DISNEY SEEMS TO HAVE THE MULTISERVICE FEVER

Rhetorical question of the month: Is MovieBeam, the new VOD service to a proprietary set-top, the best way for Disney to show appreciation to its cable MSO customers for paying all those program rate increases? The concept triggers visions of the past, present and future: DIVX — the studios’ failed 1997-98 venture with Circuit City that asked viewers to rent $4.95 DVDs for two-day viewing plus PPV charges after that. A special set-top was needed for viewing, but few people wanted it. The retail chain blew $100 mil. on Hollywood’s vision. TiVo — a digital video recorder (DVR) box with VCR features that started slow on its own but is getting a new lift from integration into other manufacturers’ set-tops. Best feature: VCR functions on any channel vs. VOD-only programs for cable, MovieBeam subs. TiVo on DirecTV and EchoStar’s own DVR are pushing cable MSOs to offer DVR set-tops to willing subs. The bright future for media centers that either combine new devices or make it easier to hook up existing units. Mantra of tomorrow: Watch any program in any room at any time, using a robust, central source elsewhere in the home. Maybe Disney thinks MovieBeam is a negotiating tool for continued, or even higher rate increases on its cable programming. Maybe it’s why Comcast was so interested in Vivendi’s Universal Studios library, and its own VOD network. More likely, it reflects Hollywood’s long-burning desire to open new windows into viewer homes, as a competitive provider, even while it acts as vendor to other broadband distributors. Broadcast TV was first, then cable, then VCR, then dish, then DIVX (but only briefly), then DVD, then MovieLink (to the PC) and now MovieBeam (to the set-top). Hollywood sees a box office in every room. Disney will have to deal with the challenge of achieving scale in homes that want fewer, not more, boxes. And they’ll compete with their broadband industry customers, who charge less than MovieBeam’s PPV prices on top of a monthly charge and activation fee, plus use of a phone line. Meanwhile, cable will try to keep the viewer’s attention through its own set-tops, even while developing a new sales distribution system in retail stores, where MovieBeam boxes can be purchased. Talk about two-way TV. There are a lot of new directions in the media infrastructure. Ask N2 Broadband. The privately held, Atlanta-based VOD network startup turned profitable in just over two years by playing traffic cop for cable’s complex head-end revolution. N2 sounds like Hollywood when it calls a movie a “media asset” that needs to be protected in delivery and tracked to the customer from end-to-end. But with the Scientific-Atlanta heritage of its engineering, it’s also offering cable operators a software and operations support package to lower cost and increase the utility of on-demand services in a program sector that’s about to explode with quantity. “We make the parts of the head-end talk to each other in ways that weren’t possible before” says CEO Reggie Bradford. Adds Raj Amin, VP/bus. development: “We’re using software to drive as much cost out of the network as possible.” N2’s software is used in systems owned by Time Warner, which was one of the company’s seed investors, Cox, Comcast and Rogers, among others. To many folks, what happens inside a system’s head-end, and its billing-and-service back office, is arcane, and hardly the stuff of headlines. But as operators slash their set-top and network costs, and as they ramp up the number of channels and programs offered, they run into the issue of head-end and network constraints. If recent upgrades really are the last round of heavy capital expenditures, software upgrades are the future. That’s one reason why Disney’s new VOD initiative rings a jarring bell. We are heading for an era of mechanical integration via software, and its new set-top concept creates still more hardware. But then, Mickey seems to have caught cable’s multiservice fever: Don’t focus on potential customer confusion; the viewers are used to multiple choice. Just try to market your product in as many ways as you can. Paul Kagan is an active investor and money manager and often owns securities mentioned in his columns. He owns shares in N2 Broadband, whose stock is not publicly traded. He may buy or sell before and after the columns are published, and his positions may change at any time. Information in his columns does not represent a recommendation to buy or sell securities, nor is it a solicitation of any securities transaction.