Escolar Documentos
Profissional Documentos
Cultura Documentos
October 1, 1999
TABLE OF CONTENTS
Executive Summary..............................................................................................................1
Management..........................................................................................................................7
Board of Advisors................................................................................................................10
Service Description.............................................................................................................12
Technology..........................................................................................................................15
Market and Competition......................................................................................................20
Marketing.............................................................................................................................32
Marketing Strategies...........................................................................................................34
Pricing..................................................................................................................................36
Internet Strategy..................................................................................................................37
Schedule & Milestones........................................................................................................39
Risks & Barriers...................................................................................................................40
Executive Summary
“The principal business opportunity driving investment in a broadband network is the
delivery of movies on demand to the home.”
Mitchell Kapor
Chairman of the Electronic Frontier Foundation
Founder of Lotus Development Corporation
Our Company
ViewPlus, Inc. is a unique video-on-demand (VOD) service company. We are a seed-
stage venture with a patent-pending video-on-demand technology and strategy that
distinguishes us from the rest of the field. While most of our competitors are focused
pointcast (one-to-one) systems, our service utilizes a multicast (one-to-many) system that
is more efficient and economical for our cable and direct broadcast satellite (DBS)
partners. Our cost-effective, flexible video-on-demand solution will immediately generate
new revenue streams and increase the service appeal for their customers. Additionally,
our patent-pending video ordering process and correlating broadband movie portal, with
web-based video ordering, will greatly enhance the convenience for our customers and
separate us from our competition.
Many companies are striving to deliver one convenient package of voice, video, and data
1
We will also launch in South Korea, which has a $356 million video rental market.
Some cable executives hope that video-on-demand will be the “DBS killer.” Current DBS
systems do not have two-way capabilities and face bandwidth issues similar to cable
companies in providing a point-to-point service. Many cable companies with infrastructure
upgrades believe video-on-demand and other two-way interactive services will provide the
competitive advantage over DBS services. So DBS companies, such as DirecTV and
EchoStar, have no direct counter-measure in sight until they deploy high-powered Ka-
band satellites.4
For the cable industry, a gap exists until true VOD services will be available to the mass
market. For ATM5 or MPEG Transport6 based VOD services, widespread infrastructure
investment and upgrades are necessary. Industry analysts believe these VOD systems
will not become a prevailing reality for at least five years in the U.S. DSL technologies,
which are being promoted by telephone carriers, are already being outpaced by cable
modem providers. The cable industry is fully confident DSL services and copper wires are
not suitable to carry high-quality video. Furthermore, almost every company is focusing
on the advent of digital television or other services. Even as cable giants, such as AT&T
and Comcast, push for digital service offerings, the reality is approximately 95% of cable
systems are still analog-based7. All these developments are marred by upgrade costs,
competing standards, and movie studios concerned about copyright issues. Given these
obstacles, it seems that offering an economically feasible and executable VOD service
may not be possible in the immediate future.
Our Solution
2
Downes & Mui, Unleashing the Killer App: Digital Strategies for Market Dominance, Harvard Business
School Press, 1998
3
Digital Subscriber Lines provide high-speed data services through phone lines. Regional Bell Operating
Companies (RBOCs), such as Bell Atlantic, are heavily promoting this service.
4
Hughes Electronics Corp. plans to launch these satellites, which will allow for two-way interactivity and
increased bandwidth, by 2002.
5
Asynchronous Transfer Mode uses available bandwidth to deliver digital video content in an efficient
manner. It does not make a distinction between packets of video, voice, or data.
6
Moving Picture Experts Group (MPEG). MPEG Transport is the transport stream that is part of the MPEG-
2 digital video compression standard. This is slightly more economical than ATM. More importantly, it
includes a method to support synchronization of audio with corresponding video sequence, which ATM lacks
(Paul Kagan Associate, Inc.). ViewPlus uses MPEG Transport through its multicast system, while some true
VOD systems utilize MPEG Transport with their pointcast technology.
7
As of March 1999, cable has 2 million digital subscribers. DBS has 9 million subscribers (all digital).
Our solution is a limited version of true VOD. Video orders will go through a short delay
before they are fulfilled (an average of 5 minutes for 80% of the requests and no longer
than 30 minutes for the remainder). Unlike pay-per-view and near-video-on-demand
systems, our solution provides viewers with improved convenience and access to a library
of hundreds of movies.
The leading VOD solutions base their technical design on the following premise:
subscribers' movie orders and times will greatly varying for each household. In order to
support this assumption, a pointcast system seems to be the ideal choice. However,
implementing a pointcast system not only requires costly infrastructure upgrades, but the
usage of high-end delivery and receiving equipment. Furthermore, market research
shows that subscriber video orders do not varying infinitely but actually converge on the
top twenty movies, and subscribing times and patterns can be anticipated. Based on
these findings, ViewPlus presents a better VOD solution.
We believe ViewPlus offers cable and DBS operators a compelling value proposition to
provide our service to their customers. Our competitors utilize pointcast technology (ATM
or MPEG Transport), which sends one data stream for each video order. Not only does
this solution consume bandwidth, but limits the revenue potential for each stream.
Recently, PaineWebber analyst Christopher Dixon stated it would not make sense for
AT&T to offer video-on-demand because of the bandwidth a two-hour movie would
occupy. He believed companies would provide services that produce the highest return,
which is currently voice traffic. For example, under AT&T’s current model it charges 10
cents per minute, so for equivalent network use it would have to charge $12 for a two-hour
video stream.
