PVRs Scrambling to Offer VOD TV Services.

Next year is shaping up to be a banner year for video-on-demand (VOD) services, especially with the introduction of TiVo and ReplayTV set-top boxes that now allow viewers to digitally record programs. Starz Encore Group's vp of SVOD (subscription video-on-demand) Greg DePrez commented, "We are on the cusp of massive rollouts ... We expect next year to be a major year for VOD." With the development of the aforementioned competing personal video recorders (PVRs), cablers and telcos no longer have to wrestle with the problem of where to cache [*] a movie or how close to the home that storage capacity needs to be.

With the proliferation of telcos delivering TV services through DSL, the reengineering of cable systems to meet upcoming digital mandates and the advent of PVRs, many companies are now able to offer something akin to video-on-demand.

These include VVOD (virtual video-on-demand), where viewers can order movies to view the next day at their leisure, and SVOD, where subscribers to a premium movie service have access to that month's releases at any time. Yet, there are still a few problems: the limited storage capacity of the service provider and a debate if it's cheaper and more efficient to store movies at the central head-end or at the hubs. Until such issues are resolved, distributors will not be able to offer their entire library of movies on a pay-per-view video-on-demand model.

TiVo disclosed last January an intent to co-develop a video-on-demand function for its recorders by first quarter 2001 with Blockbuster, the home-video behemoth. Morgen Guenther, vp of Business Development for TiVo, announced, "That's both a content deal as well as a 'development' deal, we're in the development [phase] right now." As part of the arrangement, both companies are working on the structure of the service, from technical aspects to marketing. Karen Raskopf, senior vp of Communications at Blockbuster, explained, "We're bringing our database, brand, studio relationships and relationships with content providers [to] TiVo." Blockbuster affords TiVo some 65 million active memberships (worldwide) and more than 4,000 corporate brick-and-mortar storefronts where TiVo will be able to place POP (point-of-purchase) signage advertising its PVR service.

One concern for both home-video retailers and pay-per-view operators is the possible shift in distribution windows. Raskopf contended there would be no change in these windows. "We don't have control over windows, that's something that's controlled by the sruchos. It certainly is not our intent to change the windows." Srarz' DePrez added, "I don't think the home-video market is threatened much. It is still far and away the most lucrative to Hollywood. Overall, film rentals average $15 billion per year with half of that going to Hollywood. The pay-per-view industry paid Hollywood a little over $1 billion [last year]." However, it has been suggested by industry experts that the mass rollout of a VOD service may necessitate a window adjustment once the revenue derived from that form of distribution starts rolling in.

Blockbuster and TiVo are not developing a true video-on-demand service for their initial rollout, rather TiVo's Guenther described a model where customers will have a VVOD capability. "When we say virtual video-on-demand, it's the ability to offer on-demand content personalized for [the consumer]." New movies will be a part of this offering, but evergreens will play a large role as well. In fact, the libraries of film made available by Blockbuster will be targeted to each customer's taste: If a customer frequently orders westerns, then westerns will more often be on the menu. Blockbuster has already brokered a nonexclusive agreement with MGM concerning its catalog of film for streaming or downloading via the Internet and PVR technologies. At this point, however, the actual revenue model has not been fully defined. The cost for the service "can be a subscription fee or on a pay-per-view basis,". noted Guenther.

As for the actual delivery mechanism, TiVo is exploring both DSL [phone] lines and satellite's DirecTV (as part of the deal between Blockbuster and DirecTV). Additionally, TiVo and DirecTV recently released a two-tuner set-top box that allows for data and/or video delivery over a second tuner as the consumer enjoys an uninterrupted program from tuner number one.

TiVo's chief competitor, ReplayTV, is not standing still on the issue of VOD rollouts. An announcement made last March teams ReplayTV with the Starz Encore Group, the premium channel service that has also invested in TiVo. Starz is introducing an SVOD model, where its existing subscribers can have access to Srarz' monthly panoply of films-on-demand instead of when they're scheduled. Starz director of Corporate Communications, Eric Becker, explained, "What we know from empirical data is that there is more revenue per subscriber generated for the DBS and cable operator in a subscription model rather than a transactional model....We think this is going to be the real driver for the whole [VOD] category."

