VOD In Peril?

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Cable operators who are counting on video-on- demand as their next killer broadband app might be in for a rude awakening, given that the Hollywood studios-with whom their pay-per-view distribution relationship has been tenuous at best-are exploring other options that could cut cable out of the picture.

At the Cable & Telecommunications Association for Marketing's video streaming panel last week, which I had the pleasure to moderate, Akamai Technologies Inc. president Paul Sagan warned that several major Hollywood studios are looking to distribute full-length movies over the Internet next year for a $4 fee, paid by credit card.

That model is pretty simple.

Consumers would use their high-speed connections at work to download a movie in 15 minutes and play it at home on their laptops.

Panelist John Billock, president of Home Box Office's U.S. Network Group, heeded the warning.

"It behooves the cable industry to think about serving these 22-inch, flat-screen computer monitors," he said. "If cable doesn't do it, someone else will."

Indeed, Sagan warned that outside forces could force cable operators to deal with video streaming more quickly than they might imagine.

And those forces are already at work. Cable operators and programmers in Los Angeles for last week's Western Show were trying to sniff out what was happening at the studios. MSOs are still trying to strike some accord on movie rights for VOD, an application which many say will be cable's next home run-if cable can get enough titles early enough to make it a real business.

But that looks like a roll of the dice, given what the studios are doing on their own. Clearly Hollywood does not want to be in the same boat as the music industry is with Napster Inc.

Because of Napster's file-swapping capabilities, on-demand music is available over the Internet to millions of people who are not paying a red nickel for it.

According to a page-one story in the
Los Angeles Times

last Thursday, "Pirates are downloading an estimated 270,000 films a day from the Internet."

That has the studios quaking, as they now band together, without cable operators, to use technology that would allow them to control movie downloads and collect the fees.

Last week, one cable operator downplayed the whole notion that the studios would go off on their own. They're too steeped in tradition to violate the traditional windows of distribution, he argued.

That cable executive said that the studios were fearful of upsetting the economic model in which feature films appear first at video stores-where they generate most of their revenues-then later on PPV and premium cable networks.

I hope he's right. But I have to wonder if he's on the mark here, given the slow pace of VOD deployment and its present limited number of titles.

After all, cable's history with Hollywood does not predict a happy outcome for operators-unless the industry becomes more aggressive and flexible in its negotiations with the studios.

Look at PPV, a mature but largely lackluster business for cable, largely because the studios hate the revenue splits and feel that cable does a poor job marketing the medium.

At CTAM's video streaming panel last week, Time Warner Cable president Glenn Britt said he didn't fear content providers would use the Internet to end-run cable operators. That's largely because their program contracts limit the amount of video-streamed content cable networks can put on the Internet.

But that's not the real issue, as most cable networks can't do that anyhow. In the case of movies, the studios hold all of the aces.

The next few months will be critical for cable's VOD rollout. And it's imperative for cable MSOs to get a seat at the table with Hollywood studios that are feverishly working on plans to peddle their movies directly via the Internet.

That strategy, if realized, will bring VOD to its knees before it even gets out of the starting box.

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