Our major competitors state their system's cost is $350 per video stream with a server
supporting 2,000 video streams. They assume for cable operators:
•One system covers 100,000 households with a 20% digital penetration rate, which
equates to 20,000 households.
•10% concurrent usage rate, which results in 2,000 video streams.
•500 household node8 with 10% concurrent use rate, which is fifty users9 at any given
moment for each node.
•For fifty users, true video-on-demand solutions are using five 6MHz channels to deliver
fifty 3Mbps10 MPEG2 video streams.
8
Approximately 40 nodes will cover 20,000 households.
9
50 users multiplied by 40 nodes equals 2,000 video streams.
10
Megabits per second. 8 bits equal one byte.
In examining these assumptions, our competitors face various dilemmas, such as system
capacity and subscriber bottlenecks, which can be solved through additional equipment
and infrastructure upgrades by cable operators. As the buyrate and number of concurrent
users increase, so does the cost for the system operators. In other words, these systems
have a fix cost associated with each video stream delivered, while our cost per video
stream drops as more consumers use it.
Our solution optimizes network use since it can service an unlimited amount of customers
with one data stream. ViewPlus provides system operators and consumers numerous
advantages:
• Economically viable business model with low-fixed costs and quick return on
investment.
• Enhanced convenience for customers by providing movie ordering through cable
remote13 or website14.
• Enhanced functionality, such as variable pricing15 and DVD capabilities16.
• Flexible system that can be used over two-way or one-way cable plants, digital or
analog systems, and through direct broadcast satellite and LMDS17 networks.
• Inexpensive solution for cable and satellite operators. Our digital system will cost
$700,000 and will recoup the overall investment in 13.5 months18.
• Reliable solution that will not encounter subscriber bottlenecks, which pointcast
systems will face.
11
Bandwidth available or "pipe size."
12
3Mbps is the standard size for a 2 hour movie file. 30Mbps divided by 3Mbps equals 10 video streams.
13
"Cable TV viewers are more than twice as likely to order pay-per-view movies if they can do it from the
remote control." (NewMedia, May 1999)
14
Movie ordering will be provided through ViewPlus's broadband movie portal. In 1999, a Comcast pay-per-
view, web-ordering trial resulted in a high consumer response and overall success.
15
Our multicast solution allows for variable pricing, which pointcast systems cannot offer. Variable pricing is
advantageous for consumers, and provides them an incentive to order movies.
16
Our service will give consumers similar functions that they can enjoy through a DVD player, such as
multiple starting points, foreign language capability, trailers, and additional movie footage.
17
Local Multipoint Distribution Services
18
Our projections are based on an area of 30,000 households, and we estimate the monthly VOD rental
rate to be 3.0 per household. This is based on two main factors: ViewPlus' pricing and an aggregation of
industry and VOD trial averages. First, ViewPlus will price the top 20 movies at an average of $2.60, which
is lower than the major video stores' average price of $3.00. We assume this will create a greater incentive
for consumers to purchase movies through ViewPlus. Second, we considered that the average U.S. family
rents 3.5 movies per month. Although our competitors, such as SeaChange, used a monthly buyrate of 3.5
rentals per household for their projections, we decided a more conservative base.
Our Strategy
ViewPlus will initially concentrate on its video-on-demand service for cable and DBS
subscribers. By using our proprietary technology, custom functionality, and marketing
strategy, we plan to create an attractive service for cable and DBS subscribers. Our four
strategic goals are:
• To build our brand as the premier video-on-demand service provider in the U.S. and
abroad.
• To rapidly capture market share of cable and direct broadcast satellite operators and
subscribers.
• To become a provider of various entertainment services, such as game-on-demand
and music-on-demand.
We believe video-on-demand is the ideal entry service for consumers to acquire the next
generation of set-top boxes, which will provide a wide range of interactive services (email,
e-commerce, web-browsing, and game playing). It is essential for us to obtain strategic
partners who would benefit from furthering our goal to be the premier VOD and interactive
service provider. We will establish a revenue-sharing model between the content
providers, cable or DBS companies, set-top box manufacturers and ViewPlus.
•To become the ultimate broadband and Internet movie portal by providing video-on-
demand ordering and related entertainment content.
Suk-Tae Kim
was a consultant at Andersen Consulting, LLP, in Seoul. During his stay at Andersen
Consulting, he was involved in a numerous projects covering strategy formulation,
business process reengineering and system (SAP) implementation. Recently he worked
on the convenience store (CVS) innovation project at LG Mart, a leading Korean retail
company. He conducted an environmental analysis on the current and future Korean retail
business. He also diagnosed CVS operations and developed a revenue-forecasting
program for new store sites. He worked on SAP Controlling module implementation
project at Automotive Parts Division, Samsung Electro Mechanics Corporation, where he
defined the cost centers and cost allocation rules. He was assigned an overseas project
in Brisbane, Australia to design new processes of individual housing application
registration/lease agreement processing and customer billing and receivable
management. He earned his B.S. in business administration from Seoul National
University in 1996. For ViewPlus Korea, he will be involved in content acquisition,
management, and operations.
Mu-Hyug Kwon
Ho-Seung Lee
was an associate consultant at KPMG Management Consulting in Seoul. He has recently
worked on a project that analyzed policy issues arising from the convergence of the
telecommunications and audiovisual industry for the Korea Information Society
Development Institute (KISDI), and a market entry strategy for Korea Telecom. In
particular, he was involved with convergence enabling technologies and revenue
forecasting for various services, such as telephony, video rental, and VOD. In addition, he
has participated in the leased-line service business plan for Korea Highway Corp.
