The companies began streaming full-length video content into consumers' homes this past week as part of the trial program that will reach 1,000 households in Seattle; Portland, Ore.; New York City; and a Salt Lake City suburb, American Fork. Participants in the trial can "rent" movies digitally directly from their TV sets.
Companies are eager to capture the video-on-demand market, which promises to be lucrative. The existing pay-per-view market is estimated to be worth some $1.5 billion, according to Jupiter Media Metrix. Blockbuster in particular has been eyeing video on demand for some time as a way to fend off the threat of electronic distribution to its core video rental business.
To participate in Blockbuster's trial program, consumers in test cities must receive broadband service through one of the company's affiliates--ReFlex Communications in Seattle and Portland, Switchpoint Networks in Salt Lake City, or Verizon Communications in New York City.
Unlike pay-per-view, which consumers must watch on a scheduled basis, video-on-demand users can view a movie multiple times at their convenience as well as pause, rewind and fast-forward the service.
Blockbuster is not alone in the video-on-demand sector. U.S. West, in partnership with Intertainer, launched a similar trial in Denver and Boulder, Colo., in 1999. Time Warner Cable offers a similar service via its digital cable TV lines in select cities.
California-based Intertainer allows consumers to download and view a selection of movies and other programming over their PCs. It also streams content to the television in select cities in New Jersey and Pennsylvania, where it partners with Comcast, and in Denver, where it partners with Qwest. The company said it is poised for several more digital subscriber line (DSL) launches in January.
Although other companies have made movies available over the Internet, far fewer people are willing to watch a 90-minute film on a PC instead of a television.
Analysts are unequivocal that consumers would be willing to spend more for the convenience of choosing movies and watching them when they wanted.
"Obviously delivering high-quality video on demand is the Holy Grail when it comes to interactive services," said Aram Sinnreich, an analyst at Jupiter Media Metrix.
In January, Blockbuster struck a partnership with TiVo to offer a download pay-per-view service, which the companies have said will be available next year. It has also unveiled a satellite video-on-demand service with DirecTV.
The crucial hurdle faced by Blockbuster and other companies is securing movie rights from the motion picture industry. The rights holders themselves, such as Sony Pictures Digital Entertainment and Walt Disney, are looking into their own options, including possible partners and services they could provide directly.
"Clearly the companies that own the rights are interested in bypassing the middle man," Brooks said. "It's not a trivial issue that Blockbuster hasn't secured the rights from these companies."
Industry observers say the movie studios are quickening their pace so they don't wind up like the recording industry, which has been criticized for lagging in the online arena behind free song-swap services such as Napster.
Potentially high costs are another hurdle companies must deal with in providing video on demand. High-quality video often requires a DSL speed of at least 2.0 megabits per second. Some DSL providers charge more for service faster than the standard rate, which runs at approximately 640 kilobits per second.
"How much does it cost to deliver these services over existing broadband lines?" asked Joe Laszlow, a broadband analyst at Jupiter Media Metrix. "I think that's the issue that Blockbuster has to answer after doing the test."
Besides cost, the main issue for consumers will be having the movies they want at their disposal. Blockbuster said that so far it has inked deals with a handful of companies including Artisan, Trimark, Lion's Gate and Metro-Goldwyn-Mayer.
Despite the limited offerings, however, the company says consumers have been eager to sign up.
The service costs a monthly DSL fee, typically around $40, plus $4.99 per movie rental. For now, Blockbuster is installing and leasing the required set-top box for free, but the company says it will likely charge some $10 per month in the future.
A router installed in the back of the set-top box splits the DSL service between the computer and the television. Movies are streamed over Enron's fiber-optic network, through the local carrier's service and into the subscriber's home. Movies rented for TV use cannot be viewed on the PC, Blockbuster said.
Streaming movies however, will fall under the same ranking as pay-per-view, meaning that consumers will only have access to them 60 days to 90 days after they have been released in the video store.
"You will be able to get them in the video store first," said Blockbuster spokesman Randy Hargrove.