It was confirmed that Starz was also talking to Replay's competition, TiVo, about a similar service, but neither party would comment as to the status of those discussions. Blockbuster is likewise exploring VOD opportunities beyond TiVo as it recently signed a 20-year agreement with Houston-based Enron, a utility and energy company that trafficks in Internet bandwidth. As soon as this fall, Enron and Blockbuster hope to offer some 500 movies to consumers with DSL lines (see story on page 58). The companies plan to expand their VOD offering to include approximately 7,000 films.

One of the concerns with delivering a digital signal (especially if it can be stored) is piracy. TiVo has already ensured content owners that programs stored on its set-top hard drives cannot be replicated digitally. Methods of scrambling its signal are being addressed as well. Conditional access to the signal will be used to prevent pirating from a satellite provider. "If you bring it through a DSL line, you would use an encryption [system] that's acceptable to us, Blockbuster and to the studios," Guenther conveyed. "That's really where we're spending our efforts right now and why we projected this would be a service that would be available early in 2001."

TiVo currently has a delivery mechanism in place for its TiVo Takes channel that may expand its VOD offerings to over-the-air receivers. "We're doing that using some of the broadcast spectrum of the PAX TV Network and dropping that into the box at 5:30 a.m. When you start looking at off-hours delivery, you really don't run into all the streaming difficulties and you're making efficient use of bandwidth. That's the model we want to use here," articulated Guenther.

Starz' Greg DePrez addressed how cable operators are conquering the bandwidth issue inherent in VOD services. "[Cablers] are generally designing their network to handle a simultaneous [VOD] load of 10 percent of their digital customers....One of the things cable's new digital upgrades have allowed them to do is split the nodes, so that from [those nodes] they could be serving 1,000 homes. Of those 1,000 homes, maybe 700 have [analog] cable and 200 have digital cable. Therefore, they need to have 20 channels reserved for that node for video-on-demand use....If they find at some point they need to serve not 10 percent, but 15 percent or 20 percent of the homes simultaneously, the cable systems have additional fiber as well as ways to insert additional signals into their current fiber."

According to DePrez, one analog channel can accommodate between seven and nine digital, pay-per-view channels depending on the bit rate that's used to encode the movies. "There are roughly 27 megabits per [analog] channel, so if you're encoding movies at a 3.5 megabit rate, that's seven simultaneous [VOD] streams that could be sent over that 6 MHz of space." This is using the 64 QAM (quadrature amplitude modulation) technique. If, as DePrez predicts, cablers adopt a 256 QAM scheme, "they would be able to do between nine and 11 video-on-demand streams per 6 MHz. So the capacity will be getting a little bit better."

Even though TiVo has identified Blockbuster as a "best of breed" company, TiVo is exploring other partnerships. "All the studios say they're going to do this themselves and we'd be delighted if they do," remarked Guenther, "but historically the studios have said they don't need a third party consolidator [like Blockbuster]."

Checking out TiVo's customer base, the most recent report claimed 35,000 TiVo subscribers. "We're significantly ahead of that," boasted Guenther. "I think by the end of the year, you'll see numbers for TiVo in the several hundred thousand range.

The PVR company has partnered with BSkyB in the U.K. "The next step beyond that will be something pan-European and then Asia. Asia is a natural step for us with Sony as a partner." In addition to rubbing elbows with the internationally-recognized Blockbuster brand, TiVo has also signed agreements with Internet Service Provider AOL (which is active in Europe) and DirecTV (which has a large subscription base in Latin America). Blockbuster, with stores operating in 26 countries, has likewise entered into a multi-year strategic alliance with AOL. Other TiVo partners with international concerns include E! Entertainment Networks, HBO, NBC, The Weather Channel and ZDTV.