Currently, he is on leave from KPMG to pursue his AICPA license. He earned his B.A. in
economics from Grinnell College in 1996. For ViewPlus Korea, he will be involved in
marketing and finance.
Bernard B. Moon
is a recent graduate of Columbia University’s School of International Affairs where he
earned his MPA (1998). His concentration was in telecommunications and new media
policy. Bernard has a variety of new media experiences from consulting Koplar
Communications on their InTOUCH TV venture, an interactive television service, to the
creation of several websites. He has also worked in the strategic planning unit of Digital
City Chicago, a partnership with the Tribune Co. and AOL. Prior to his graduate studies,
he completed a fellowship with the Coro Foundation. He earned his B.A. in English from
Michael Crow
is Executive Vice Provost and Professor of Science Policy at Columbia University in the
City of New York. He is responsible for the integration of Columbia University’s central
research functions which includes research support, technology transfer, strategic
initiatives, and an assortment of special projects. As Vice Provost for Research (1992-
1993), designed and implemented The Columbia Innovation Enterprise and the Columbia
Knowledge and Innovation Network.
Prior to moving to Columbia six years ago, Dr. Crow was Director of the Institute for
Physical Research and Technology at Iowa State University. While at ISU, he developed a
technology transfer program for business start-ups which led to the creation of more than
10 new ventures.
He earned his Ph.D. in Public Policy from the Maxwell School at Syracuse University in
1985, with his dissertation, relating to the structure and performance of energy
laboratories, serving as the basis for the National Comparative Research and
Development Project (NCRDP). He co-authored the forthcoming book, Limited By Design:
Federal Laboratories in the U.S. National Innovation System, which draws upon 12 years
of NCRDP work. He is the author of many articles and editor of several books relating to
the analysis of laboratories, technology transfer, strategic R&D management, research
universities, science and technology policy, and the practice and theory of public policy.
He currently sits on the board of directors for Engineering Animation, Inc. and In-Q-It, Inc.
Young-Gil Kim
is President of Handong University. He still maintains his professorship of material
engineering at the Korea Advanced Institute of Science and Technology (KAIST) where he
has been since 1979. Additionally, he was a visiting professor at UCLA and worked as a
researcher at NASA from 1974-76. He is a fellow at the American Metal Research Society
and president of the Korean Innovative Science Research Society. His numerous awards
include the King Sejeong Award for Science (1989), the Presidential Dongbeck Medal for
Scientific Achievement (1987), Scientist of the Year by the Korean Press (1987), the
American IR-100 (1980), and the NASA Tech Brief Award (1976 & 1981). He has also
Dr. Kim is the holder of 40 Korean and U.S. patents. His inventions include special steel
CAM-1, electronic semiconductor lead frame PMC-102, and special alloy MA 6000. He
earned his Ph.D. in material engineering from Rensselaer Polytechnic Institute, M.S. in
metal engineering from the University of Missouri at Kansas City, and B.S. in metal
engineering from Seoul National University. Dr. Kim is widely considered the leading
material scientist in South Korea.
Woo-Young Lee
is Vice-President and Professor of Business Administration at Sogang University. He
previously served as Dean of the Graduate School of Business at Sogang University from
1993-1997. He has been a visiting professor at Harvard University (1984-1985) and an
assistant professor at the University of Northern Michigan (1976-1977).
Dr. Lee was the president of the Korean Marketing Association from 1994-1996 and the
chief business advisor for the Korea Broadcasting System from 1991-1993. He earned
his Ph.D. in business administration from the University of Nebraska, M.A. in business
administration from Northern Illinois University, and B.A. in political science from Yonsei
University.
Other Relationships
Morrison & Foerster LLP is one of the largest international law firms with more than 600
lawyers in 15 offices worldwide, including San Francisco, Los Angeles, Sacramento, Palo
Alto, Orange County, Walnut Creek, Denver, New York, Washington D.C., London,
Brussels, Beijing, Hong Kong, Singapore, and Tokyo.19 Morrison & Foerster was recently
ranked the “Top IP Practice” by Am Law Tech as the largest intellectual property practice
of any general practice firm.
19
The leading VOD solutions base their technical design on the following premise:
subscribers' movie orders and times will greatly varying for each household. In order to
support this assumption, a pointcast system seems to be the ideal choice. However,
implementing a pointcast system not only requires costly infrastructure upgrades but also
the usage of other high-end delivery and receiving equipment. Furthermore, market
research shows that subscriber video orders do not varying infinitely but actually converge
on the top twenty movies, and subscribing times and patterns can be anticipated. Based
on these findings, ViewPlus presents a better VOD solution. By utilizing existing
infrastructure and broadcast technology, ViewPlus provides a VOD solution that not only
serves subscribers' needs but also is cost-effective for system operators and can be
readily implemented.
To our end-customers, ViewPlus provides a whole new viewing experience. They have
access to hundreds of movies and television programs at their disposal 24-hours a day.
They can request a selection using a remote control or our web interface, and orders will
be fulfilled within an average of five minutes. Customers will have full VCR-functionality
with fast forward, pause, and rewind capabilities.
The consequential news to our cable and direct broadcast satellite partners is that our
service is not only readily available, but is also cost-effective to deploy. By utilizing existing
CATV or satellite infrastructure and technologies, ViewPlus’s products minimize
incremental expenses. The result is fast market penetration and rapid return on
investment. Furthermore, compared to our point-to-point competitors, our design
inexpensively accommodates growth in the subscriber base. These savings, from low
entry cost to inexpensive scalability, presents cable and DBS companies a compelling
reason to partner with ViewPlus to offer a VOD service to their customers.
