Follow the Logic

Yes, sometimes it’s useful to read your junk e-mail. Even a modest spam glutton can occasionally pick up whiffs of tech trends in the air. Recently, for example, amid the various porn, Viagra and get-rich schemes, my inbox has been piling up with pitches for DVD copying software. "Copy any DVD with your home PC!" screams one typical ad. "Absolutely FREE! DVD Copying," exhorts another.

This got me to thinking and naturally led me to my favorite game of "follow the logic." If mass copying of copyrighted digital music content combined with a Web-based peer-to-peer distribution network produced Napster, then what do you have when mass copying of digital video content is combined with a broadband peer-to-peer distribution network that links homes employing such high-tech storage and playback gizmos as personal video recorders?

It’s just another chapter in the growing saga of VOD that we’ll one day look back on as the story of how a chicken-and-egg dilemma, combined with a deep fear of technology’s onrushing headlights, led to another bunch of flattened media conglomerates – in this case, the Hollywood studios.

The studios, you see, don’t want to play follow the logic. In August, five of them – led by Sony – announced their pitiful response to potential Napsterization by unveiling an Internet-based distribution plan under the working title of Moviefly; the other two majors – Disney and News Corp. – have had their project under wraps as well.


Not much has happened in the months since then to dissuade me of the notion that the studios are still stuck in a chicken-and-egg conundrum: they can’t generate solid VOD revenues without a distribution system and the main distribution system available to them – namely, cable – can’t sell VOD without recent hit movies.

Cable operators and their VOD partners, including DIVA, Intertainer and iN DEMAND have achieved some spectacular initial successes, including 30 percent buy rates in some markets despite limited front-line studio product and pricing, (roughly $4 per flick) that’s hardly enticing. Latest industry estimates peg the number of cable subscribers with VOD available to them at more than a million.

iN DEMAND – the one to watch because of its cable investors (including AT&T Broadband, AOL Time Warner, Cox and Comcast) – has managed to pull together deals with Universal, Sony’s Columbia Tri-Star and DreamWorks, but iN DEMAND president and CEO Steve Brenner isn’t rejoicing yet.

He and various cable bosses have swallowed a tough revenue split (reported to be 5 percent for iN DEMAND, 35 percent for the MSO and a whopping 60 percent for the studios) because they know they need more top theatricals to make cable’s VOD service a stronger destination. Without that, it’s going to be tough shifting consumer behavior away from rentals.

"Frankly, we don’t have enough product to make this a really attractive store," Brenner said. "We need a couple more major (studios)."

But studios don’t want to cannibalize their pay-per-view revenues (even though PPV has never generated the buy rates VOD could easily garner). The studios also don’t want to alienate the video stores (even though those are about to go the way of the dinosaurs). So they have held back their theatricals from VOD release until after PPV and rental stores have had their turn – or have not done significant VOD distribution deals at all.

What the heck are they waiting for?


Hardened industry cynics perceive yet another sinister studio plot to eliminate the middleman. Although Moviefly is focusing on retail Web distribution and leaving each individual studio to cut its own cable distribution deals, the alliance between News Corp. and Disney is rumored to be eyeing the wholesale business – doubling their leverage in negotiations with operators and possibly creating their own branded destination in the VOD space.

Security concerns, while oft-cited and certainly legitimate, are rapidly approaching a moot point. Studios and VOD technology providers have been jousting over various encryption schemes. But if I can copy a DVD onto my PC or PVR hard drive – or, more likely, obtain a copy through a P2P network – no amount of encryption is going to stop me from watching what I want to watch.

The studios are really missing the point, and that has everything to do with consumer behavior.

Brenner gets it. He and some of his more enlightened cable cohorts envision a VOD viewer’s paradise, a virtual store with your choice of films, documentaries, classic sports matchups, how-to videos – you name it – all available at prices that drive usage, not some corporate suit’s limited vision of the bottom line.

Brenner and his cohorts even put together highly appealing subscription VOD, or SVOD, packages that give viewers access to – say – ESPN’s or HBO’s library. Some cable renegades say SVOD subscriptions to HBO, Encore or Showtime constitute a great end run around recalcitrant studios.

But there the studios stand, like deer frozen in various stunned poses, mesmerized by VOD’s looming high beams.

It’s hard not to sympathize with them after watching Napster steamroll its record industry counterparts. But for years the record industry made the mistake of charging far too much for discs that cost far too little to produce – never giving customers the flexibility of choosing their own music. What had begun slowly but naturally with mixed tapes only jumped to light speed with Napster, MP3 files and CD burners.

And now it’s the studios’ turn.

Oh sure, no one wants to watch a movie on a computer monitor. And no one wants to wait hours, even under broadband conditions, to download a feature-length film. But it’s just a matter of time before broadband connections, networked homes and PVRs create the right environment for a video Napster.

The studios and the cable operators have a rapidly narrowing window of opportunity to follow the logic and give customers what they want, when they want it, at a reasonable price – to co-opt, not control, consumer behavior.

Or we’ll be taking matters into our own hands.

You can reach Will at