Quotes of the Day

It's almost 2 a.m. in the English Bookstore in a cosmopolitan Berlin neighborhood near Savigny-Platz, and Markus Jonas is fiddling with a computer mouse to adjust the video image on his PC. He and three friends are watching a live broadcast of a Boston Red Sox baseball game that's taking place six time zones away. Manny Ramirez, the Red Sox left fielder, steps up to bat and belts a home run over the fence at Fenway Park, putting three runs on the scoreboard. "I've been a die-hard Red Sox fan for the past two years," says Jonas, 33, a recent American Studies graduate, who sometimes helps out at the bookstore while he looks for a job, as he sips a Berliner Kindl beer. "I subscribed to MLB.TV last year to watch the play-offs. It's a bit shaky sometimes, but lately the service has gotten a lot better."

Jonas can watch his beloved Red Sox thanks to the latest quantum leap in the quality of broadband Internet services. He subscribes to Major League Baseball TV, a Web-based sportscasting service that gives him access to nearly every Major League game for $14.95 a month. All Jonas needs is a computer with a broadband Internet connection. Then he surfs over to the MLB.com website, logs into MLB.TV with a password, and can choose between live broadcasts or archived games. MLB says 90 games are available on any given day. Some of these new Web broadcasters like MLB.TV only require a fast Internet connection and a monthly fee. Other broadband video services, like T-Online Vision or France Télécom's MaLigne TV, require users to first subscribe to their Internet service. As more and more consumers in Europe, the United States and Asia opt for broadband — delivering everything from sporting events and live concerts to movies on demand — high-quality video services are becoming the norm. A movie buff in Poland can watch Hollywood's latest blockbuster even if it never comes to his town's cinema; a Bon Jovi fan in Weimar, Germany, can see the rock star play an English gig in real time without leaving home. The era of live events and video on demand (VOD) is finally here.

Sound familiar? It should. The media industry has been promising VOD for more than a decade. In 1994, Time Warner, which owns TIME, launched an expensive experiment with an interactive television service in Orlando, Florida. For two years, 4,000 test homes were hooked up to a fast cable network with hundreds of channels (with 100 movies on offer), online banking and a pizza order service. It was an idea before its time. Time Warner invested at least $100 million in the project, which was plagued with technical snafus and a marked lack of interest. Time Warner pulled the plug in 1997, declaring the technology not ready for market. Since then, incremental innovations — like cable TV's pay-per-view services and the hundreds of channels available through satellite broadcasting — have increased consumer choice, but still fall short of the global video jukebox media moguls promised in the past.

So why is VOD happening now? There are several reasons, some of them technical, but the short answer is that broadband penetration — via phone lines and cable — is only now reaching levels that make the service commercially attractive. Technology research group IDC estimates that this year 27.8 million homes in Western Europe will have access through digital subscriber lines (DSL) that run over existing phone networks, while 7 million will be getting theirs via cable — in all that's 17% of European households with broadband access. But that number will more than double to 36% by 2008, IDC predicts. According to In-Stat/MDR, a technology research group based in Arizona, the current number of subscribers to Internet-based video services (primarily sports, movies and adult content) worldwide only amounts to 5.2 million, generating about $315 million in revenue. But look ahead to 2008 and again, the numbers start to explode: more than 42 million subscribers worldwide, generating estimated revenues of $3.7 billion — a growth spurt that has U.S. cable companies and European telecoms scrambling to entertain the cybermasses. And global franchises, like Major League Baseball, are scrambling too. "We are all collectively trying to figure out the best way to deliver content," says Bob Bowman, CEO of MLB Advanced Media.

And it's easy to see the appeal: these services are a couch potato's dream. Take T-Online, Deutsche-Telekom's Internet arm. Subscribers to its broadband connection simply login at the T-Online Vision website, go to the "View movies now" menu and choose from a list of some 300 titles. Once a film is chosen, the user just clicks on "Play now" and the movie starts almost immediately in Windows Media Player; the €3 or €4 per film charge is either deducted from the client's credit card or added to the phone bill. The video image occasionally stutters because networks sometimes get clogged or the PC interferes with the stream, and there are sometimes short delays due to network sluggishness or problems at the servers, but overall the quality is acceptable. With faster Internet connections, say analysts, picture quality will one day be similar to DVDs in the future.