Once establishing itself, ViewPlus plans to leverage its platform and offer services such as
music-on-demand, music-video-on-demand, game-on-demand, and e-commerce,
therefore offering our subscribers the ultimate multimedia experience.
True VOD is defined by instantaneous delivery of video content and full VCR-functionality.
Currently, true VOD solutions are being implemented by utilizing ATM technology over
ATM compatible networks (ADSL, two-way hybrid-coax). These solutions are based on a
pointcast system, which sends one data stream to the home for each movie order. This
allows for instantaneous movie ordering and full VCR-functionality (PLAY, STOP, FF, RW,
or PAUSE). However, due the requirement of infrastructure upgrades and equipment
costs, current true VOD solutions have high-end functionality but remains an expensive
solution.
PPV and NVOD offer a limited number of movie titles in long intervals without full VCR-
functionality. NVOD is simply a more frequent version of PPV. Instead of every hour, it is
usually at half-hour intervals.
The VOD service offered by ViewPlus is a limited version of true VOD and can be
categorized as a service between NVOD and true VOD. ViewPlus’s VOD service can
offer a wide selection of titles as true VOD. However, our service delivers the requested
video content in quick 10-minute intervals (average wait time is 5 minutes). Additionally,
ViewPlus’s VOD solution offers full VCR-functionality similar to true VOD. Overall,
ViewPlus offers a VOD solution that is more advanced than what PPV and NVOD
currently provide, and comparable to the true VOD solutions currently available.
Since ViewPlus utilizes broadcast (multicast) technology to deliver its content, the revenue
per stream is not limited to a single order but an infinite amount. ViewPlus’s patent-
pending movie ordering process leverages the strengths of broadcast technology
(described below and in following sections). Continuing from our example above, for our
solution, if one hundred subscribers order “Titanic” at the same time, rather than one
hundred separate streams being sent out, only one stream is required. Furthermore, if
30,000 subscribers order “Titanic” at the same time all subscribers could be satisfied by
one stream. ViewPlus’s system has no subscriber bottlenecks, and does not have any
additional costs associated with increases in digital penetration or purchase rates.
A recent trial by Comcast provided consumers a web-based ordering option, which was an
overall success and resulted in 46% of orders coming from first-time pay-per-view users.
We believe our unique ordering process coupled with our video-on-demand service will
bring an enormous amount of traffic to our website. Not only will ViewPlus leverage its
traffic by selling advertisements on its website, but will also offer targeted marketing for
our advertisers. ViewPlus plans to keep a profile of each subscriber, track every movie
order, and create a database of video rental patterns.
ViewPlus will offer movie-related content such as movie reviews, movie trailers, short
films, and interviews with Hollywood stars. The combination of our VOD service and
content will be providing the synergy for ViewPlus to become the premiere broadband
movie portal.
Unlike the pointcast technology used by other VOD solutions, we utilize a broadcast
technology. This enables us to efficiently use the bandwidth available and generate more
revenue. It also provides us with a variable pricing mechanism which empowers viewers
to control their price.
Our solution uses a buffering technology in the client set-top box (STB) to provide viewers
with DVD like functions and personal control over the content they are watching.
Decentralized control on the content significantly reduces the load on head-end server
and enables simpler and cheaper head-end equipment.
The broadcast and buffering technologies used in our VOD solution allows our solution to
be indifferent towards the size of the network. Therefore, our solution does not need any
additional upgrades or investments as the buyrate or size of the network increases.
Technical Design
Head-end System
On the head-end side, our VOD system consists of three major components: Content
Delivery System, Control System, and Data Communication Module. The technical
architecture needed for a single CATV network to provide a VOD service is shown below.
The tec hnic al arc hitec ture for our VOD s ys tem.
QPS K MOD
Control S erver
HFC
... Network
QAM
Content Server Modulators STB
The Content Delivery System consists of a content server and QAM modulators. The
The Control System is the brain of the whole VOD system. It is responsible for processing
viewers’ orders and commanding the content server to deliver the requested videos.
Viewers’ orders come from STB through the Data Communication Module and also from
our Internet website. Order processing includes authenticating the viewer and managing
channels and videos in order to schedule the delivery of movies and programming.
Users place an order from the electronic program guide (EPG) screen generated by the
STB. The contents for the EPG, which includes content listing and pricing information, is
generated from the control system and delivered to all STBs and used for active
promotion. Determining the variable prices based on each timeslot’s number of viewer
participation is another major task for the control system. Additionally, the control system
generates order records for billing purposes and interfaces with existing head-end’s billing
and subscriber management systems.
The Data Communication Module handles all the data communication between the control
system and STBs. QPSK modulator and demodulators are used for data communication
separate from broadcast channels. Data Communication Module is a generic module built
into the broadband technology for any application utilizing data communication. For our
VOD solution the Data Communication Module delivers order and confirmation
information between the control server and STB.
Set-top Box
On the STB side, EPG functionality, dynamic channel allocation protocol, content buffering
and playback, and the data communication functionality with the Control System needs to
be implemented. The content of the EPG is configurable in real-time from the Control
System that enables active promotion to the viewers on video content and their prices.
The dynamic channel allocation protocol needs to be implemented to align the receiving
channel with the broadcasting channel from the head-end system. The content buffering
and playback need to be implemented to download the content rapidly and to playback
from the buffer with DVD functionality for personal control on the content playback.
Furthermore, the communication function needs to be implemented to send order
information and receive the assigned channel and EPG information.