TiVo's arrangement with AOL includes a $200 million equity investment from the Internet giant and a three-year deal making TiVo a programming partner in AOL's new AOL-TV enhanced-TV service. Both TiVo and AOL have agreements in place with DirecTV to incorporate each of their services into set-top boxes later this year. "Where do those services fit on a worldwide basis?" pondered Guenther. "I can only say that all of the partners have that same question."

(*.)cache (pronounced "cash"): To store programming at a head-end or node.

Telcos Also Dialing VOD Opportunities

As cable companies and satellite providers assemble their VOD lineup, telcos are fast entering the premium-service market with their own VOD blueprints in tow. Canada's PixStream is dialing up partnerships with telephone-operators-turned-TV-service-providers across the planet by developing a video head-end specifically for them. Or, as Dave Caputo, PixStream's vp of Marketing put it, "There's a war between telcos and cable companies to deliver an array of services to the home. That [includes] phone service, high-speed Internet, TV entertainment and video-on-demand, a form of time-shifted television."

In the U.K., Yes Television is providing a similar service with video servers manufactured by nCube. Yes TV's director of Communications, Steve Garvey, stated, "We provide customers the technology of the Internet at very high speeds but over a closed network. We don't [stream] at anything less than 2.3 Mbps and more often at no less than 4 Mbps."

Caputo cited PixStream's 10 trials and two deployments (Kingston Communications in the U.K. and NBTel in Canada) around the world as a blossoming trend. "They all have the vision of doing to TiVo and ReplayTV what they are able to do with the answering machine, that is absorbing that functionality into the network." PixStream has concocted a model whereby consumers have VCR-type control over live programming in much the same way as PVR owners do, but without the set-top box. Here, the live programming is streamed from the head-end at 3.5 Mbps while another stream of the same program is transmitted at 1 Mbps. When a viewer resumes watching a program after a pause, he/she receives the broadcast at the lower bit rate (which delivers VCR-quality video) unless, through fast forwarding, he/she catches up to the live broadcast. For the video-on-demand deployment, movies are streamed at a bit rate ranging from 2.5 Mbps to 3.5 Mbps. Asked if its video-on-demand offering would overload its DSL capacity, Caputo replied , "This is a completely engineered network [with the capacity of] a minimum full-rare ADSL, which gets you 6-8 Mbps, or VDSL [very-high-speed digital subscriber link], which gets you up to 26 Mbps."

Like an engineered cable network, both PixStream and Yes TV conduct regular trials and pilots to ensure its video delivery, both live transmission and on-demand. Garvey remarked that "there has never been on our service or any other VOD service a peak contention ratio of more than 15 percent, which means as long as you provision your bandwidth for that, you will not have any dropout of service."

Two drawbacks are technical and financial limitations. DSL subscribers must be within 6,000-8,000 feet of the head-end to receive service. Plus, the telco companies must supply each of their nodes with video servers and distributed disk drives (mirroring the system at the head-end), which can be very expensive. Still, offering a subscription-based television service over pre-existing connections seems attractive to the telcos. "There are many more people who have telephone service than have cable service. If now you want to deliver TV entertainment, you can do it over the same twisted pair [of phone lines] that already exists in the home, rather than digging up the roads to put in a new cable plant," noted Caputo. "The real breakthrough for [television-service offerings by] phone companies has been the Internet Protocol [IP]-multicast technology -- it's a way to transmit over a digitally-switched [telephone] network. If you put a stream over an IP-multicast, it doesn't matter whether there is one receiver or 1,000 receivers watching that IP-multicast, it's the same amount of bandwidth."

Garvey concurred. "It means you can integrate the VOD service you have with other services that can include access to the web, broadcast television and e-mail....Those four offerings [VOD, Internet access, TV and e-mail], will be the key drivers in consumer offerings for the next year.

The deregulation of telecommunication rules throughout Europe has provided the impetus for telephone companies to dive into the television business overseas. Garvey explained, "There's a European Union directive at the moment which forces the national governments belonging to the EU to open up their telecom networks to independent service providers like us." As a result of such deregulation, Yes TV has partnered with British Telecom in the U.K., Skyline in France and Telenor in Scandinavia.