VOD Returns to Fast-Forward

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The play button for video-on-demand is back in action,
after being stuck in the pause mode for nearly four years.

New interest in VOD is prompting a fast-forward attitude
among a host of new players in the cable, manufacturing and interactive-service
industries.

Steep price drops -- some as much as 75 percent to 90
percent -- for key VOD components such as digital set-top boxes, video servers and
incremental streams from the headend have revived the once-promising VOD business.

VOD headed south during its crucial trial period at Time
Warner Cable's Full Service Network in Orlando, Fla., from 1994 until its demise in
May 1997.

But the man who headed that project is still bullish.

"It's looking like a very attractive business. I
think that we'll see VOD deployed in 1999; widespread in 2000; and, in 2001, a
substantial penetration of VOD-capable service," said Tom Fiege, now Time Warner
Cable's Los Angeles-division president.

Although some have called the FSN experiment a flop, many
believe that it paved the way for VOD's emergence as a potentially big-time
revenue-maker for cable operators and a genuine threat to the $16 billion video-rental and
sales business.

FSN was the first hybrid fiber-coaxial network to combine
analog- and digital-video signals, and it represented the first deployment of QAM
(quadrature amplitude modulation) in an HFC network, according to experts involved in its
construction. It was also the first time that MPEG-encoded and compressed video
information was used in a cable system.

Add the rollout of digital-video services currently under
way at many of the top MSOs -- a crucial component to VOD's success -- and its future
looks even more promising; but only if cable operators buy into the VOD mentality.

"The product is very viable, but it ends with the
MSO," said Bruce Leichtman, director of media-entertainment strategies for
Boston-based The Yankee Group. "Is there enough two-way digital rolling out to make
it work?"

With approximately 25 million homes expected to eventually
be digital-capable, the numbers seem encouraging. Yet many cable operators remain in a
"show-me" state of mind regarding VOD. They have long memories, and they
haven't forgotten the huge costs -- more than $4,000 per set-top box -- and the
eventual shutdown of FSN.

"We've done a lot of research with digital,
expanded pay-per-view and multiplex pays, and the jury is still out," said Cindy
Winning, group vice president of marketing for Jones Intercable Inc. "VOD has some
unique headend and investment requirements, but if we see a rich pay-per-view environment,
we'd take a look at VOD."

Jones is conducting VOD tests in Pima County, Ariz., and
Savannah, Ga., each of which will weigh heavily in VOD's future at Jones, Winning
said.

"I think that VOD has a good future. In recent tests,
our customers told us that video is No. 1. There's 30 percent-penetration in video
and 2 percent for modems. From this business perspective, we can get a much better return
on our investment," she said.

Cablevision Systems Corp. is also conducting VOD trials in
several-hundred homes on Long Island, N.Y., where the response has been "very
positive," said Charlie Schueler, vice president of media and community relations for
the MSO.

Cablevision's VOD strategy is linked to its aggressive
rebuild schedule and consolidation around the Boston, New York and Cleveland markets. The
MSO has said that it eventually plans to introduce data, VOD, telephony and other two-way
interactive applications.

Interactive-service providers such as Prasara Technologies
-- a fledgling software and interactive-TV company comprised of former FSN executives --
are banking on the VOD buy-in by cable operators (see sidebar).

Praveen Rao, vice president of software development for
Prasara, and his partners, Robert Montgomery and Scott Wilcox, should know about the VOD
business: They've been there.

"Because we've done this before, at FSN, cable
operators are asking us what the industry needs and where operators will make their money.
It's not just technology: It's a business," Rao said.

And the business is growing. Celerity Systems Inc.,
Concurrent Computer Corp., Diva Systems Corp., Oracle Systems Corp., Scientific-Atlanta
Inc. and SeaChange International Inc. are just some of the service providers that will
compete for a slice of the VOD business.

"The No. 1 alliance is with set-top vendors,"
said Yvette Gordon, director of interactive technologies for SeaChange. "They have
the network architecture that we have to fit into. So partnering with them and with
headend manufacturers is critical."

SeaChange recently announced an agreement with S-A to
jointly develop a server-to-set-top digital-VOD system that will integrate
SeaChange's MediaCluster video servers with S-A's OpenCable-compliant
digital-broadband system.

The agreement reflects the freedom that companies like
SeaChange now have to move from one set-top manufacturer to another, and to work with
multiple cable operators within the guidelines of OpenCable.

Added Gordon, "There are more players, which is to be
expected, because there is great market potential for VOD. But video servers are very
difficult to build, with thousands of video streams and fault tolerances. It takes us a
long time to get there."

While Fiege explained that set-tops won't initially
carry VOD, the concept is in the company's long-range digital plans.

"We culled this from our FSN experience, and it is a
digital strategy to get us into VOD more quickly," he said.

Fiege cited cost as the reason why Time Warner has not yet
deployed VOD. But that is changing.

Cost has been the scourge of VOD since day one of the FSN
trial in Orlando, Fiege admitted. But costs have fallen sharply.

"If you look at FSN, we jump-started the future with
technology that we wouldn't see for five to seven years," he said, adding that
FSN's most pressing problem was the lack of software. "There wasn't
any."

Now, there are huge amounts of applications to chose from,
Fiege said, noting that during the final days of FSN, software prices were 10 percent of
the initial costs.

"Getting through those cost issues was difficult. But
we got through them with money. The cost now for software, servers and equipment like QAM
modulators is a fraction of what it was," he said.

Set-top-box manufacturers such as General Instrument Corp.
sense the renewed interest in VOD, as well.

GI and Diva recently agreed to integrate Diva's OnSet
VOD service into GI's interactive-cable platform, and they will test the service at
Lenfest Communications Corp.'s Suburban Cable division in Delaware County, Pa., this
year, said Denton Kanouff, vice president of marketing for digital-network systems at GI.

Adelphia Communications Corp. is also making Diva's
OnSet available to its cable subscribers in Lansdale, Pa., a suburb of Philadelphia.

"VOD makes sense from a business model more than it
did two years ago," Kanouff said, adding that interest should grow even further when
GI rolls out its DCT-5000 digital set-top next year.

Kanouff noted that one-half of the 1 million DCT-1000
set-tops that GI has shipped are now in consumers' homes.

Diva -- which reportedly has agreements with 10 MSOs
passing 11.6 million homes -- is "cautiously" adding customers, according to
Alan Buschell, Diva's president and CEO.

"It's a complex business, and we are exclusively
committed to work with cable operators. Time Warner spent $300 million on its VOD
exercise, and operators are saying that they aren't going through that exercise
anymore because they have too many arrows in their backs," he said.

S-A is also sensing a heady return to VOD.

"I think that operators were waiting for digital to
arrive because you can't do VOD without it. They sense that VOD is real," said
Jack Miller, director of applications and licensing for S-A's digital-video-systems
division. S-A is working with Diva, as well as with SeaChange and Concurrent.

Miller said operators realize that there is no
"single-purpose-box" solution, and that to be successful, "we must take
advantage of multipurpose boxes with analog, descrambling and two-way-modem
capabilities."

Concurrent, with 50 percent of its business coming from
international sales, will now turn more of its attention to the domestic VOD market, said
Corky Siegel, the company's chairman, president and CEO.

However, it is digital that will drive its VOD business.

"That's why the S-A deal was critical to
us," Siegel said. "There's a huge market out there, and we've been
getting lots of interest."

Concurrent's MediaHawk video server is scheduled to be
deployed with S-A's Explorer 2000 set-tops later this year.

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