Movie purchase event is described with actions taken by the STB and
headend systems.
Once the STB displays the confirmation message to the viewer, it sends back an
acknowledgement to the Control System and configures itself to the assigned channel at
the expected start time. The Control System collects the video content requests for one
timeslot (10 minutes) and directs the Content Server to prepare for the broadcast at the
end of the timeslot.
The protocol described above is called Dynamic Channel Allocation protocol because the
broadcast channel for delivering the content is determined dynamically on real time. The
broadcast channel is selected among the downstream channels allocated for VOD
service. Our VOD solution requires at least fifteen 6 MHz channels for minimum
configuration and needs thirty 6 MHz channels for optimum performance. The usage of
the CATV bandwidth and information flow between the STB and the Control System are
shown below.
Control
System
STB
¨ç ¨é ¨è ¨ê
Ñ Information flowbetween Control System& STB Ñ
1. STB sends request for VOD service to Control System
2. Control System assigns a channel and sends the information back to STB
3. STB acknowledges and sets its channel to the assigned channel
4. Control System sends the content down to STB through the assigned channel
* Frequencies used for existing CATV broadcasting varies from operators to operators.
* * Data downstream can be an In-Band channel as shown above or an Out-Of-Band channel.
* * * ViewPlus needs to use 180Mhz out of this bandwidth for optimal performance.
In ViewPlus’s VOD scheme, the content server at the head-end uses a broadcast channel
to fulfill a video request. This is in contrast to the more popular point-to-point counterparts,
where a personalized data stream is used for each STB, creating a massive bandwidth
and server load problem at the head-end when high concurrent usage occurs. ViewPlus’s
VOD system sends out a single stream per content for multiple requests at set intervals to
all STBs. Only the STBs with correct decryption key are allowed to accept and view the
content. Therefore, within a given time interval, the bandwidth requirement is the same
whether a particular content is order by one viewer or ten thousand viewers.
Our design uses a timeslot to collect orders. The timeslot is a time interval to collect
orders. During this timeslot, our VOD system captures as many requests as possible and
fulfills them concurrently at the end of the timeslot. We believe that 10 minutes is a short
duration acceptable for viewers to wait without dissatisfaction. Actually the average wait is
5 minutes since requests are collected for 10 minutes and fulfilled at the end of a 10-
minute interval. Our timeslot concept maximizes bandwidth utilization and service delivery
while minimizing costs. This short period of wait will also provide a valuable advertisement
space.
Currently, our solution guarantees to deliver 30 different videos for each timeslot. A
Clearly, the duration of a timeslot, available bandwidth, and the number of videos fulfilled
per timeslot are interrelated to each other. For example, increasing the number of videos
provided for each timeslot requires either increase in bandwidth or increase in the timeslot
duration. Thus, increasing bandwidth will allow us to offer more videos per timeslot.
Our main competitor will be the video rental industry. It will be crucial for ViewPlus to
accentuate the benefits and conveniences of our service compared with the traditional
method of selecting movies for the home. It is also essential to our success that we
differentiate ViewPlus’s service from pay-per-view, enhanced-analog or digital cable
services, and other offerings for our customers and strategic partners.
We are able to provide our solution to any type of multi-channel video providing firm:
traditional cable companies, direct broadcast satellite services (DBS), and telco cable
services. It is important for our venture to build the right strategic alliances.
Our additional competitors are companies preparing for true VOD services to the mass
market. We need to be constantly aware of their operations, changes in cost structures,
and development of new technologies.
Video
Purchase Video Rental
15% 15%
Recorded
Music
15%
Movie Theaters
9% Cable &
Satellite
Subscription
Source: Standard and Poor's 46%
Even with the recent turmoil and changes in the video industry, consumer demand is
stronger than ever. People's desire for movies as a source for entertainment is evident
from a recent study conducted by The Yankee Group shown below.
• Hollywood Entertainment Group is the second largest retailer with over 1,100 video
stores in 42 states. It has been opening approximately one store per day. In 1997, it
experienced a sales increase of 65.6% and sales of $500.5 million. Of its sales,
$418.5 million (84%) were from rentals and $82 million (16%) were from product sales.
Its stores present a decorative big-screen theme and typically carries 10,000 movie
titles. Recently, Hollywood acquired Reel.com the premiere online video sales store.
• Movie Gallery Inc. is third largest retailer in the U.S. with about 840 video stores and
100 franchises in 22 states, concentrated in the Southwest and Midwest. Each store
carries anywhere from 3,000 to 10,000 movie titles. In 1997, its sales hit $260.4
million, an increase of 2.4% over the previous year. $220.8 million (85%) accounted
for its rental revenue and $39.6 million (15%) accounted for its product sales.
• West Coast Entertainment Corporation owns about 290 video stores and franchises
220 more. In 1998, West Cost obtained $102 million (82%) in rental revenue, $19.3
million (16%) in product sales, and $2.5 million (2%) in franchise fees, which totaled
$123.8 million. This was a 68.9% increase over 1997.
• Hastings Entertainment Inc. operates over 125 superstores in the Midwest and
western U.S. In addition to video rental and sales, it provides music, books, and
magazines to its customers. Hastings primarily targets underserved markets that are
towns with populations between 25,000 to 150,000. Video rentals accounted for 21%
($74.7 million) of its total revenue of $357.7 million. $131.1 million (37%) in music and
$93.9 million (26%) accounted for more.
