Positive VOD trials in test markets around the country are pushing cable companies to pony up more investments in the technology and make faster roll-out a priority.

As a result, competition for new contracts is intensifying, industry analysts note, especially among the VOD companies that make interactive and digital television-related computer systems and software.

"We estimate that (cable industry) spending on VOD equipment could approach $2 billion over the next five years," wrote Marla Backer, iTV analyst with emerging-industry investment firm Brean Murray, in a recent research report.

The rosy outlook bodes well for VOD-focused server and software systems companies such as SeaChange International, Concurrent Computer and privately-held nCube, whose backers include Oracle Corp.

Brean Murray also puts VOD software maker Diva Communications on its list of companies to watch, even though it is about to be acquired by iTV heavyweight Gemstar TV-Guide International as part of a pre-packaged bankruptcy proceeding.

SHIFTING SANDS

As the cable industry makes VOD rollout a priority, alliances are shifting more quickly as players scramble for market share. At the same time, cable providers are hedging their technology investments by going with more than one VOD provider.

Take cable provider Charter Communications, which just announced that it would deploy nCube's VOD software and systems in six of its markets that have VOD service, as well as in additional markets this year. Charter has been working with both nCUBE and Concurrent Computer's VOD software and design for the past several months, using their products as a back-up because of financial problems facing its original VOD software provider, Diva.

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Charter has already installed and tested nCUBE VOD equipment in the markets where the company has been offering VOD service on digital set-top boxes by iTV hardware company Scientific-Atlanta. Charter also plans to launch nCUBE on Motorola's competing iTV platform later this year.

Not to be outdone, Seachange has just announced its latest breakthrough in alliance with optical carrier Internet Photonics. The two companies have certified what they call the industry's first end-to-end VOD server at 10-Gigabit Optical transport.

The message to MSO's (cable multiple service operators): Invest in ours. It's fast and a lot cheaper.

SeaChange, meanwhile, is revising some of its software after a federal court found that SeaChange infringed nCube's VOD patent related to upstream and downstream communication between digital set-top boxes. The court ordered the company to pay nCube over $2 million in damages plus a 7 percent royalty on sales of its products that infringed the patent. SeaChange said the verdict would have no effect on VOD products it has already shipped.

The frequency of press releases about alliances and breakthroughs these days is yet another sign among VOD players that the market for delivering interactive content to television audiences is finally maturing, and that competition is intensifying.

ADDING UP WHO'S READY

Even estimates on the VOD installed base are reaching a kind of consensus after years of widely divergent numbers from researchers. Brean Murray's Backer estimates that VOD technology is available to about 25 percent of the nation's 80 million cable subscribers. Television industry publication http://www.TVPredictions.com, meanwhile, estimates seven million US homes as VOD-ready, and expects that number to pass the 10 million mark by year's end.

The figure is in line with Backer's count, as well as research by Paul Kagen Associates and consulting firm PricewaterhouseCoopers.

Leading the way among cable providers rolling out interactive movie services is Comcast Corp., according to a recent survey by TVPredictions.com. The site said the Philadelphia-based company is now offering VOD services in more than 3 million homes, a number expected to grow only slightly once Comcast and AT&T Broadband complete their merger plans and become the nation's largest cable/broadband provider.

A&T Broadband has not publicly released its VOD deployment numbers, which this publication has also queried the company about. Based on industry sources and its own research, TVPredictions pegged AT&T's VOD-ready customers at 350,000 out of its 14.3 million cable subscriber base.

Second in TVPredictions.com's tally is AOL Time Warner, which is said to be ready to serve up movies on demand to about 1.5 million of its 12.9 million cable subscriber base.

TVPredictions.com counted 700,000 VOD-ready customers out of Cablevision's 3 million cable base (although only 24,100 homes are actually subscribing to the digital service that carries VOD service).

Cox Communications came out with 600,000 VOD customers out of its 6.3 million base. Charter Communications was listed with 500,000 VOD-ready homes out of its 6.8 million base.

The TVPredictions.com results were based on financial reports and interviews with company officials and industry sources. The seven million figure represents homes where the service is available. Whether or not the subscriber is taking advantage at this point is unclear, since many services are still new to consumers.

But researchers think subscribers could be pleasantly surprised with VOD, enough to help cable providers cut their customer churn rates.

Although pay-per-view services for cable subscribers took roughly five years to reach annual revenue of $2 billion, Brean Murray's Backer notes that VOD could reach and even surpass that revenue potential in shorter time.

The main reason is the technical advantage VOD holds over PPV such as movies on demand, SVOD (subscription VOD), customized news, sports or weather programs and PVR (the ability to record a program while watching another). In addition, the range of services with VOD technology has opened up growth opportunities for hotel in-room entertainment, Backer noted.

In-Stat/MDR also strikes a similar tone with its outlook for VOD growth. The technology research outfit said as high-speed cable modems and Digital Subscriber Line (DSL) penetration grows throughout the world, VOD services over Internet Protocol (IP) networks will total more than 17 million users by 2006 and will generate over $1.9 Billion in subscription and pay-per-view revenue.

Although VOD largely consists of adult-oriented material at this point, In-Stat points to four new cable family-fare oriented VOD deployments from CinemaNow, Intertainer, MovieLink, and Movies.com as developments that could help spur wider adoption.

At an estimated 10 million by year's end, the VOD market is still relatively embryonic. But for VOD players like nCube and SeaChange, whose estimated 2.5 million digital subscribers ready to deploy VOD services puts it in the lead on market share, the stakes and opportunities are rising fast.