Video on demand on the horizon

Network speeds have increased from about 1Mbps in 1974 to 1Gbps today, to a projected 100Gbps in 2014 and 1Tbps by 2020. Clearly, networks haven’t peaked – we’re pushing more data down our networks and using algorithms to compress it.

Let’s relate this growth to North American consumers in their homes. Networks give consumers choices – and one of these choices is video on demand.

Imagine for a moment that you could view your e-mail only between the hours of 8 a.m. and 11 a.m.

Furthermore, imagine you could read e-mails only in the order received, and suppose you had to stop reading and sending your e-mail every eight minutes to view an e-mail advertisement from Bill Gates or Larry Ellison telling you what exemplary citizens they are. You would go ballistic, but that’s exactly what you put up with today as a consumer.

You didn’t know it, but you signed a pact with the devil: free entertainment for intrusive barrages of messages. But that’s now changing as a result of both digital video recorders (DVR) and your cable company offering you video on demand.

Bruce Leichtman, who used to run The Yankee Group’s cable research group, predicts that by 2008, video on demand and DVRs will each be in more than 30 million U.S. households, and 15 million households will have both. Access to video on demand won’t be free. The content providers and the networks need two things: a new source of revenue and some protection against the incursion of direct broadcast satellite, which currently is in about 23 million households in the U.S., about half of what the cable industry has (58 million).

In addition to video on demand and DVRs, broadcasters are toying with “datacasting” – using portions of the broadcast signal for one-way video transmission – but this will require specially designed receivers or PC tuner cards. BellSouth Corp., Verizon Communications Inc. and SBC Communications Inc. plan to bring fibre to about 2 million homes, which could give consumers even more choices. I recently heard about a start-up that is using technology developed by John Fanning (of Napster) to allow peer-to-peer video on demand – and built-in protection of the content, ameliorating the issue of “Napsterizing.”

What will consumers do with all these options? The real question is what will programmers do, because consumers only will react to what is available. Years ago I invented a cute term – TAFFIES, short for technologically advanced families. There are a little more than 100 million households in the U.S., of which TAFFIES make up about five per cent – but they are the early adopters.

It’s not easy selling to this elite group, but once they buy in, then the early majority (30 per cent to 40 per cent of the market) usually will follow. This is what marketers love: when the large numbers begin to pile on, and there is evidence that this is starting to happen. Bruce Leichtman says that last year, 45 per cent of digital cable subscribers with video-on-demand capability bought programming, up from 28 per cent in 2002.

That’s huge. There is a chicken-and-egg situation with video on demand – the infrastructure has to be built before the applications find a home. Sure, it takes about 10 years to coalesce – and in 10 years, those broadband networks will be able to handle even more programming.

I am a “West Wing” junkie. I schedule nothing on Wednesday nights at 9 p.m., rush home to watch reruns on Bravo at 7 p.m. and buy the DVDs of the show the week they come out. TiVo solves some of my problems, but not all. I want to watch the episodes before they are broadcast – and I will pay US$2 per week to be able to tell everyone what happens before it happens. For some reason, my co-workers don’t believe this comes under the heading of a valuable fringe benefit.

Anderson is founder of The Yankee Group and senior managing director of YankeeTek Ventures, a Cambridge, Mass., venture capital fund for early-stage technology companies. He can be reached at [email protected].

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