Our weaknesses are one; we may not be able to provide the latest movies on the same
date as they are released in video stores. Due to the current bargaining power of the
video market, PPV service providers, which are closest to VOD service provider, are
allowed to air movies only 45 days after the video market releases the movie. We believe
this will eventually change as the VOD market gains bargaining power with content
holders. Two, the advancement of technology cannot directly replace the social and
cultural exercise of people going to their local video stores with family and friends. For
some, this arranges an opportunity to bond and share time with family and friends.
CATV Market
The cable industry in the U.S. has experienced steady growth over the past several years.
In 1991, the industry penetration of television households was 60.6% or 55.8 million
homes. By 1997, 65.9 million out of 98 million television households (67.2%) had basic
cable service. 20 In 1997, the overall industry revenue was $30.8 billion generated by
10,850 cable systems across the U.S.21 Of this total revenue, basic subscriber services
yielded $20.4 billion and pay services yielded $4.6 billion. The remainder came from local
20
Nielsen Media Research
21
Paul Kagan Associates, Inc.
With relevance to ViewPlus, in 1997, cable systems offering pay service had a penetration
rate of 73.9% or 48 million households. In all cable households, pay services held 8% of
viewing shares while broadcast networks had 39% and basic cable had 46%. The chart
below provides a more detailed analysis of viewing shares across all television
households and among cable subscribers. It reveals the distribution of viewing (Monday-
Sunday, 24 hrs/day) during a given broadcast year. A broadcast year begins on October
1st and ends on September 31st of the following year.23
To increase its services and capture more viewing shares, cable companies have been
building for the future. In 1998, the cable industry invested $6.01 billion in infrastructure
improvements for enhanced picture and sound quality, increased programming, and two-
way capability.24 From 1996 to 2001, the industry is projected to spend an estimated $33
billion to upgrade its facilities.
By the end of 1998, it is projected that 44.8 million cable homes (47%) will be passed by
22
Paul Kagan Associates, Inc., The Cable Investor, April 14, 1998
23
Nielson Media Research & Cable Status Report Data. Due to multiset use and rounding off of figures, the
totals are over 100%.
24
Morgan Stanley, 4Q/1Q Preview, January 30, 1997
For ViewPlus’ solution, a cable system needs to have the necessary bandwidth, but two-
way plants are not required. The attraction to our system is the flexibility over current
cable infrastructure. Our system can be implemented over one-way or two-way plants.
Beyond cable companies’ projections, the reality is upgrades are not rapidly moving
forward. Recently26, TCI stated only 26 percent of its cable infrastructure had been
upgraded to two-way plants.
Thus, we can operate within the current cable infrastructure as cable companies invest in
the future. Our ability to operate immediately allows us to capture market share now. And
as the industry converts to two-way plants, ViewPlus’ technology can easily accommodate
the upgrades and grow our current market share.
25
Paul Kagan Associates, Inc.
26
March 1999
40%
30% 20%
20%
10%
0%
1997 1998 1999 2000 2001 2002
In 1999, the cable industry has been heavily promoting “digital” cable to compete with the
growth of DBS companies. These digital services provide more specialized content and
movie channels to compete with direct broadcast satellites’ 180+ channel offering. Many
cable companies, such as TCI, have aggressively advertised to extol the benefits of their
“digital” service over direct broadcast satellite.
This push is not only external to customers but also internal to system operators. Cable
industry leaders are pushing system operators to upgrade their analog systems to digital.
Broadcast
22.9%
Analog
Satellite Cable
10.5% 64.4%
Digital
26 Confidential & Proprietary
Cable
Source: Paul Kagan Associates
2.2% (Wired April 1999)
Today’s reality is less than 5% of all cable systems are digital. This provides ViewPlus
with the unique opportunity to cater to either type of system during this push towards
digital. Though our strategy is to focus more on our digital product in the U.S., our
extremely low-cost analog system can also greatly benefit those system operators who
are not rushing towards digital upgrades.
Competition against cable companies has been increasing over the past years. Direct
broadcast satellite services (DBS), such as DirecTV and EchoStar, had 4.3 million
subscribers in 1997, which is a growth of 62% over the previous year. There are over 11
million subscribers to non-cable multi-channel video providers (DBS, wireless cable
systems, etc.) which is over 14% of the multi-channel video market.27
Cable companies have also faced additional competition from telcos. The
Telecommunications Act of 1996, opened the doors for the ‘Baby Bells’ to offer cable
service. For example, Ameritech’s americast service is available in select areas of
Chicago, Cleveland, Columbus and Detroit, and has over 100,000 customers within a year
of its launch. GTE already has 25,000 subscribers and plans to “build video networks in
66 markets reaching about 7 million U.S. households by the year 2003.”
Video-on-Demand Competitors
Since the early 90’s, cable companies and telcos have spent hundreds of millions of
dollars testing video-on-demand & interactive television systems. Their trials have proven
viewers want and enjoy watching movies whenever they desired. Unfortunately, their
systems were too costly for the average consumer. Time Warner’s well-known Full
Service Network trial had a minimum installation cost $12,000 per household28.
Interactive television, which was billed as the ‘next big thing’, would be place on hold due
to its high cost and the onslaught of the Internet.
27
National Cable Television Association website (www.ncta.com).
28
Red Herring, January, 1999, p. 64
Now with lowering costs and the rush toward digital television, video-on-demand and
interactive television has come back to the forefront of the industry. The following are
competing technologies and their supporting companies:
"More questions are being raised about Intertainer's technical feasibility. The market
for DSL services is currently fragmented because the industry has not agreed on a
standard for the technology. ...insiders doubt that Intertainer could scale on DSL
networks. They point out the DSL service providers, which are already short on
space, would each need a terabit server in the central office. Because DSL signals
can be transmitted only a short distance without degrading, Intertainer would have to
place a huge number of terabit servers all around the country. …And because the
digital set-top boxes needed to play Intertainer’s programming over TVs have not yet
been developed, Intertainer will initially have to convince people to watch videos over
their PCs-a daunting task, indeed."
