On-demand set to change European TV biz model.

Although European rollout of on-demand services (such as VOD and SVOD) has been slowed by the high costs associated with upgrading the infrastructure, it is still widely seen as the next big thing in interactive application.

In the U.S., home video companies, such as Blockbuster, are investing in VOD movies on the Internet, to stave off cable and satellite operators, which are encroaching on their rental business.

According to recently published reports from Datamonitor, while revenues from DSL (high-speed Internet) video-on-demand will remain sluggish until large-scale rollout begins in 2004, the majority of European cable VOD operators will be in a better financial position because they will be able to include VOD as part of their high-speed Internet/telephony/TV bundles, thanks to advanced set-top box technology now being deployed at greatly reduced costs.

"The cost of a set-top box has much to do with the amount of silicon there is in it," said Andy Trott, chief technical officer for British set-top manufacturer Pace. "We're working with the latest generation of products, which means that we're using less silicon in a set-top box. This allows us to be more competitive."

VOD services over Internet Protocol (IP) networks are expected to grow to a total of more than 17 million users, generating over $1.9 billion in subscription and pay-per-view revenue during 2006, according to data from InStat/MDR. Sweden, Norway and Germany have already begun using advanced IP-based set-top boxes. VOD supplier*Intertainer and the Italian new media conglomerate Freedomland have also announced plans to form a joint venture to launch an IP VOD service for broadband customers throughout Europe called Intertainer Europe, modeled after Intertainer's U.S.-based broadband VOD service. It will feature both American and European-produced content.

European consumers have long-embraced interactive technology on their television sets, which is why VOD is a natural evolution there. According to a February 2002 study by Strategy Analytics, there are 32 million ITV households in Europe, compared to just 16 million in all of North America. Because of services such as Teletext, consumers are already conditioned to approach television as an interactive experience, not merely a passive one, which is still largely the case among U.S. consumers.

Beyond consumer acclimation, the fiercely competitive European marketplace, which includes cable, satellite and terrestrial delivery systems, also makes it fertile ground for new services such as VOD. Because European cable companies are playing catch up with public and satellite TV, emphasizing digital services is one way they can narrow the viewership and financial gap, because as of now VOD is not a service satellite operators can provide. According to reports by the Yankee Group, by 2006, 65 percent of all cable TV set-top boxes in Europe will be digital. Compare that to the U.S., where the National Cable Telecommunications Association estimates that only 49 percent of households will have digital services by then.

There are approximately 200,000 VOD users currently in Europe. But Screen Digest, a U.S.-based research company, projects Europe's broadband VOD user base will reach 2.6 million by 2005 and will eventually surpass the $2 billion per year pay-per-view market.

During the last quarter of 2000, Video Networks launched VOD commercially in the U.K. Although audiences remain limited, it is estimated that there will be a substantial increase in the number of subscribers to the VOD service by 2006. Among the factors that will drive the penetration is consumer experience, increases in availability of bandwidth and increased competition among the service providers.

However, not everyone is convinced the VOD breakthrough is imminent. "Video-on-demand is one of these things that everyone knows is going to be a messiah, but nobody really knows when it's going to be deployed," says Pace's Trott. The reason for the skepticism is VOD revenue margins are small, meaning it takes longer to pay for the system upgrades. For example, studios take up to 45 percent of pay-per-view profits, but are seeking 65 percent ofVOD earnings. This has made some European operators leery of foregoing pay-per-view services for true VOD.

"If you compare investment costs and buy rates and potential revenues generated, I think that near video-on-demand is still interesting," says Volcy Lesca, international business manager of Viaccess, the France Telecom-owned conditional access provider. "Maybe VOD will be the desired application, but nor soon. Near video-on-demand will remain a very good solution for a long rime.

Then there is the issue of advertising, which faces a radically different business model in a VOD world. Most agree the issue isn't if the model will change, but how to facilitate the inevitable evolution. Steve Mendelson, CEO, BradnX Management, noted, "Advertising has been the underpinning of TV since the medium began, and both industries are undergoing changes, so the question is: how do you bridge the divide between what advertisers need and how content delivery models are changing? The answer is, over time, both sides must work together to get the marketing message our. VOD will force networks around the world to be better brand builders."