Vivendi Deal Could Make On-Demand Films Viable

Breaking ranks with the other major Hollywood studios, Vivendi Universal has struck a long-term agreement to license its movies to cable operators for new video-on-demand services that are considered the next big growth opportunity for the cable industry.

Vivendi acknowledged late Thursday that it has signed a deal with In Demand, a cable programming distributor that is owned by four of the nation’s top cable operators: AT&T; Broadband, AOL Time Warner Inc., Comcast Corp. and Cox Communications Inc.

The companies are expected to announce the deal today.

The agreement could kick-start movies-on-demand services that cable operators have been slow to deploy without rights to big movies. These services allow cable subscribers to order movies whenever they want by the click of a remote control, instead of having to drive to the video store or wait for one of the prescribed start times on a pay-per-view movie channel.

Current releases, however, still won’t turn up on television until well after they are available at video rental outlets.

Although cable operators have been pushing to get releases at the same time as video stores, Hollywood has been unwilling to budge, afraid of cannibalizing its biggest source of revenue: Blockbuster Inc. Vivendi Universal held the line as well, releasing new movies to In Demand for video-on-demand services 45 to 60 days after their availability for rental, according to sources close to the negotiations.

That is the same time that feature films are available on HBO, Showtime, Starz or pay-per-view channels.

Neither In Demand nor its owners would comment Thursday.

Vivendi broke a yearlong stalemate, seizing an opportunity to extract favorable terms from cable operators for being first among the major studios to sign a long-term deal. Two sources involved in the negotiations said the company received a signing bonus, estimated at less than $5 million.

Under the deal, Vivendi will receive about 60% of the revenues cable operators collect from customers who order the studios’ titles. That is less than the 70% that studios have been demanding but more than the 50% they now receive from operators for pay-per-view movies.

Cable industry sources said the deal will give Wall Street comfort that cable operators will roll out these services on the schedule they have promised.

For instance, AOL Time Warner has been holding back on deployment in 20 markets, waiting for studios to relinquish long-term rights to their movies. Other operators, such as Charter Communications Inc.’s system in Pasadena, have rolled out the service with limited recent releases, children’s programming and old movies.

For a host of economic reasons, Hollywood studios have held back rights from cable operators. Studios want better terms than cable operators give them on pay-per-view movies. One top movie executive said the studios have no reason to rush because video-on-demand services are still available to only a few million of the nation’s 70 million cable homes.

Studios also worry that easy access to movies over digital cable could give consumers less incentive to buy digital videodiscs, an exploding source of revenue, or to rent movies. Sales and rentals of home videos accounted for 55% of the studios’ $17.4 billion in U.S. revenue last year from feature films. By comparison, theaters accounted for 22%, and pay-per-view television and video on demand, only 2%, said Tom Adams, president of Adams Media Research in Carmel Valley, Calif.

Bad blood between the cable industry and Hollywood is also a factor in the stalemate. After watching the cable industry build billion-dollar franchises such as HBO and Showtime on the strength of hit Hollywood movies, the studios have been reluctant to help In Demand become a movie juggernaut.

Studios still complain about being burned by cable operators on pay-per-view movies. Rather than being the blockbuster revenue generator that cable promised, pay-per-view has been a bomb, largely because of poor marketing and low buy rates.

“Studios are looking to eliminate the middleman wherever possible,” Adams said. In pay-per-view deals of the past, In Demand has taken a 10% cut of the revenues.

Many want to cut deals directly with cable operators.

For the last year or so, the studios also have been exploring ways to bypass cable operators by going to consumers directly over the Internet. Led by Walt Disney Co., News Corp. and Sony Corp., the studios are working on new ventures to sell subscription services for downloading or streaming movies over the Internet. Yet most studio executives acknowledge that such a business won’t be commercially viable for at least five years because of the time it takes to download and the poor quality of streaming movies.

Some analysts and cable executives wonder if the cable industry will ever make enough money to justify the huge investment in video-on-demand.