if everyone has a good copy
of it. You have to protect your future windows -- not just the here and now."

For that reason, that executive predicted that the
technology will roll out that much more slowly.

Moreover, the executive said, cable is a slow-moving
industry, and "there are a lot of hassles to convert to digital before even thinking
about VOD. Cable operators are saying 18 months, but they've been saying that for five
years. Of course, if they think of the reasons why digital will be valuable to them beyond
VOD, that may motivate them."

One key in the security issue is new video technology DVD.
How DVD solves its security problems may be the key to how rapidly VOD becomes a reality,
the executive said, adding that if DVD comes up with anti-copying technology, this will
make VOD move a little more quickly.

"The person who invents that is the next
billionaire," the executive added.

At what point will VOD surpass video? Will it ever get the
window first?

"It's not a question of who studios will favor,"
Bleier said. "We want them both to happen. Video is too important, and we want to
keep it healthy while developing a new market."

Still, video is in for a rough ride not just when VOD
arrives, but when it goes beyond theatrical titles. At some point, Ramo said, there will
be time-shifting of television material.

"It will require big storage capability at the
headend," he added, "but if that's achieved, there will be much broader product
offering with VOD than there is in the video store today. If you can time-shift a TV show
-- if you can take a soap opera and time-shift it to see it when you want -- that is
product that won't be available on shelves of the video stores."

Terry Mathews of Bijou Movies in Waterloo, Ill., still
wasn't worried.

"Everyone is talking about VOD," he said,
"but it's a long ways off. Plus, it will never give people the social experience that
they get in a video store. People want to talk about movies in person. You get cabin fever
being inside all of the time. Sometimes, you just want to rub shoulders with others and
relax."

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