- Red Herring, January 1999
"The inherent problem with DSL is that service is only available to customers within a
three-mile radius of a phone company central office, which substantially reduces the
number of potential customers. The only way to reach these customers would be to
substantially reconfigure the existing networks, costing billions of dollars that the
RBOCs may be unwilling to pay.”
- Forbes, February 1999
DIVA Systems Corporation was formed by Paul Cook, the founder of Raychem, in 1995.
Its scalable video server was initially developed at Sarnoff Corporation (formerly RCA
Labs), and served as the foundation for its OnSet video-on-demand solution. OnSet is an
end-to-end solution similar to ViewPlus’s, but provides true VOD to the consumer.
Disadvantages:
• Incredibly high break-even point and return on investment.
• $80 million cost for a 4,000 household trial.
• Uncertainty regarding its scalability over large areas.
Intertainer, Inc. was founded in 1996 by Richard Baskin, Jeremiah Chechik, and
Jonathan Taplin. The founders have various entertainment media connections that they
hope to leverage to build a quality content offering to their customers. Intertainer is a
service delivered through cable modems or DSL to a customer's TV or PC.
Disadvantages:
• Based on cable modem or DSL technology, which has lower quality video and
suffers from inconsistent delivery of video and sound.
• Small customer base within infant markets.29
SeaChange is the television industry’s leading supplier of digital server systems. Based
on a scalable, distributed software architecture and standard computing components,
SeaChange systems allow television operators to automate the distribution and
29
Currently, about 500,000 people use high-speed cable services, such as RoadRunner or At Home, and
only 100,000 use DSL. By 2002, Forrester Research projects only 15 million homes will use cable modems
and 2 million homes will use DSL.
Disadvantages:
• Dependent on digital cable architecture.
• Expansion costs. One standard rack can only support 5,000 VOD subscribers.
30
Taken from SeaChange International, Inc. corporate literature. (NASDAQ symbol: SEAC)
Strengths Weaknesses
Cost effective & early ROI provide compelling reasons for MSOs & DBS companies to partner with ViewPlus
No “disappointment factor” (vs. video rental stores)
Patent pending technology 10-minute wait in air time
Provides convenience for consumers Delay in release window of movies (compared to video)
Provides savings (no late fees) for consumers
Empowers viewers to control their prices 30 contents delivered for every 10-minute interval.
Uses existing cable infra-structure
ViewPlus
Opportunities Threats
• Voracious Viewers
This segment is mostly young (72% under 40) and female (66%). They are very likely
to have children at home (74%) and are more urban (40%). In general the Voracious
Viewers segment is comparatively less educated (18% college grads) with lower
household incomes ($35K average). This segment is more likely to be frequent renters
(39% rent once a week or more), more likely to be renting videos more often, rent the
most videos per visit (2.6) and purchase the most videos (13.3 average over past
year).
• Hi-Fi Bachelors
This segment is the youngest group (26.5 average age), mostly male (69%) and the
least married (6%). Like the Voracious Viewers, this segment is more urban, less
educated and have relatively low household incomes ($31.2K average, the lowest of
any segment). Hi-Fi Bachelors are most likely to be frequent renters (40% rent once a
week or more), most likely to be renting more videos and rent from the most different
video stores (24% rent from 3 or more stores).
• SUV Suburbanites
This segment is young (36.9 average age) and mostly female (63%). Most in this
segment are married (86%) and almost all have kids (96%). SUV Suburbanites are
educated (45% college grads), mostly live in the suburbs (43%) and have the highest
average household income ($45.6K average). This is most likely the group thought to
be the highest volume purchasers and renters, however, SUV Suburbanites include
just an above average proportion of high frequency renters (33% rent once a week or
more) and are slightly above average video purchasers (8.4 average over past year).
• Cultured Ladies
This segment is the oldest group (84% over 40) and mostly female (72%). They are
mostly married (71%) with virtually no children at home (3%). They are relatively
educated (35% educated), have higher household incomes ($43K average) and are
less urban (30%). This segment is less likely to be high frequency renters (21%) and
are more likely to be renting fewer videos (37%). They are lovers of "classic" films and
are the only segment to favor dramas (63% pick as favorite).
• Disinterested Gentlemen
“The two most valuable renter segments are the Voracious Viewers and Hi-Fi Bachelors.
These two groups represent 40% of video renters but account for 55% of video rental
activity. The SUV Suburbanites, above average renters, represent 25% of the video
renters and 25% of the video rental activity, while the Cultured Ladies and Disinterested
Gentlemen segments represent 36% of video renters but just 19% of video rental activity.”
As the Yankelovich study points out, our target customers are a minor fraction of the
overall viewing population, but will be a majority of our revenue source. This is further
supported by a recent study conducted by The Yankee Group shown below.
The system costs less than US$600,000 and allows us to retrieve the hardware/software
investment within 10 months. This is based on a 10% daily purchase rate from a CATV
network of 30,000 subscribers (10% purchase rate means one subscriber purchases 3.0
movies per month).
