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VOD Takes to the Airwaves

Over-the-air broadcasters officially entered the VOD business last week with the launch of Disney's MovieBeam service, which uses analog spectrum to deliver movies from major Hollywood studios to 160-GB set-top boxes equipped with a small antenna.

The service was rolled out in Jacksonville, Fla.; Salt Lake City; and Spokane, Wash. Plans are for rollout across most of the country by the end of next year. Subscribers rent the MovieBeam box preloaded with 100 movies for $6.99 a month and will have instant rental access to those titles each month. Besides the monthly fee, viewers will pay for 24 hours of access to each movie: from $2.49 for older titles to $3.99 for movies either in or close to the current VOD window.

MovieBeam will pay ABC O&Os and PBS National Datacast member stations to deliver the content (PBS stations are providing the signals in the first three markets). According to Salil Mehta, executive vice president, corporate business development, for Walt Disney Co., it costs about $250,000 to install the equipment at the TV station's transmitter for inserting the delivery stream into the active portion of the analog broadcast signal. The service requires delivery speeds of a little more than 1 Mb/s to send 10 new movies to viewers each week, replacing the 10 oldest films. Such low setup costs reduce the burden on getting profitable.

"MovieBeam can break-even with very few subscribers," says Adi Kishore, media and entertainment analyst with the Yankee Group.

Disney is banking on attracting households that rent a large number of movies and pay a large amount in late fees. But, with companies like Netflix, Blockbuster and even Wal-Mart offering monthly contracts that don't involve late fees, the real challenge is to turn movie VOD into a solid business with a release window opening well after a movie is released on home video.

Mehta says Disney studies show that high-volume movie-rental families (eight to 10 titles per month) don't rush to the video store to get the new releases.

Bad movie "windows," however, have proved a big drag on cable's new VOD and 20-year-old pay-per-view businesses. Wary of jeopardizing their home-video sales to the likes of Blockbuster or Wal-Mart, studios release theatricals to PPV and VOD 30 to 60 days after titles hit home video. Such stale product has crimped cable and DBS PPV for years. Movie sales generated $1.5 billion last year, just 4% of cable-industry revenues. Without windows on par with home video, cable operators acknowledge, VOD will never be a big profit generator.

Still, Disney President and COO Bob Iger believes that there will be enough consumers interested in a hard drive loaded with 100 movies to get MovieBeam started until VOD services secure better windows. "The windowing strategy is a strategy that we're deploying going in. There's going to be a lot of changes in windowing in that business in general over the years. You're going to see a lot of different window offerings."

Mehta agrees, adding that the studios are aware that the way to grow the video-on-demand market is to offer a more attractive release date. "The time between the video-release window and the VOD window," he says, "will compress over time."

Even with the windows sorted out, the bigger challenge will be making sure retailers can convey to consumers what exactly the service is. Such retailers as Best Buy, Circuit City, Sears, and Magnolia Audio and Video have signed on to demonstrate the service and sign up customers (the set-top box is sent to subscribers via FedEx).

One industry segment that should welcome the new service is DBS. One trump card cable operators have held is VOD service, but MovieBeam weakens that selling position. Also, Mehta says, the capabilities of the box will continue to evolve with software updates, new types of content offerings, and even the possibility of wider pipes into the set-top.

Just how much of a competitor with cable VOD the new service will be remains to be seen. Cable's VOD offerings continue to expand beyond movies, including content from premium movie networks and even other networks, such as Comedy Central or NBC. Operators are also starting to roll out HDTV VOD, a capability that is not possible with the current MovieBeam service but could be if Samsung develops an HD-capable version of the box (the higher bandwidth requirements would also need the help of digital TV signals as opposed to analog signals).

Cable VOD won't have as large a footprint as the MovieBeam service could conceivably have by the end of next year. According to Kishore, cable VOD will be available to only 32.5 million homes at the end of 2006.

"Cable's VOD offering is limited by whose library it's offering," says Jupiter Research Senior Analyst Lydia Loizides. "MovieBeam has the same window as everyone else's VOD service, but [the hard drive] allows them to offer something that is a little richer and deeper."