VOD is winning fans outside Germany, too. Italy's e.Biscom was an early mover with its FastWeb Internet-based service, launched in 2001. For about €49 a month its customers get basic television and Internet service; for an additional €5.90 a month and €3 to €6 per film, subscribers can choose from some 5,000 video products, of which 1,000 are feature films. The latest blockbusters are Kill Bill: Vol. 1, The Lord of the Rings: Return of the King, Love Actually and Scary Movie 3. Customers can watch the films as often as they want during a 24-hour period, with the ability to stop, rewind and fast-forward. In December, France Télécom formed a partnership with TV companies TPS and Canal Plus to provide a full package of TV and VOD channels over DSL. The service, called MaLigne, offers nearly 80 channels for j16 a month and a premium package called TPS L Prestige for €21 a month that includes six movie channels, League 1 soccer and French basketball. So far the service has 10,000 subscribers; France Télécom says it expects to have as many as 100,000 subscribers by the end of the year.

Another breakthrough that's helped push VOD into prime time has come from the legal realm. For years, movie studios and sports leagues were reluctant to make their products available in digital form lest they be Napsterized like the music industry. But new Digital Rights Management (DRM) software can ensure that programs distributed by Internet are legal copies for which the copyright holder is being paid a fee. When a movie is purchased online, the file downloaded contains a digital proof of purchase. DRM software checks the receipt to ensure that only legally purchased content can be viewed.

The software has made Peter Kerkhoff's job a lot easier. As manager in charge of acquiring content for T-Online Vision, he spends most of his time flying between the company's headquarters, near Frankfurt, and Hollywood. "Over the past 18 months, I was in Hollywood 10 times," Kerkhoff says. "Each deal requires two or three visits and very intense negotiations." With the digital rights sewn up, Kerkhoff has managed to line up DreamWorks, MGM, Universal and 20th Century Fox in "output" deals by which a studio agrees to make its films available to T-Online for a period of three to five years.

It's still a tough sell. The studios know that the day will come when online distribution outpaces the sale of DVDs, but until then, why should they change a winning formula? "Everyone believes that the electronic rental [of films] is going to be concurrent with home video release. But you have a cash cow now and it is the business that is saving the studios," says a Walt Disney Co. executive, who spoke on condition of anonymity.

For the foreseeable future, the $49.8 billion VHS and DVD sales and rental industries look safe, since there are still a number of obstacles to VOD dominance. For starters, most VOD customers are watching movies or sports events on their computers, which is not an ideal viewing experience. "If broadband video is going to migrate to the mass market, it has to move onto the TV," says Jan Hein Bakkers, a senior analyst at IDC. T-Online offers a set-top box that feeds the images into the subscriber's TV, but prices start at a whopping €999.

Another barrier is that DVD rental outlets get the latest Hollywood movies six months before they become available to VOD or pay-TV services. Kerkhoff won't reveal details about the terms of his firm's contracts, except to say that T-Online's VOD service can first show movies 12 months after their release in German cinemas and six months after their release on DVD.

Some analysts believe the payoff won't come for years — if ever. Right now, Mark Schröder, head of content marketing at T-Online, estimates that, on a good weekend, about 1,000 T-Online Vision subscribers download a film. Hellen Omwando, an analyst at Forrester Research, says that the pool is simply too small to support any big fish. "The technology is there; it's the business model that's the problem," she says. Omwando estimates that phone companies offering VOD over DSL currently lose €2,666 a year per customer. That's partly because building the network is expensive, but also because the costs of acquiring and retaining customers is higher than the revenue generated. "In many ways [the phone companies offering video services over DSL] have no option because of the competition from cable. But the way the market is going today postpones profits indefinitely," Omwando says.

And yet for some, VOD services are clearly compelling. Back at the English Bookstore in Berlin, Ramirez has hit another homer. During a commercial, Jonas calls up the list of other live games available to view, and he and his friends cheer when they see that the Red Sox's archrivals, the New York Yankees, are getting scalped by the Cleveland Indians. Turning to a visiting Yankees devotee, Jonas quips: "It must be tough to be a Yankees fan tonight. Maybe you want to watch a different game during the breaks." If VOD continues to catch on, there should be plenty of other games to choose from.

• WILLIAM BOSTON
• Long promised, video on demand is here