Studying the rental patterns of the video market, we discovered that over 80% of the
rentals are from the top10 movies in video stores. This figure climbs up over 90% if we
include the top twenty movies. The movie purchase patterns may vary in the VOD market
because the added convenience of the service enables us to reach a wider customer
base that might diversify the movie selections. Overall, the rental patterns of video market
should not significantly differ from the VOD market. There is the possibility the purchase
patterns might even converge more narrowly on the top10 movies. Market research has
shown many people rent outside of the top10 because of the lack of copies in video
stores. With ViewPlus, this would never happen.
Quality Content
Acquiring quality content is an essential success factor for our venture since it is useless if
there is nothing to watch. From researching our competition, we discovered that some
trials failed because they overlooked the importance of acquiring popular and interesting
movie titles. Our efforts will focus on securing licensing agreements with most of the
major studios and attempting to shorten the release window for the VOD market so that it
is comparable with the video rental industry.
The release window is an initial barrier for us to directly compete with the video rental
industry. Currently, the release window for the PPV market, which is the most similar to
VOD, is at least 45 days after movies are released in video stores. This is a significant
handicap when competing with companies such as Blockbuster. Fast market penetration
is important for us to garner enough customers, so that we can negotiate the best terms
Revenue-sharing agreements are standard between the movie studios and video-on-
demand providers. Fifty percent of the revenues will go to the movie studio and the
remainder will be divided among the system operator, set-top box manufacturer, and
ViewPlus. Movie studios are in the favorable position of distributing their movies through
various channels while cable operators and video-on-demand providers battle for market
share.
Patti Mae
Associate Professor, M.I.T. Media Lab
We will price our top10 movies to directly compete with the video rental industry. A top20
movie rental is $2.50. In addition, movies are released to the pay-per-view market (similar
to our market) a minimum of 45 days after the video rental market. We believe that in the
market entry stage the convenience offered by a VOD service is not enough to overcome
this release delay and justify a higher price point.
Movie titles outside the top10 will be priced at $3.50. This is a different approach from the
video rental market where stores price older titles at lower prices. The primary reason for
this pricing structure is to encourage customers to select from our top10 movie list. As
described in the Technology section, there are a maximum number of titles that can be
fulfilled during a given timeslot. Orders requested beyond the maximum number will be
pushed back to later timeslots. Therefore, bandwidth will be more effectively utilized when
a lesser number of non-top10 movies are chosen.
However, higher pricing will not eliminate the possibility of non-top10 movies from being
ordered. When a non-top10 movie is ordered, we need to maximize our revenue from the
already committed bandwidth. This is where we need to provide incentives and actively
promote these choices. Once a non-top10 movie is selected, we will discount the price to
$2.00 or lower for all our customers. This notice for discounted movies will be displayed
on our order screen and preview channel. We hope this will create a piggyback effect and
allow us to efficiently use the bandwidth.
We are currently seeking a business process patent for our pricing method, so we could
not discuss it in detail.
Goal
• To become the ultimate broadband and Internet movie portal by providing video-on-
demand ordering, entertainment news, movie reviews, and related services.
Objectives
Industry Background31
This year Prevue Networks32, TelVue33, and Comcast34 jointly conducted a field test for
pay-per-view online ordering in select areas. Prevue Online, Prevue Network’s website,
attracted approximately 10,000 visitors and 270,000 page views per day. Prevue Online’s
visitor profile was:
• 70% were premium cable subscribers.
• 60% watched television and surfed the Internet at the same time.
• 45% ordered pay-per-view in the past six months.
Integrated into our online video-on-demand ordering will be our unique ordering process.
Our goal is to encourage consumers into a piggyback effect and maximize the amount of
orders for each movie demanded. Currently, we are seeking a business process patent
for our ordering process, so details cannot be disclosed.
Implementation
We are considering two methods of implementing our strategy. First, to internally manage
our broadband movie portal. This includes staffing, website development, content
development, and backend integration with cable or satellite system operators. Second,
is to outsource all or some components of the operation. For example, we would seek out
content partnerships with established movie websites, such as Mr.Showbiz.com,
Film.com, or TVGuide.com. Our video-on-demand service could greatly increase their
service offerings to consumers, while we would benefit from co-branding with more
established names. We can also outsource our website development to a variety of
companies. These are issues that need to be further addressed.
35
Paramount Picture Corporation is excluded due to its relationship with Blockbuster through its parent
Viacom. Paramount has already rejected a licensing agreement Diva Systems, a VOD solutions provider.
Risks
Unknown VOD purchase patterns
We assumed that the VOD purchase pattern will follow the video rental pattern. Video
rental patterns indicate that Top10 titles account for over 80% of the rentals and Top20
titles account for over 95%. In our solution, viewers will experience delays if VOD
purchase patterns are not clustered on the top titles, which will cause potential set
backs in implementation. However, since VOD is aimed at replacing the video rental
market, we assume the rental patterns will not significantly change. As mentioned in
our Marketing and Pricing sections, we intend to promote the orders of the Top10
movies by pricing them lower than non-Top10 movies, and offer a discount for delayed
customers. Furthermore, our technical solution is scalable, and we have already
planned for a digital version of our system. This will increase the available channels
to an average of 30-60 channels per time slot from the current average of 10 channels
per time slot. We know that our digital solution will satisfy 100% of our customers.
Barriers
Release window for videos
An impending threat is the interference of video rental chains to lengthen the release
window of content for ViewPlus’ customers. Currently, the video rental market
contributes to 50% of the movie industry’s revenue and 60% of their profits.
Therefore, the major video rental chains, such as Blockbuster, can influence our terms
with these content providers. A delay in the release window is a disadvantage in
competing with the video rental market. This is why ViewPlus will focus on rapidly
building our customer based to gain negotiating power with the movie studios.