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By eweek  |  Posted 2001-07-02

A breakthrough in digital compression could lead to widespread deployment of video-on-demand, as cable and telephone broadband operators discover a profitable model for rolling out the service.

Using new methods of compressing video and audio streams, regional Bells and others see a way to reach more customers, using less bandwidth while providing higher quality.

Still in beta tests, On2 Technologies is using the VP4 method of compression, which promises up to 15 percent reduction in bandwidth usage, compared with video streaming standards used by larger companies such as Microsoft and RealNetworks.

Until recently, the cost of transmitting a two-hour movie over broadband has run about $5 — roughly $2 more than most viewers will pay for a movie rental. But with the new technology, the cost falls to about $1.25, leaving room for profits even after the cost of content is added.

"Youre getting a benefit on two fronts," said On2 CEO Douglas McIntyre. "Bandwidth costs are dropping and compression technology is improving. It means that any of the long-form feature programs that you see now, including sports and movies — the really expensive stuff that studios spend $100 million to produce — can get to market without back-breaking costs."

The low cost of compressing and distributing video-on-demand over copper wires or cable spells trouble for video retailers. For example, Blockbuster tried to strike deals to distribute video-on-demand, but was rebuffed by most of the studios. The studios prefer to do business with companies such as the regional Bells, which have potentially millions of customers and low overhead.

Among On2s possible customers are BellSouth, Qwest Communications International, SBC Communications and Verizon Communications.

Verizons decision to launch a video-on-demand trial was based in large part on the declining costs of streaming video, said Verizon spokesman Larry Plumb.

More important, the ability to sell video services over broadband could give the incumbent carriers a stronger financial incentive to roll out DSL service, since they would be able to sell more services.

While video-on-demand will initially be a consumer service, businesses could also make use of it by ordering training videos or news dealing with their specific industries.

To prove its ability to stream video with acceptable quality, On2 posted the first feature-length film on a Web site, the cult classic Sleepaway Camp. However, PCs that lack adequate processing power, video memory or updated video cards may not be able to process the stream, says Chris Schapdick, On2s director of customer service.

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