Video on Demand Not Yet a Big Movie Player

With video on demand, the cable TV industry thought it had a blockbuster service that paid off for everybody but the local video store.

The new technology gave consumers the ability to start, pause, replay and fast-forward movies without having to run back and forth to Blockbuster. And it promised to generate more money for cable operators and movie studios than pay-per-view services, which have attracted a tiny audience.

Despite the upsides, however, video-on-demand services are off to a slow start. Although some in the cable industry say Hollywood is hamstringing them, studio executives say cable operators have only themselves to blame.

The main complaint from the cable side is that the studios withhold movies until long after they’ve been released on DVD and videotape. The average lag time is about seven weeks, with delays often running as long as three months.

To video-on-demand advocates, the waiting period smacks of the entertainment industry obstructing new technology, just as it did initially with videocassette recorders.

The ultimate vision for video on demand is to give movie fans access to any movie whenever and wherever they want to watch it. Although technology can fulfill much of that promise today, the major studios have tucked all the on-demand services into the same slot as pay-per-view.

That means the services have to wait for films until well after they have appeared in theaters and discount cinemas, on airlines, in hotels and finally in video stores.

This late “window” for video-on-demand movies is “the single biggest contributing factor” holding back growth of the business, said Kip Simonson, vice president of sales and marketing at Charter Communications Inc.

Noting the growing threat of online piracy, video-on-demand proponents say the studios need to be more aggressive in making their wares available on demand, whether through cable, the Internet or other digital technologies.

Otherwise, they say, people are more likely to turn to bootlegged movies online, just as they have with music.

Studio executives and analysts say ineffective promotion by the cable operators is hurting the new services more than the movie release date. And although the studios stand to make more money from video on demand than they do from video store rentals, they’re worried about what might happen to a much bigger cash cow: DVD and VHS sales.

Larry Gerbrandt, chief operating officer for research firm Kagan World Media, said “there’s no way [cable] video on demand services can compete” with the profit margin on DVD sales.

“Until somebody can come up with research that absolutely says there’s no impact on DVD sales, that’s going to be the first concern,” Gerbrandt said.

“Nobody has hard data on that,” said one high-ranking studio executive who asked not to be named. “Obviously, we’re all quite concerned about it.”

In addition to the cable operators’ services, companies such as Movielink of Santa Monica and CinemaNow Inc. of Marina del Rey offer on-demand movies through the Internet, although the picture quality isn’t as good as a DVD and moving a video from computer to TV can be a challenge. Walt Disney Co.’s experimental Moviebeam service uses television airwaves to load movies wirelessly into a set-top box, giving viewers dozens of on-demand titles from which to choose.

While the studios quietly study how video on demand might affect video sales, the cable industry’s leading supplier of video-on-demand programming, In Demand of New York, is publicly touting its research on the effect of release dates.

The company, which is owned by three of the top cable operators, looked at 100 movies from 2003 that reached video-on-demand services 30 to 90 days after they were released on DVD and VHS. On average, titles delayed less than 45 days attracted 50% more on-demand viewings than those delayed more than 45 days.

It found a similar disparity when it compared films from the same genre or with the same star that had different release times. .

For example, “Minority Report” and “The Bourne Identity,” two summer action movies from 2002 that featured popular actors running for their lives, drew nearly equal numbers to U.S. theaters. But “Minority Report” attracted 60% fewer on-demand viewers. It was released 73 days after it came out on DVD and VHS, compared with 45 days for “The Bourne Identity.”

Sergei Kuharsky, head of marketing for In Demand, said the vast majority of people who rent movies do so within 30 days of their release on disc or tape, when 80% to 90% of the home-video revenue is generated. Video-on-demand services don’t receive the average movie until 52 days after the video stores get it, Kuharsky said.

Simonson of Charter said the situation resembles the late 1970s, when he ran the second video store to open in Southern California. The video rental market was just emerging, and a “new release” on VHS was a 3-year-old movie.

“There was the chicken-and-the-egg there, the same thing as here,” he said, noting that as more movies became available on tape, more people bought VCRs.

More than 90% of U.S. homes have a VCR or a DVD player, and only about 10% are expected to have cable video-on-demand service by the end of the year. But Bruce Leichtman, an independent media researcher, said the potential audience is much greater -- video on demand is available to half the homes in communities served by cable.

Still, even the people who have video on demand don’t make much use of it. As of June, Leichtman said, less than 40% of the people who could order any kind of video on demand, including the free television programs offered in growing quantities by cable operators, have done so.

Those statistics underscore the belief at many studios that video on demand is languishing because cable operators haven’t educated the public about the new technology.

Jeff Calman, executive vice president of video on demand and pay-per-view for Time Warner Inc.’s Warner Home Video, said his company looked at long-standing on-demand services from a pair of unnamed cable operators. In two communities, Warner found that half the subscribers were unaware of video on demand. In a third area, most customers knew that video on demand was available, but they didn’t know how to use it.

“There are many, many other factors that are of far more importance” than release dates to building video-on-demand usage, Calman said.

There’s no question that on-demand services offer Hollywood a better deal than video stores do. Typically, on-demand services give 60% of their rental fees to the studios, while the video stores pay less than 50%.

But to the studios, video on demand is just one piece of a large puzzle.

“All the studios are looking at video on demand and other forms of digital delivery to see how they can optimize the total amount of revenue collected,” said Peter Murphy, a Disney senior executive vice president. “You can’t look at any one window in isolation.”

Even if shorter windows quadrupled the video-on-demand business over the next few years, “it would still be much less than 10% of the whole home video market,” said Crossan R. “Bo” Andersen, president of the Video Software Dealers Assn.

“We are talking about marginal growth in comparison to the contribution that home video makes to the industry,” Andersen said.

Another factor is the studios’ fear that viewers will record and store on-demand shows, eliminating much of the incentive to buy a movie on disc or tape. In particular, studios are concerned about digital recorders with hard drives that can store more than 80 hours of video and computers that can digitize, copy and redistribute films over the Internet.

“There’s still no foolproof system out there for preventing the duplication of films,” said Nick Cincoli, an attorney at Morrison & Foerster who previously worked at Disney and Sony Pictures. “So people within the studios are concerned about putting their prized films out there.”

On the other hand, some studio executives say, letting movie lovers watch films on demand through cable or the Internet may be the best defense against piracy. And with hard-drive powered portable video players starting to hit the market, studios are under growing pressure to move beyond the current distribution model.

“We need to publish our content in a format that allows people to use it,” Murphy said.

Otherwise, he said, the studios risk making the same mistake as the record companies, which waited too long to offer fans a legal way to fill their computers and MP3 players with music.

“We want to make legitimate content available to people in the formats that they will be using,” Murphy said. “And ultimately, consumers will decide in what format they want to view their movie.”