Rising star VOD poised to upstage the DVD

The Seventies’ hit single “Video Killed the Radio Star” from cult band The Buggles (and the first video ever played on MTV), may soon have to be updated to “DVD killed the VHS star” if other retailers follow Dixons’ decision to stop selling VHS recorders.

But DVD itself may be under threat from video-on-demand (VOD) services offered by cable, satellite and broadband providers, and from the internet, just as CD sales have reportedly been hit by file sharing and music downloads, both legal and illegal.

VHS is definitely on its last legs. Lavinia Carey, director-general of the British Video Association, which represents content owners, says: “The video industry is not dead – DVD is video. But VHS is on the way out – video on DVD is so much better.” Having said that, she adds that the increase in DVD sales is now showing signs of slowing, with growth down from the 20 to 30 per cent see in the past couple of years to somewhere between ten and 20 per cent.

The rental market, up six per cent in October to 13 million compared with the same month last year (BVA) shows the fading light of VHS. While DVD rentals were up 42 per cent, accounting for 81 per cent of all rentals in October, VHS rentals were down 48 per cent.

As Blockbuster marketing and planning director Alistair Macrow says: “Fifteen per cent of our rentals are VHS. It tends to be the less frequent renters, or households with children.” And those who have yet to make the switch from VHS to DVD are just waiting for recordable DVD systems to come down in price, he believes.

But there are industry experts already predicting that DVD will go the way of VHS and Betamax (the technically superior video tape system comprehensively out-marketed and killed off by VHS), and eventually be overtaken by the development of near video-on-demand (NVOD) and true VOD services. These deliver content directly to consumers’ television sets through cable, satellite or broadband networks. BT has just created a division devoted to developing content services such as on-demand movies, music and television.

Existing NVOD services – such as Sky’s Box Office channels – broadcast the same film with staggered start times, say every 15 minutes, while true VOD enables consumers to download movies or programmes to watch instantly on their home PC or television.

Figures from research company Informa suggest that in 2004, about 41 per cent of the 24.7 million UK households with televisions can get NVOD services, either through digital cable or a satellite dish (mainly Sky). At present, the household penetration of true VOD is minimal. Informa estimates that 23,000 people subscribe to such services, but that figure is expected to rocket over the next five years, to hit 1.5 million by 2010, as players such as NTL and Telewest Broadband upgrade their movie services and broadband operators come on board.

Sky says it has no problem with the rise of true VOD. A spokesman says: “We’ve seen an explosion in choice in the ways that viewers can access movies, and undoubtedly it’s now a highly competitive market. But with the huge local storage offered by our Sky Plus Personal Video Recorder system, we can offer a virtual VOD service.”

Sky is also rumoured to be developing a system that will enable subscribers to download video content to their Sky Plus box, and then copy it to a personal media player. Apple, in turn, is believed to be developing an iPod that can store and play feature film-length video footage.

Rivals, particularly those offering true VOD, might disagree with Sky’s viewpoint. Video Networks managing director of content strategy Jonathan Sykes says: “Sky’s never going to go away, but its inability to offer a true VOD service is a weakness.”

If VOD – or NVOD or virtual VOD – does threaten DVD, then it also potentially poses a threat to the delivery systems that have evolved to distribute DVDs – both the bricks-and-mortar high street outlets and the more recent, but phenomenally fast-growing, online DVD rental companies.

These DVD rental companies argue that the physical dimensions and weight of DVDs mean they can be sent through the post easily and relatively cheaply and they have the capacity to stock tens of thousands of titles, compared with a maximum of say 7,000 for the biggest high street stores.

The threat of VOD services does not deter Simon Morris, marketing director of Lovefilm, which has just signed a deal with Sainsbury’s to operate an online DVD rental service for the supermarket. “DVDs aren’t going to disappear this year or next. And when they do, we’ll have several hundred thousand people subscribing to the Lovefilm brand, and that brand will be easily transferable to a new delivery format – such as broadband,” he says.

Saul Klein, founder and chief executive of online rental company Video Island – which runs its own service as well as running services on behalf of Tesco, ITV and, most recently, Stelios Haji-Ioannou – also does not fear VOD-type services. “We’ve just made our 3 millionth rental – that’s the equivalent of 15 million gigabytes of content in just over a year. If you tried that using VOD on broadband, you would bring down the UK’s broadband system. And we already provide on-demand entertainment – our service for Tesco enables consumers to choose from 26,500 films and receive delivering within 24 hours, for a monthly subscription.”

From the point of view of the rights owners, however, it is irrelevant whether consumers rent VHS or DVD videos from the high street or over the internet, or get them from Sky, a cable or telephone company – so long as they get them legally. Indeed, as the BVA’s Carey says: “We don’t see VOD or downloading of films as a threat – we see it as an opportunity. Our members are already involved in developing other platforms.” She adds: “It may be a threat to retailers, though – unless they’re prepared to think outside the box.”