October 31, 2006, 12:00 AM

Movie madness

The shape of things to come: How video on demand may restructure DVD rentals and sales.

Seven years ago Netflix Inc. shook up the movie-rental industry by enabling movie lovers to go online and rent DVDs, which are shipped and returned via regular mail. Today video on demand services may very well be ushering in a new era in how movie buffs rent, purchase and watch films after their initial ­theatrical run. This year Amazon.com Inc., Apple Computer Inc. and Instant Media, a company launched in May by Buy.com founder Scott Blum, have joined pioneers Guba.com, CinemaNow and MovieLink to leverage technology and market developments that are making a new business case for video on demand.

“We’ve seen more changes in the industry this year than we’ve seen in the past decade,” says Darren Giles, co-founder and chief technologist at CustomFlix Labs Inc., a company acquired by Amazon.com earlier this year that specializes in ­digitizing limited-run and old movies and manufacturing on-demand discs, which it mails to customers.

Amazon’s acquisition of CustomFlix-coinciding with its recent launch of the separate Amazon Unbox video on demand service-speaks volumes about the future course of the market for consumers renting and buying films and television programs online. While companies like Netflix have long expected that Amazon would launch its own video rental service, it came a bit out of the blue that even the world’s largest Internet retailer would invest in two different types of video on demand, also known as VOD.

Blossom
The blossoming video on demand market is showing a flexibility for supporting broad ranges of both content and distribution. It’s not just for video viewed on TV screens-the new batch of services cater to the viewing of recorded films and TV programs on desktop computers, laptops and other mobile devices as well as television sets.

“We see great potential in the VOD market and are ­committed to being a leader in the space,” says Doug Craig, vice president of programming and new media at Discovery Communications Inc., a provider of video programming content whose more than a dozen TV channels include The Learning Channel, The Science Channel and Discovery Times. In addition to creating a new line of sales, he adds, video on demand offers a new channel for advertising revenue through ads distributed through cable TV on-demand programming and enhances customer acquisition strategies.

Supporting the rise of video on demand is a combination of ­developments in the market and the technology, experts say. “There are a number of ­rising tides that met at the same time,” says Bart Myers, senior vice president of product development at video-sharing site Guba.com, which recently added the sale of movie downloads to its offerings.

The largest single driver of video on demand may be the spread of broadband Internet access, which makes it possible to download full-length features and begin watching them within a few minutes, according to Amazon.com and other merchants. Broadband now accounts for about 44% of U.S. households, about 50 million people, according to multiple reports.

Fifteen percent of broadband consumers watch video online at least once a week, Jupiter Research found in a July 2006 survey. Although these numbers include all types of online video, including free content generated by consumers on sites like YouTube and MySpace, the overall research points to a strong demand among a growing number of consumers for access to video content when and where they want it-a dynamic that ­obviously portends well for on-demand ­movies, Myers and others say.

In addition to broadband, new technology that supports video on demand, he and others say, includes better video cards, flat-panel computer screens that display high-­resolution images and DVD compression technology that enables consumers to receive files huge in size of high-­quality images through quick downloads.

The importance of being earnest
Still, while few in the movie and television program rental and sales industry doubt the importance of video on demand in the market, there are plenty of questions ­regarding just how fast it will take off.

The two most common arguments against a fast take-off are that there will be only a limited number of recent movies available to the video on demand format over the next few years and that there is no reliable and efficient means of transferring downloaded videos from PCs to televisions. Recent growth in the sales of large-screen and high-definition TVs, experts say, reinforces where consumers want to view their home video entertainment. And the rise in broadband households still pales compared with the 86% of U.S. households with VCRs and/or video-cassette ­recorders or DVD players.

“There’s a huge, crippling difference between online distribution of video and all other formats-online distribution lands the video on your computer, and that’s not where consumers want to watch movies,” says Josh Bernoff, vice president and principal analyst at Forrester Research. “That was true when Movielink started doing online downloads, and it’s true now with Amazon and Apple doing it. Until there’s a simple way to connect a computer and a TV set, the video download business will be a footnote in the video distribution landscape.”

Moreover, he and others add, movie studios largely still follow a distribution model that starts with theaters, followed by DVD sales and rentals, then video on demand. With huge contracts for wholesale sales of DVDs to Wal-Mart Stores Inc., Netflix and Blockbuster Inc., movie studios are in no hurry to migrate to video on demand, experts say.

Further, there are market battles within studios themselves. “Each studio has a division for DVD sales and another division for video on demand,” says Myers. “The online sales divisions are trying to offer a competing product while the DVD divisions want to protect their turf.”

Video on demand also has some catching up to do regarding viewing features available on DVDs, which offer extra content like behind-the-scenes documentaries and deleted scenes not typically offered through video on demand. “For now, and the near future, it’s a DVD world,” says a Netflix spokesman.

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