A battle is forming. It's a battle, the outcome of which will involve billions of dollars. With possible monthly revenues of just $4-$5, from tens of millions of users, the annual revenue over a course of a few years quickly gets to billions. Concurrently, it's a battle for the hearts, and minds, and eyeballs of scores of millions of America's subscription TV consumers. It's also a battle for scores of millions of Americans in the nation's multiple dwelling units (MDUs). Video on demand (VOD) is the name of this battle, and it's coming to America.

Yet, VOD today has it's own set of struggles. VOD is battling competition from other content, competition from other forms of content delivery mechanisms (such as Digital Video Recorders (DVRs)), and competition from an economy that will stifle additional consumer spending on new forms of "beyond-video" entertainment.

Because cable operators today badly need a new form of incremental revenue, VOD is being hailed as the next opportunity. Within MDUs, cable operators are expected to have the first best shot at delivering new VOD technology and content. This is because, within buildings with multiple units, and certainly within those MDUs with hundreds (and more) units, the economics of VOD are expected to be much more favorable than those of the nation's many more millions of single-family dwellings. VOD is today also a cable-based product based upon the development of its technology and the melding of that technology to existing land-based infrastructures. Instead, many would argue that PPV has become more the franchise of the Direct Broadcast Satellite (DBS) industry.

Just as there are significant opportunities and challenges facing VOD in general, so too, there are challenges and opportunities facing the introduction of VOD to America's 60 million or so MDU inhabitants.

VOD Challenges

One of the biggest challenges facing VOD wherever deployed (and whether it is rolled out in single family dwellings or MDUs), is the competition it already faces from the hundreds of thousands of nationwide video store outlets, not the least of which include Hollywood Video and Blockbuster. To compete in this space, VOD system operators have to offer the variety of titles that these megastores typically offer. Huge libraries of videos require huge headend-based servers and other major infrastructure investments, all of which, not unexpectedly, will cost hundreds of millions of cable (and MDU) industry dollars. Successful integration of new VOD offerings will also require many score more millions in marketing dollars.

Another challenge for VOD includes getting consumers to pay a few more dollars a month in order to receive content will be available a few minutes sooner than today's Pay-Per-View (PPV) titles (which are typically available every half-hour or, at most, every hour).

Yet perhaps the biggest obstacle facing a pure rollout of VOD across the U.S. is the attractiveness of what is arguably a rival and competitive technology: DVRs. DVRs built into cable and satellite set-top boxes allow not only the robust pause, rewind and fast forward of real time video and audio, but DVRs also typically contain hard drives that record many, many hours of time-shifted content. Many argue that this makes them as good and better than just about any VOD product.

Yet, nothing is that simple, is it? To properly use DVRs requires learning, patience and some planning ahead. They are not as instantaneous as VOD is expected to be. Plus, DVRs are today encountering the wrath of Hollywood and others who chafe at the idea of super-DVRs that will automatically eliminate all commercials in a pre-recorded show, and store and possibly reuse hundreds of hours of digital quality content, all in the confines of the average user's living room or den.

VOD Opportunities

What are the VOD opportunities? Well, first most turn to how well PPV has done, especially in certain cable and satellite environments, and especially for cable in certain upscale parts of their franchise territories. VOD then becomes a higher form of PPV, a PPV on steroids, if you will.

VOD is also one of the few arrows in cable's quill that, if successful, will allow the cable industry to begin covering some of the costs of upgrading from analog to digital services. This is a big deal. Additionally, VOD is one of the few advantages cable may be able to play in the years ahead, as it battles the efficiencies and qualities of the rival Direct Broadcast Satellite (DBS) industry. No doubt aware of this possible economic and strategic advantage, masterminds like Charter Cable's Carl Vogel and Paul Allen are placing solid resources behind the VOD opportunity.

Wrapping VOD Up

In summary, VOD has been hyped a lot and today there's not much real data backing it up. Thus, VOD still has a long way to go. It also, no doubt, as outlined above, has some significant questions to answer. VOD, however, is also a ray of hope for cable operators, and for MDU owners and operators, who can begin offering solid, financially sound subscribers in niche markets, the opportunity to push a button or two, in order to acquire that magical key to the golden door of subscription TV: affordable choice.

About the Author

Jimmy Schaeffler researches, analyzes and writes this monthly report. He is a subscription TV analyst at The Carmel Group (www.carmelgroup.com), a publisher of industry databooks and the monthly newsletters DBS Investor and Satellite Radio Investor, and a consultancy based in Carmel-by-the-Sea, CA. The company specializes in telecommunications, computers and the media. He can be reached at e-mail jimmy@carmelgroup.com or at telephone number 831/643 2222.