Goodbye to the Video Store (continued 2/5)

Yet, if the future is indeed “anytime anywhere” video-on-demand, as digital-media buffs suggest, then Movielink, Intertainer and other online film sites will require a codec with many times the compression muscle of MPEG-2. The demand for such a codec is spurring a feverish race between developers all angling to create the de facto compression/decompression standard for online video delivery.

There are the established organisations, such as RealNetworks, Microsoft and Apple, each with a video- playing software product (ie, “media player”) that exploits the firm's own proprietary codec. With 29m users, RealNetworks hopes to propagate its popular RealPlayer beyond the desktop and into set-top boxes, cell phones, PDAs (personal digital assistants), and anywhere it imagines full-motion video might be feasible. Microsoft is closing in on RealNetworks with its Windows Media Player that is now reckoned to be on some 13m personal computers. Apple's QuickTime comes third with 8m users.

It is the upstarts, however, who are better positioned to rule the future of video-on-demand. For instance, the latest iteration of the Moving Picture Expert Group's standard, MPEG-4, is honed to function smoothly on consumer-electronics devices, which gives it an advantage over Microsoft, RealNetworks and Apple, whose algorithms are better suited for the beefier microprocessors inside desktop PCs. And there are a handful of others, including Pulsent, On2, and DivXNetworks, each hawking their own video codecs to content creators and electronics manufacturers, convinced that their technology is the best for the job.

Ryan Jones, who tracks media and entertainment strategies for the Yankee Group, a consultancy based in Boston, believes that Microsoft and RealNetworks will lead the way on the PC, mainly because they have reliable systems for stemming piracy. But gathering around the computer in the study to view the latest Star Wars sequel is unrealistic. “Consumers want the movie experience in their living room,” Mr Jones insists. That is exactly what those developing the newest video codecs are counting on. Mr Jones believes that the first step will be the evolution of the set-top box—the device that decodes the cable or satellite feed for displaying on TV—into a competitive consumer-electronics product.

Such a trend will turn the movie, video and TV businesses upside down. Currently, the design of set-top boxes is largely in the hands of the cable-TV operators, who want to control the kind of content accessible over their networks, such as pay-per-view (they choose the movie, you choose the time). Eventually, however, the cable providers will find themselves ceding control over the set-top box to consumer-electronics manufacturers such as Matsushita, Sony and Philips, on the one hand, and to content creators, on the other. Why? Because both the technological and market forces will simply overwhelm them. As a result, the set-top box will handle video-on-demand from any number of providers. Users will then access the content they wish to see using an Internet-like “browser” displayed on their TV screens. Eventually, film studios will rent or sell new films direct to the public.

The implications of such a trend: declining influence of the movie-distribution chains that hold sway over when and where new films are released; few video stores outside large urban areas; and dwindling attendances at cinemas everywhere. Cable providers will get their cut in the form of payment for opening their networks to third-party content.

Meanwhile, the set-top box will replace the VCR—the greatest single product the consumer—electronics industry ever produced, and one which, at its peak, generated half the industry's sales and three-quarters of its profits. That is why the consumer-electronics makers cannot afford to lose the battle for the set-top box.