Arena Set For AOL/MSN Video-on-Demand Brawl

The latest, but surely not last, round in the continuing war between rival
Internet service providers (ISPs) AOL Time Warner and the
Microsoft Network is focusing on the increasing
popularity of video-on-demand (VoD) and delivering it over a high-speed
platform.

It’s all part of both ISPs strategy to marry content with broadband AOL on
its nationwide cable network and MSN with its growing digital subscriber
line (DSL) presence.

For the past several years AOL and MSN, the largest and second-largest
ISPs, respectively, have fought over everything from instant messaging (IM)
to browsers, open access to desktop icons. It’s been months since the two
have sparred over anything, but the increased efforts by both in the past
week to increase their VoD product lines are sure to lead to a future
confrontation.

To date, video-on-demand has been seen as a viable option only for the
cable TV companies, though they have been unable to attract the attention
they’ve wanted. DSL, while theoretically possible in today’s environment,
has been written off as an unstable environment, due mainly to the
provisioning problems and technical support issues plaguing the DSL industry.

Slowly but surely, however, DSL is making a comeback as a viable option for
VoD, MSN is set to capitalize on that fact. A report by Cahner’s Instat,
an online analysis firm bears that out.

A recent report shows DSL alone will accrue more than $7 billion in
revenues and have more than 11 million DSL users in 2005. The only
uncertainty is which application will be most popular.

“Each segment of the market is attempting to find the best combination of
hardware and software to provide added value to consumers and drive
demand,” says Cindy Wolf, an In-Stat analyst. “Growth barriers include the
need for consumer education, the need to modify the business models for
services, and the current downturn in the economy.”

Microsoft has quietly been building up its high-speed and entertainment
fare over the summer, brokering deals with incumbent local exchange
carriers (ILECs) Verizon Communications , SBC Communications
and Qwest Communications for digital
subscriber line (DSL) service.

The software giant’s ISP arm then announced Wednesday the rollout of its
VoD offering through Intertainer, a privately-held company backed by
Microsoft and others which promises better-than-VHS movie quality. It’s a
common ploy with the company, which likes to keep its hands on the control
of every asset it touches. Microsoft had a similar arrangement with its
interactive TV box, Ulitmate TV.

Will Poole, Microsoft Windows digital media division vice president, said
Interntainer’s deals with studios like Universal, Warner Bros., Dreamworks
SKG and New Line Cinema.

“Intertainer has put all the pieces together to make video-on-demand work
at last for home viewers,” Poole said. “Intertainer’s outstanding library
offers the kind of top-tier entertainment people have been waiting for, and
the technology is here today to deliver a great viewing experience.”

Meanwhile, Time Warner Cable (a subsidiary of AOL/TW), Thursday ordered
475,000 set top boxes from Scientific-Atlanta as part of its continuing
efforts to market VoD.

Mike Hayashi, TWC senior vice president, said the deal is the opening salvo
in its upcoming deployment.

“We have an aggressive plan in place to deploy VOD and SVOD services across
the vast majority of our Scientific-Atlanta systems, including all of our
major metro areas, by the end of next year,” Hayashi said. “We expect
significant demand for these new services as well as for new services such
as personal video recording and high definition TV.”

The only difference between the two VoD services each ISP plans to deploy
is the platform movies will be delivered, cable and DSL.

Bill Gates, who signed a similar agreement with Samsung Electronics in
South Korea Wednesday, said the day is coming fast when most houses in the
U.S. will have integrated entertainment systems.

“We are entering a Digital Decade where smart, connected devices and
advanced home-entertainment solutions will enable people to utilize
technology in new ways and maximize its full potential,” Gates said.

Both companies stand a good deal ahead of the Hollywood studios, which have
been penning deals themselves this summer to capitalize on VoD and stay
ahead of the ISPs. Disney, Sony and Universal Studios have all announced
their own service at their Web sites.

But it’s a given that the studios, or any other Web site for that matter,
will not have the marketing power that AOL or MSN will be able to throw
into the mix. AOL, with its vast media holdings through its ownership of
Time Warner, and MSN, with its marketing deals with Vivendi and such, will
create the largest focus for broadband entertainment.

The two companies seem to be reading the same reports, if the recent
attention to video-on-demand and set-top boxes is any indication.

Jupiter Media Metrix earlier this week publicized a report that lends
credence to the VoD buildup, despite America’s bad experience with DSL to
date. In its report, author Joe Laszlo predicts that a whopping 40 percent
of Internet users will use a broadband connection by 2006. That’s a sharp
increase from this year’s nine percent.

“Despite the recent failures of several broadband pioneers, and slower
growth of the overall online population, broadband will find the masses in
the US shortly,” Laszlo said. “While consumers’ awareness of broadband has
grown considerably, improved and increased marketing by cable and DSL
providers will finally help overcome lingering resistance to the cost of
broadband subscriptions. It is absolutely critical for companies with
relevant content, products and services to time their business initiatives
to reach the anticipated broadband audience.”

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