Telephony: Carriers Call Entertainment Top Priority For Broadband

Byline: Vince Vittore

If U.S. telcos are to avoid having their broadband pipes turn into commodities in the near future, they must develop strategies that let them charge a premium for content, according to carrier and vendor executives at last week's RHK Startrax 2004 Conference in San Francisco.

While many have pointed to Japan's Yahoo! Broadband and Italy's Fastweb as potential success models, both operate under different conditions than U.S. carriers do. Additionally, U.S. users don't always want the same content as users in either of those two countries. However, recent research from RHK indicates that most broadband users lean heavily toward looking at - and paying for - entertainment options online (see chart). And while video-on-demand over broadband is a mere sliver of the online content world, it's growing at 140% annually, according to RHK, and is quickly becoming the must-have product for carriers.

SBC took a minor step in that direction when it announced it would offer movies from CinemaNow for 98cents as part of a 30-day promotional offer. At the end of that period, both SBC and CinemaNow will evaluate the arrangement. The deal marks a first for CinemaNow, which, like its rival MovieLink, is owned by a series of movies studios but had yet to sign on a major U.S. telco partner.

"There's a huge opportunity for telcos here," said Curt Mavis, CEO of CinemaNow, which is experimenting with several pricing models including one recently launched service in which users pay $14.95 to own movies in a protected digital format on a permanent basis.

The biggest issue for carriers, in fact, is pricing and deriving a profit out of the VOD model.

"It still costs about $1 to serve a movie that retails for $4 from CinemaNow or MovieLink," said Josette Bonte, head of the content and service practice at RHK. "The costs obviously have to come down, otherwise the margins are just too thin."

BellSouth, which has signed a distribution agreement with MovieLink, is exploring several VOD models including one in which users would pay a premium for faster movie downloads, according to Douglas Bulleit, chief strategist for the RBOC. Currently BellSouth DSL subscribers are automatically given a "turbo" button to download MovieLink content at up to 3 Mb/s. However, everything in that model is up for review at this point.

"The whole on-demand broadband thing is still in trial," Bulleit said. "It's less of a technology question than a demand issue."

Indeed, while both CinemaNow and MovieLink offer up plenty of content for the PC-based user, only about 15% of the latter's users bother to transfer that content to the TV, according to Jim Ramo, CEO of MovieLink. Until broadband carriers - read telcos - can make it easy for users to view downloaded movies and other video content on their TVs, the market will remain limited to the tech-savvy crowd.

"People want to watch a movie lying in bed or sitting on the couch," Ramo said.

There are currently about 25 different consumer devices to get that content from the PC to the TV, but no large U.S. service provider has put its weight behind any of them, in part because standards are still being developed. Using wireless links inside the home will be key, said Bulleit.

"Broadband is as much of a wireless proposition going forward," he said. "How 802.11 settles out at the premises is going to be an interesting."

In addition, transmitting video content over Wi-Fi even inside the home will bring up legal issues, Ramo said. Studios will insist that any carriers offering to support those links do so by transmitted encrypted information.

"It's early in this game," he said. "There are still only 25 million broadband-connected homes in the U.S. But broadband looks like it can be an equal player with cable and satellite."

Entertain us

Percentage of people paying for specific broadband content in the $8.8 billion market in 2003

60% Online gambling

25% Adult content

8% Online gaming

6% Music downloading*

1% Video-on-demand**

*Music downloads are growing at 87% annually **VOD is the fastest growing segment at 140% annually

Source: RHK