Retailer to offer closed-circuit approach to video delivery

Blockbuster has taken an extraordinary step to try to jump-start its planned entry into the electronic delivery of entertainment.

The world’s largest video retailer has struck an exclusive 20-year deal with Houston-based Enron Broadband Services to offer Blockbuster movies on demand through high-speed telephone lines that does not involve use of the Internet.

Blockbuster chairman John Antioco said Wednesday that he expects to have 500,000 subscribers in the first two markets by the end of the year.

The temporarily dubbed Blockbuster Entertainment On-Demand service — offering pay-per-view and monthly subscriptions to movies, games and music — will be available in 20 to 30 markets by the end of 2001, Antioco said.

The companies have distribution deals with three of the four major regional telcos: SBC Communications, Verizon and Qwest, as well as Covad Communications.

Strategic path taken

Blockbuster has been on this strategic path since it went public last August in an effort to convince Wall Street that the company will continue to be viable even as electronic delivery threatens Blockbuster’s core video business.

Blockbuster previously announced partnerships with DirecTV to offer a Blockbuster-branded near-video-on-demand service by satellite next year, and with TiVo Inc. to offer a Blockbuster-branded download-and-storage pay-per-view service next year.

Wall Street was apparently unimpressed with Wednesday’s announcement, however. Blockbuster’s stock dipped slightly on the news and stands at about half the price the stock was trading at when it went public.

“This fits into our overall plan to transform from retail only to a multi-channel distributor of entertainment,” Antioco said. “This is a giant step to accomplishing that vision.”

Challenges to face

However, Blockbuster has many challenges ahead both technologically and in making deals for content.

John Sie, chairman of premium and subscription video-on-demand service company Starz Encore, balked at the announcement, saying Blockbuster has not struck a single deal with any studio for film product and is unlikely to do so, since studios will want to deliver movies electronically themselves, once technology allows for it.

Indeed, Blockbuster will have to strike such deals in this new arena as a pay-per-view distributor rather than a homevideo retailer.

Antioco said he was unable to discuss details of the new deal with suppliers before Wednesday’s announcement but now will do so aggressively.

He said that the technology, which essentially offers a closed-circuit approach to video delivery, should alleviate fears studios have about piracy on the Internet.

Warner Home Video president Warren Lieberfarb, who has also taken over the studio’s pay TV operations, gave the deal a ringing endorsement.

“It reflects the progressiveness and clear strategic vision that Blockbuster is in the home entertainment business irrespective of the distribution system,” he said. “Now that their businesses are becoming horizontally integrated, their business interests and those of the studios will be more closely aligned. It’s a real leap to the future.”

Always a need

As to Sie’s comments, Lieberfarb said that Warner Bros. licenses product to a multiplicity of businesses, many of whom are in competition with each other. He also said he believes that even if studios start their own video-on-demand services, there will always be aggregators like Amazon.com, adding, “I don’t think they are mutually exclusive.”

The Enron system, which has been operating for about a year with clients including AtomFilms, uses a nationwide fiber-optic network to deliver video to servers in each city, where the signal is then delivered to the home through high-speed DSL.

Enron claims the signal quality is about the same as a videotape. The service will allow for VCR-like control of movies. Enron also has a network set up in Europe and is building networks in South America and India.

Deal calls for Enron to receive a fixed fee per transaction for the next 20 years. Antioco said the service will likely be priced at about $8 or $9 for a monthly subscription to older movies. New releases will cost slightly more than current PPV movies and video rentals at about $4.99. That’s all on top of the monthly DSL service charge of about $40. A separate set-top box will also be required.

Big future

Antioco said that while the PPV industry has grown to just $1 billion in 15 years, the video-on-demand business should grow to $3 billion in the next few years.

The overall $20 billion PPV and homevideo market will grow to $30 billion in the next seven to eight years with the incremental revenue from video-on-demand, he projected.

DSL is expected to reach 15 million homes in the next four to five years.

Just as Blockbuster stores will start selling DirecTV systems in September, the retail chain will also start hawking DSL services next year.

But Antioco said these new technologies will not undercut physical videotapes for the home and DVD rentals and that there is no plan to move up the window for video-on-demand movies closer to the premiere of movies on homevideo.

Lieberfarb said Blockbuster is in a unique position to help make electronic delivery an incremental business to homevideo, not cannibalistic. “Being in both businesses with a foot in both camps, they will help manage the transition,” he said.

Set-top deal pending

Blockbuster is about two weeks away from striking a deal with one or more set-top box manufacturers, Antioco said.

Although the current deal with Enron is exclusive for delivery via DSL telephone lines, the technology could be adapted to satellite or cable systems.

Enron Broadband is a wholly owned subsidiary of the $50 billion electricity, natural gas and communication company Enron Corp.

Enron has spent $600 million-$700 million per year over the last four years developing the network.

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