The article sent shockwaves throughout Wall Street, as the stock prices for both TiVo and Netflix shot up. Last September, a Newsweek article reported that TiVo and Netflix might be getting together to produce a true form of video-on-demand (VOD). Last week, a Netflix official fueled this speculation by dropping hints about a potential joint venture. TiVo, the original and premier provider of digital video recorders (DVRs) in the U.S., would eventually provide instantaneous online access to the entire DVD library (currently more than 35,000 films) of Netflix, the nation’s number one mail order video rental service. This would be accomplished via a broadband internet connection to specially equipped TiVo DVRs. This development could also spell the beginning of the end for premium movie services like HBO, Showtime, and Starz.

First, let’s put all of this into perspective with a little history of the premium services. Home Box Office (HBO) was the first premium service, debuting in 1975. It was one of the first channels beamed from a satellite and carried by cable operators across the country. As its popularity grew in the late 1970’s, several other premium services like Showtime, Cinemax, The Movie Channel, as well as some lesser known premium services came into existence. The industry started consolidating in the early 1980’s as HBO bought Cinemax, Showtime bought The Movie Channel, and those lesser known services went belly-up. In the early 1990’s, the Starz-Encore networks debuted to compete with the HBO and Showtime networks.

During the mid-1990’s, as satellite services such as Directv and Dish Network debuted, the premium services began offering “multiplexed” channels, i.e., multiple channels of HBO, Showtime, Cinemax, The Movie Channel, and Starz-Encore for the price of one. Unfortunately, the number of movie choices didn’t increase. Those services just began to air their same libraries of movies at different times on their various multiplexed channels. There are hundreds of movies at local video stores that have never played (and will never play) on the premium channels while there are a comparatively small number of others that have played on these channels thousands of times. That has always been the major weakness of the premium services. Multiplexing did not fix this problem.

Several market tests of VOD were conducted during the 1980’s and the early 1990’s but, because the technology was rather primitive, it did not catch on with consumers. By the late 1990’s, it finally seemed ready and lots of promises were made about the brave new world of VOD. The cable companies were talking about veritable online video stores, which were going to put Blockbuster, et al, out of business. Unfortunately, the reality of VOD has never lived up to its hype. The stuff the cable companies are currently passing off as VOD is nothing more than a glorified version of pay-per-view or a DVR. For the most part, their VOD offerings aren’t any different from the stuff currently playing on the premium channels and/or on pay-per-view. This is what I call “faux VOD.” How lame!

Fortunately, led by the apparent impending TiVo-Netflix undertaking, the landscape is about to change and a new era of genuine VOD is about to be ushered in. PC-based broadband VOD services like Cinemanow (www.cinemanow.com) and Movielink (www.movielink.com) have been up and running for several years and are about to broaden their offerings. In addition, SBC Communications and EchoStar Communications have already announced that they are teaming up to provide an online-to-TV VOD service this year, while several similar phone company-satellite operator projects are still in the negotiations stage.

Also, Internet Protocol Television (IPTV) platforms, offering hundreds of television channels via a broadband internet connection to a TV set-top box, will be coming online this year. One of the major features of these services will be advanced VOD technology. Microsoft has developed its own version of IPTV technology. See Microsoft’s website (www.microsolft.com/tv) for details. The nation’s two largest phone companies, Verizon and SBC, plan to utilize Microsoft’s technology in the rollout of their respective IPTV platforms later this year.

Not to be outdone, several smaller companies also plan to compete in the broadband-to-TV market. Akimbo Systems (www.akimbo.com) debuted its service last fall and is currently in the process of expanding. Similar ventures such as DAVETV (www.dave.tv), TimeShift TV, (www.timeshiftv.com), and VCinema (www.vcinema.com) plan to enter the market later this year. All of these companies plan to offer almost unlimited amounts of movies, TV shows, sports, specialty programming, and international programs via a set-top box interface between a broadband connection and a TV set. This programming will be culled from the vast internet universe and made available for TV viewing. For a more detailed description of these services, see my related article entitled, “The Coming Television Revolution.”

If nothing else, all of these developments should compel cable companies to offer a much more competitive form of VOD. Comcast, one of the leading cable providers and a partner with Sony in its recent purchase of the MGM movie library, is now in the process of rolling out its advanced VOD platform. The other cable companies are sure to be following suit real soon.

Meanwhile, the premium services have still been slogging along. The premium channel paradigm has long outlived its original usefulness and has only been able to hang around because of the lack of a good VOD system thus far. The only thing really going for the premiums right now is their award-winning original programming; including series’ like “The Sopranos”, “Dead Like Me”, and “Six Feet Under.” Perhaps the premium services could morph into original-programming-only services in order to survive. However, they’d have to seriously increase the number of series’ (and the number of episodes of each) they produce. Perhaps they could also carry longer and/or alternative versions of programs already aired on broadcast television and basic cable. In addition, they would have to find a way to lower their subscription rates. I’m not sure all of that would be feasible. One thing I do know for sure is that people would not continue to subscribe to the premium channels for their movie content once they could conveniently pull up virtually any movie or TV show they wanted, any time they wanted.