The VOD Wars

 While social TV seems to be garnering the bulk of the buzz these days, the real action is happening in Video on Demand or VOD.

VOD was once treated as the ugly stepsister of the industry, with most operators regarding it as a promotional vehicle (hence the proliferation of 5-minute “Making of X” videos on most On Demand channels.)

Purchasing broadcast rights from the studios was costly, VOD technology was very unstable and prone to mid-broadcast meltdowns, and, with the ubiquity of DVD rental services, there was very little demand for On Demand.

Until, of course, there was.

Reed Hasting and his board seem just as stunned as the rest of the industry by the rapid growth of Netflix streaming video. The fact that consumers, a notoriously technophobic lot, would actually figure out how to hook up a third-party device (laptops, PlayStations, Roku boxes and the like) and use them to stream movies over WiFi to their television sets was not something anyone could have predicted. Especially given how thin the Netflix streaming catalog was at first. And the completely unsocial nature of the site. (You cannot, for instance, message another Netflix user to recommend a movie to them. In fact, if you try and post a movie to Facebook or Twitter from the web application, all that’s displayed is the sign-up page.)

Which makes Netflix growth all the more astounding. In 2011, Netflix accounted for 32% of peak time bandwidth use in the US. Netflix users watched 2 billion hours of video 2011. And they did all that with only 20 million customers. (That’s less than 7% of the total US population.)

Those figures were not lost on any number of other companies, all of whom are now jumping full force into VOD. The field is getting crowded and the players are coming from all sides.

Pay TV Providers

First up are the various pay TV providers, the companies who blew off VOD to begin with. In the US, the major players are all beefing up their catalogs, Verizon FIOS in particular. FIOS currently has over 2,000 available titles and is rapidly growing that number. They have even introduced an iOS app that allows non-subscribers to download rental movies.  And FIOS, along with Comcast and others, is giving users access to its streaming VOD catalog via XBox, PlayStation and other gaming devices.

Tech Companies

Apple and Google have been getting into the act too, via their proxies iTunes and YouTube. Both have been in busy buying up movie rights. iTunes, which was once a strictly download service, will soon offer streaming options as well. (Even with a high-speed connection, a movie can take a good 20 minutes to download, unacceptable when instant streaming lets you watch right away.)

Google, for its part, is planning to launch VOD channels on YouTube for movies and TV shows. Details are still sketchy, but Apple and Google both have very deep pockets.

Retailers

Amazon has launched a VOD rental service called Amazon Instant Video that operates on an a la carte, pay-as-you-go system with the option of getting most rentals for free by paying $79/year to join Amazon Prime (which also gets you free shipping on Amazon retails orders - a benefit of being a retailer in this market.) Amazon Instant plays on browsers and via Roku, Kindle Fire and similar devices, but there is no iOS app and the format is unsupported by iOS browsers. Amazon has been investing heavily in its catalog and there are recurring rumors that the entire Instant Video operation will be spun off into its own unique entity that will go head-to-head with Netflix.

At the same time, discount retailer WalMart has been building up Vudu, its own streaming video service. Vudu claims to have the largest selection of HD movies and is often able to release new movies long before Netflix. Vudu, which is available via Play Station, Xbox and iPad (but only as a browser app,) positions itself as a discount service, but in truth, new releases are priced competitively with Amazon, iTunes and other streaming VOD services.

Hollywood

The major Hollywood studios make a lot of money on DVD sales, but they're savvy enough to realize that the DVD is about to go the way of the dinosaur. In order to save that revenue stream, a consortium of studios (e.g. all the big players except for Disney) came together to create UltraViolet, a product that forces users to buy the actual DVD in order to get a code that provides entree to a cloud-based “digital locker” where they can download the movie to any connected device. UltraViolet has been poorly received: the technology is both glitchy and confusing and there has been much infighting among the studios as to who is to blame.

Which is not to say they have given up on it: a deal with Amazon was announced during CES (details to follow, though industry scuttlebutt has Amazon partnering with Warner Brothers.) And with a few substantial tweaks, the technology should work more easily and consistently. UltraViolet may ultimately prove to be a better tool for retailers than consumers, but either way, it will give movie studios a strong presence in the streaming VOD market.

Cinema Chains

While the major US cinema chains (Regal, Cinemark and AMC) are not getting into the streaming VOD game (yet), they are in many ways the 800-pound elephant in the room. As pressure grows to shorten the window from theatrical release to VOD release, the theater chains are pushing back. Hard.

This past fall, Comcast and its new subsidiary Universal Studios announced a deal whereby Comcast would release the new Eddie Murphy/Ben Stiller movie “Tower Heist” two weeks after its theatrical debut. The release would be limited to two test markets (Portland and Atlanta) and the film would rent for a whopping $60.

Despite these preconditions, theater chain owners blew a gasket and many, including the 4,000-screen Cinemark chain, threatened to boycott the movie unless Universal and Comcast reneged on their deal. Anxious not to lose the income (and inherent buzz) from a theatrical release, Universal and Comcast quickly retreated. But this is just the first skirmish in a longer battle: the larger the VOD industry gets, the more pressure there will be from consumers to shorten the VOD window.

What’s Next?

While Netflix has a clear early mover advantage, it does not have the deep pockets most of its new competitors do. (And though Facebook is currently content to record its users viewing habits on their Timelines, that may change if the rumored IPO happens this spring.) Those deep pockets should allow Google, Apple, Amazon et. al. to amass a catalog that outshines Netflix.

This will ultimately benefit consumers, who will have a broader range of options, both what to watch and where to watch it. Pay TV providers will likely begin providing direct access to third party streaming video services sometime in 2012, and the service that negotiates the best deals will come out ahead. (Americans are still by and large technophobes, and a solution that involves a “cable guy” coming in to swap out one set top box for another should prove very appealing.) The streaming VOD market will continue to grow rapidly in 2012, with bandwidth caps the only thing that could conceivably slow it down.

Conceivably, but not likely, as the people in position to impose those bandwidth caps are the same pay TV providers who also provide us with broadband... and their own proprietary streaming VOD offerings.