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Set-top box makers still waiting for customers

Cable set-tops are everywhere, but consumers continue to show a lack of interest in buying separate boxes for Internet-based video-on-demand services. Photos: Vudu's movie box

Imagine investing in a restaurant and then having to pay for your meal every time you eat there.

Sounds like a raw deal--and it's a situation similar to the one that confronts buyers of set-top boxes that download movies via the Web: You invest a significant amount of money when you buy the box, then whenever you want to watch a movie, you have to pay again. It's one of the reasons that, so far, the few companies to introduce standalone products in this space, such as Akimbo and MovieBeam, have called it quits, or at the very least no longer exist in their original incarnations.

Now the makers of a more evolved version of the Internet-based video download box hope they can change things.

Vudu, which unveiled its offering last week, is the latest comer in this little (some would call it "puzzling" or even "pointless") entertainment niche. The Santa Clara, Calif., start-up has designed a with an even sleeker remote in which a database of 5,000 movies can be streamed over a broadband connection directly to a TV, which is essentially equivalent to the contents of two brick-and-mortar video stores, says Vudu. It's $399 to buy the box, $1 to $4 to rent movies and $5 to $20 to own them. So owners still have to "pay for the privilege of paying," as Ross Rubin of the NPD Group put it.

In other words, you're back to the basic problem with this business: the average consumer, as long as he or she doesn't have true control over downloads thanks to technology such as digital rights management, is going to have a hard time justifying an expensive set-top box when it has neither the channel-surfing capabilities of a TiVo digital video recorder nor the low to nonexistent price of a DVR provided by a cable television company.

Nonetheless, Vudu executives believe they've solved many of the problems that Akimbo and MovieBeam encountered. To start, they say content owners are far more cooperative than they have been in the past. "I think relationships with the studios (have) completely changed everything," said Patrick Cosson, vice president of sales and marketing for Vudu. The company negotiated deals with every major studio and some independent ones to bulk up its offerings to "two video stores" worth, something Akimbo and Moviebeam struggled to do.

"I think there is a realization in Hollywood that there is a need to figure out this distribution over the Internet," Cosson said. "They're showing a lot of openness and interest and appreciation for the technology."

Second, they believe delivery over broadband is far more acceptable than over-the-air transmissions used by MovieBeam. Broadband adoption will only increase, but still the market for Vudu or any other broadband-delivery box service stands at just 25 percent--that's total broadband adoption in the U.S.--for now.

"When you're on the TV, you need to compete with the cable-on-demand experience, which is essentially instant," said Rubin, director of industry analysis for The NPD Group. "Amazon Unbox has done a good job on progressive downloads, where movies start pretty soon after you order it, but it's still not the same kind of gratification as seeing the studio logo when you hit the play button," as Vudu has promised.

Of course gadget bloggers and early adopters get gaga over devices like these, but will consumers in general react any differently to a box this time around, or ever? Not likely if the pricing model doesn't change, according to Josh Martin, an analyst who monitors the connected home industry for The Yankee Group. Consumers have shown a distinct aversion to buying hardware associated with one service--with the exception of digital audio players, he said.

"The biggest strategic misstep by all of these companies is their inability to lease the box and charge for content, or give the box away for free and charge more for content," he said.

Set-top box ownership hovers under 30 percent in the U.S., and the breakdown of numbers tells the story about consumer preferences: cable and satellite service providers are dominating the set-top industry. According to The Yankee Group's Penetration and Usage Survey, 20.6 percent of U.S. respondents own a set-top box from a service provider, like a cable company, while 7 percent own a standalone box. The rest did not own one.

"We're dominated by service providers that subsidize equipment," Martin said. "Users get used to that."

TiVo, which basically owns the 7 percent of standalone box users, and other set-tops linked to a single source of content like Apple TV, are neat, whiz-bang technologies, but there doesn't seem to be a strong demand for them. Cable providers also do something that seems to be more appealing to a wider array of customers: all services are included on one bill and there's only one box. While TiVo's much-lauded user interface and Apple TV's distinct "Apple-ness" are attractive, cable boxes' generally acceptable quality, instant content and convenience have so far won more users.

Whatever happened to MovieBeam and Akimbo?
MovieBeam was unveiled by Walt Disney in 2003 as a VOD service using a technology called datacasting, which took advantage of unused portions of the broadcast spectrum. The box cost $199 and movies could then be rented for $3.99 a piece. But the nature of the broadcasting technology made it difficult to roll out on a nationwide basis. And by 2005 Disney spun it off into a separate company, in which Intel and Cisco Systems poured $50 million of capital. A relaunch was attempted before the company was bought in March by video rental chain Movie Gallery for just $10 million.

Akimbo hasn't fared much better. It arrived on the scene in 2004, offering video-on-demand via a $230 set-top box and a $10 per month subscription fee. Programs and movies were downloaded from the Web, but each box could store only 500 at a time. Two years later, it announced investments from AT&T and Cisco. It's now a vehicle for, ironically, a cable company, used to distribute AT&T's Homezone U-Verse VOD service.

"Clearly, it's a challenging market for companies to break into and find success with it," The Yankee Group's Martin said. For example, "TiVo has had tremendous difficulty maintaining relevance in the market even though they basically invented the DVR market."

Amazon Unbox on TiVo isn't the only competition that VOD boxes have. There's popular DVD mail-delivery services from Netflix and Blockbuster, as well as downloads from Microsoft's Xbox Live service, which is available to any Xbox console owner.

Granted, success in this industry doesn't have to be defined as 50 million boxes sold. Selling 10 million, or at least covering costs, would be an improvement over Vudu's predecessors.

Said Martin, "I think expectations should be realistic until they prove they can buck the trend."