In Depth

Online Video Seen as Biggest Threat to On-Demand Business, Report Says

But DVRs May Boost VOD Thanks to Shared Set-Top Box

The video-on-demand business is one of the entertainment mediums most vulnerable to being replaced by online video over the long haul.

That’s the finding of a recent report from research firm One Touch Intelligence, which contends that the DVD and paid VOD businesses face a real threat from the burgeoning online video marketplace.

For the most part, the experience of watching a movie or paid TV show is replicated easily by online portals and services including Hulu, iTunes, Fancast and now Netflix, which streams many of its movies and TV shows online.

“For both ad-supported VOD and transactional [pay-per-movie] VOD, flourishing in a time of rising Internet video availability depends on content and convenience,” said Stewart Schley, author of the report. “Viewers will gravitate toward whichever platform provides more choice in titles and more ease in access.”

Internet video now offers a greater range of titles and programs than do cable or satellite VOD offerings, Mr. Schley said. As an example, he pointed to Verizon’s FiOS TV offering, which includes 14,000 free VOD titles each month, one of the largest VOD libraries offered by a multichannel provider.

That pales in comparison to the Web. Netflix offers 12,000 titles for instant streaming and Hulu has 7,000 hours, together surpassing the Verizon offering. Throw in Amazon and iTunes, not to mention scads of content on YouTube and smaller sites such as FunnyorDie.com, and the scales tip heavily in favor of the Internet.

“There’s substantially more range of content available online than over VOD today. Until or unless that disparity changes, or a new approach such as network DVR gains traction, managed VOD services risk being usurped by Internet video as the preferred platform for on-demand video access,” Mr. Schley said. “When you look at Netflix, I do believe the lines will cross and over time more customers will choose online delivery.”

Availability is also an issue that hampers VOD. One Touch Intelligence found that about 40% of U.S. homes can receive VOD service from a multichannel provider. That compares to about 65% that can receive high-quality online video over a broadband Internet connection.

Cable has its secret weapon, though, in the digital video recorder. DVR and VOD often go hand-in-hand because most consumers use the same set-top box for both services.

Leichtman Research Group reported last fall that about 27% of U.S. households are DVR users and 87% would recommend the service to a friend. Since those users are already inclined to use the DVR to watch shows, they’re in the right position—on the couch with remote in hand—to also use VOD.

Mr. Schley acknowledged that any erosion in VOD from online video won’t come in the next year. For now, consumers still prefer watching movies and TV shows on larger TVs and home theater systems, he said.

If online video remains a computer-based experience, cable and satellite operators don’t have much to fear. But if more consumers connect PCs to the TV, then multichannel providers could see VOD movie and TV show purchases decline, he said.

“Over a longer time horizon, we do see the possibility that cable and satellite providers may concede meaningful ground to Internet-based video services that already offer wider and more compelling lists of popular primetime television programs,” the report said.

“Online video may have different levels of impact on different types of television viewing, with movie rentals on DVDs and VOD in particular more vulnerable to displacement than traditional networks and channels,” the report said.” “Generally, we believe media that rely on fees for prerecorded individual program titles—these include DVD movies and paid video-on-demand—are most vulnerable to online video replacement. Subscription and ad-supported media, in contrast, seem less vulnerable to online video encroachment, at least in the short term.”

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