Streaming Entertainment's Big Moment

Life may soon get even harder for satellite and cable TV providers. Already under pressure from phone companies eager to enter the video market, operators like Comcast (CMCSA) and DirecTV (DTV) are facing accelerating competition from a host of upstarts eager to deliver movies and TV programming on demand.

ZillionTV on Mar. 4 became the newest rival intent on giving consumers an alternative way to get their entertainment fix: delivered à la carte, via home Internet connections, instead of on a slate of channels in a monthly subscription package the way cable and satellite companies do. Once ZillionTV's set-top box offering is available later this year, it will compete in a crowded field that includes game consoles, Apple's (AAPL) Apple TV, Roku, TiVo (TIVO), and Hulu's video-streaming portal on the Web.

Companies are trying to come up with just the right mix of video to beat out the competition. On Mar. 3, Roku announced it was adding's (AMZN) Video on Demand library of 40,000 titles to its $99 Roku Video Player, joining Netflix's (NFLX) streaming video service, which offers about 14,000 titles of mostly older movies and TV shows. "Customers…are trading off cable or satellite subscriptions," says Tim Twerdahl, Roku's vice-president of consumer products.

A Future Only with Streaming?

A week earlier, Netflix CEO Reed Hastings suggested his company might launch a streaming video-only service later this year or early in 2010 for customers who no longer want to have DVDs mailed to them. "We recognize at some point in the long term, the streaming will be good enough that an appreciable number of people will find streaming is all they need," Hastings says.

There's no question that demand for video is on the rise. In the quarter ended Sept. 30, the typical American watched 142 hours of TV monthly, up about five hours from the same quarter the previous year, Nielsen Research shows. Internet use averaged more than 27 hours monthly, an increase of an hour and a half, according to Nielsen.

On-demand providers are betting consumers will opt for customized programming tailored to a person's tastes and schedule rather than watching at a set time or place—known in the industry as linear viewing. "Linear TV of yesterday is exactly that—the television model of yesterday," says Patrick Gauthier, ZillionTV's senior vice-president of product marketing and strategy.

The idea of Web-served TV is not just wishful thinking from companies trying to market new products. Researcher Parks Associates reports that among U.S. broadband households, nearly 50% are interested in receiving premium Web content, including TV shows and movies, through a connected set-top box. Nearly 35% are interested in receiving content through TV widgets, which are snippets of code that users click to access content stored on the Web.

Hollywood's Big Role

Hollywood also has a big hand in the trend. For years, major studios and content providers were reluctant to fix a system they didn't see as broken. Shows and movies were released at set dates and times and made available for purchase months later at Best Buy (BBY), Wal-Mart (WMT), and other retail outlets. Now, with DVD sales tanking and many people turning to the Web to watch video programming, Hollywood has become more open to alternative forms of content distribution.

ZillionTV, for instance, received its initial funding from major TV networks and Hollywood studios. When it begins selling its $50 set-top box through Internet service providers later this year, it will offer content from 20th Century Fox (NWS), NBC Universal (GE), Walt Disney (DIS), Sony Pictures (SNE), and Warner Brothers (TWX).

Massive investments in cheap online storage are helping usher in the era of personalized TV. Most of the services being offered today let the consumer "virtually" own the content. Instead of downloading the latest James Bond flick to a hard drive after purchasing it, Amazon and others store it on their servers. "You can access your library anytime and no longer have to worry about where you downloaded it," says Roy Price, director of Amazon's Video on Demand service.

Content providers love the idea. By streaming video instead of downloading it, there are fewer opportunities for users to copy the content without permission. And they still collect the lion's share of rental and purchase fees while relying on the streaming companies to do heavy lifting such as video encoding and storage.

Bandwidth Hangups

For their part, cable and satellite companies aren't standing still. Comcast, Time Warner Cable (TWC), and others already have large on-demand libraries. They also are installing equipment that as early as this year will let consumers order shows any time they want by freeing up cable bandwidth and opening up a two-way communication channel between the provider and the consumer's home.

There also are limits to the types of video that can be streamed to most consumers' homes. While 72% of U.S. households have broadband connections, only 28% have purchased the superfast connections necessary for delivering quality streams of video in high definition. That means many of the streams for now aren't DVD-quality. Cable, satellite, and telephone providers such as Verizon Communications (VZ) and AT&T (T) have dedicated pipelines into homes that have fewer bandwidth hangups.

Rival services say it's only a matter of time before they catch up. Even if they don't, it looks like customized TV is here to stay.

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