Television content aggregator Spark Interactive has licensed New Line Cinema’s film library for video on demand, becoming the second major player in the VOD content space to license the studio’s film collection.
One of Spark’s largest competitors, Intertainer, also holds rights to the New Line library. Unlike Intertainer, Spark has had trouble accessing the vast set of film titles controlled by major film studios. Intertainer’s VOD arsenal includes many titles from Warner Bros. and Universal as well as reruns from cable network A&E.
Flattering its adversary with imitation, Spark is in discussions with several television studios and additional independent film producers such as Firstlook Media about video-on-demand licensing agreements.
“We will evolve into [signing] VOD deals with the networks and the broadcasters,” said Spark President William Dever. “But we’re just starting negotiations on that.”
For most of Spark’s several years of existence, the fledgling new media business survived on a minimal stream of funding from angel investors-a far cry from Intertainer, which is believed to have raised nearly $100 million in venture capital, with the majority coming from software giant Microsoft in early 2000.
But Spark has persevered by being frugal, and trials of its service in numerous local midsize markets convinced the company that consumers were willing to pay a premium for a television service that unshackled viewers from the constraints of traditional scheduled programs.
Savvy enough not to place all its eggs in the unproven video-on-demand basket, Spark is supplementing its video service with similar on-demand music and gaming portals as well as a digital cable offering that includes interactive versions of 200 cable channels. Enhanced versions of such traditional cable mainstays as CNN, TNN: The National Network and ESPN feature Spark-branded t-commerce pop-up screens.
Spark, which is planning to launch its first commercial service within the next few months in Memphis, Tenn., has devised an unconventional method of distributing its interactive content. Realizing that American cable operators are reluctant to continue financing their investments in digital infrastructure by swelling their already onerous debts, the company is partnering with municipal utilities and overbuilders, both of which provide consumers with a suite of cable, broadband and telephony services for a monthly service charge in the $40 to $60 range.
Memphis Gas, Light and Water, a municipal utility that serves more than 400,000 customers in Tennessee, is leasing a fiber-optic network to Spark as the backbone for the soon-to-be-launched television offering.
Mr. Dever, emphasizing the importance of such a technological foundation to the development of the broadband entertainment market in the United States, said utilities are an untapped resource for providing interactive television infrastructure because of the financial privileges and protections they enjoy under state laws.
“Utilities are used to paying back their infrastructure costs over 40 years, which allows our rollout to be quite aggressive,” Mr. Dever said.
To obviate the need for emergency bailouts of bankrupt utilities, state legislatures have granted utilities the latitude to finance purchases and investments by issuing bonds. One of the most controversial prerogatives that state legislatures have granted utilities in recent years is the authority to issue asset-backed securities, which are bonds that provide relatively hight yields for investors because the bond issuers guarantee that the investors will be repaid even if the issuer is forced to file for bankruptcy.
Such “bankruptcy-remote vehicles,” which were originally created by investment bankers at Salomon Brothers (which has since folded into Citigroup) during the mid-’80s, enable a bond issuer to sell projected cash flows from steady businesses such as mortgage or car loans into a special protected trust, ensuring that the bonds will be recommended to investors as safe investments by major bond-rating agencies on Wall Street, such as Moody’s and Standard & Poor’s-which, in turn, comforts investors enough that they are often willing to pay relatively high yields for the bonds.
In a move that has drawn the ire of consumer advocates, legislatures in the past couple of years have afforded utilities the discretion to charge customers additional fees to help repay those investors.
Mr. Dever said one Kansas utility is planning to soon issue $150 million in asset-backed securities. The first-of-its-kind deal would package Spark’s expected income generated by fees for its video-on-demand and t-commerce offerings into a bond issue, Mr. Dever said. But it remains to be seen whether Moody’s or S&P would rate a bond backed by such relatively untested receivables highly enough to make the deal economical.
Aside from utilities and overbuilder networks, Spark has allied itself with several other technological partners to help strengthen its digital backbone. The company has entered into an informal, exclusive arrangement with Sun Microsystems to use Sun’s video-on-demand servers and has licensed Kasenna’s streaming video software to power its interactive television service.