THE INSTANT GRATIFICATION PROJECT
Video on demand is a live option for 6 million households, thanks to a little company called Intertainer and some bold folks in, of all places, Cincinnati.

By James Lardner

For sheer cockiness, the business plan that Jonathan Taplin hatched with two friends in the summer of 1996 ranked right up there. Intertainer, as they named their company, promised nothing less than instant access to a vast electronic storehouse of movies, documentaries, and other fare, right from your own home. A couple of clicks and, to hear Taplin tell it, you could be watching Almost Famous or Ken Burns's jazz series or the latest Eric Clapton video or the final game of the 1975 World Series, all with the VCR-like ability to interrupt the show whenever you felt like going out for a beer.

The basic idea, called video on demand, or VOD, had been knocking around for years, as had Taplin himself. He was in his mid-40s -- almost his dotage, by the entrepreneurial standards of the Internet Age -- and he had suspiciously close ties to the entertainment industry establishment. He conceded nothing to his juniors, however, when it came to evangelical fervor. And indeed, if you stop to think about what home entertainment is and what VOD could be, the implications are dizzying. Such things as channels and schedules could eventually wither away. The whole idea of "watching TV" -- that is, turning on the set and seeing what's "on" -- could come to be regarded as a peculiar and slovenly habit of the medium's early days.

But if the promise was huge, so were the obstacles. Other companies, notably Time Warner (AOL) (parent of Business 2.0), had tried and failed to turn the idea into a business. In addition to a tangle of feasibility questions, both economic and technological, Intertainer would meet intense resistance from many quarters of the entertainment world. Fully four years after its launch, the company was running tiny trials involving a few hundred people each -- a rate of progress that led experts to conclude that the technology was far from ready for prime time. "Come back in 10 years," the Economist pronounced as recently as June.

Little noticed by the skeptics, however -- or by anyone else -- Taplin & Co. pressed on, moving from trials to full-scale deployments in Cincinnati, Denver, Minneapolis, Phoenix, Salt Lake City, Seattle, and Portland, Ore. In mid-October, the company announced an agreement with Microsoft's MSN (MSFT) network that makes VOD a live option for an estimated 6 million Americans -- basically, anyone living in one of the 35 largest media markets in the country and possessing a broadband Internet connection of 580 kilobits per second or better. For a monthly fee of $7.99, you get a basic allotment of TV shows, children's programming, and music videos, plus the ability to watch, for $3.99 apiece, any of more than 200 movies old and new -- a rotating selection from a library of some 75,000 hours of licensed content. That's now, not 10 years from now.

It's anybody's guess, of course, how many people will pay for the service, and how soon. But Intertainer has proven, at least, that its technology works, and it has given the world a first tantalizing taste of VOD's potential. And if the idea catches on from here, history will record that it began with no Napster-like storming of the establishment battlements, no hockey-stick adoption curves, and, significantly, no lawsuits from the content providers. For all the grandeur of their vision, Taplin and his associates have shaped their plans to be as nonthreatening as possible to the entrenched powers of the entertainment world. Success, if it comes to them, will be the result of gentle prodding and patient persuasion as much as anything. This will be a case study, in short, in revolution as an inside job.

He had already founded one company, making interactive CD-ROMs with his director-friend Jeremiah Chechik, when in the spring of 1996 he heard about a cable-modem experiment in Philadelphia that delivered data at the rate of 1.5 megabits per second. Being a "little bit of a techy," he knew that this was roughly the throughput necessary for MPEG-1, the video standard of the day. Getting together with Chechik and Richard Baskin, an ice cream heir turned maker of music videos, who is now Intertainer's chairman, Taplin laid out a scheme for a sort of MTV.com. The idea mushroomed from there.

Bankrolling the venture out of their own pockets to start with, the founders hired a team of engineers, who spent a year developing a system for taking and tracking orders and streaming content to customers for viewing on either a PC or a TV. While other companies had come up with pieces of a VOD program, Intertainer had assembled "an end-to-end system that really worked," says Marc Coblitz, senior vice president for strategic planning at the Philadelphia-based cable operator Comcast, which in 1997 became one of the company's first outside investors. It was, in Coblitz's opinion, a "monumental achievement."

Two key decisions were made in the early going. One was to pay fastidious attention to intellectual property issues and other movie industry concerns. The second was to seek backers who could supply credibility and practical assistance as well as money. "We never went after venture capitalists," Taplin says. "We only went after strategic partners." With $37 million in first-round financing from Comcast, Intel (INTC), NBC, and Sony (SNE), Intertainer was able to offer generous advances for top movies. By the middle of 1999, its content providers included Columbia, Disney (DIS), DreamWorks, Fox, and Warner Bros., as well as an array of smaller movie and TV companies.

If the content came relatively easy, the customers came hard. Intertainer planned to store its video files on strategically placed servers in each local market, and to stream them over proprietary networks rather than trusting the public channels (and unpredictable routing) of the Internet. But that arrangement -- designed to ensure a high-quality image, and to assuage the piracy concerns of the studios -- had the incidental effect of making Intertainer dependent on others for distribution as well as content. The major cable companies were the obvious candidates to be distribution partners, but to Taplin's dismay, most of them weren't interested.

One of the main sticking points was the set-top box. Intertainer's original system, relying on Internet Protocol as a transmission standard, called for a new generation of boxes costing at least several hundred dollars each. None of the cable companies were in a mood to make that kind of investment, or push it on their customers. To compound matters, the cable industry already had an a la carte movie service: pay-per-view. And the executives who ran that side of things tended to be ambivalent toward VOD; it made them feel threatened and, at the same time, proprietary. VOD was something they would get around to in their own good time, and when the time came, many cable people reasoned, it was an idea they were perfectly capable of implementing without the help of middlemen like Intertainer.

Of the 10 biggest cable operators, only Comcast signed on. And when, two years later, Comcast got around to launching modest VOD trials in Willow Grove, Pa., and Monmouth County, N.J., it went with a stripped-down form of the technology, largely in the interests of making VOD compatible with existing digital set-top boxes.

That left DSL. In theory, Intertainer could stream video over digital subscriber lines, which use ordinary copper wire to achieve transmission rates as high as 1.5 mbps. But the reality of DSL tended to fall far short of the theory. In many parts of the country, the throughput was barely good enough for a postage-stamp image. And that's assuming that the local telephone company could install and maintain the service in the first place -- not always a safe bet.

Nevertheless, Intertainer's first major success came in the DSL arena -- and in Cincinnati, a venue not previously known as a hotbed of digital innovation.

Of the Baby Bells, Cincinnati Bell was, in several respects, the odd baby out. Semi-independent of AT&T (T) even in the days before the breakup, it had more recently become a unit of Broadwing, a telecommunications company whose CEO, Rick Ellenberger, remained bullish on DSL when many of his peers were running scared. Broadwing had decided to make Cincinnati a laboratory for "the kind of applications that people were just beginning to think about," says Michael O'Brien, president of the company's broadband subsidiary, Zoomtown. In that spirit, Zoomtown began offering Intertainer to a pilot group of customers in the spring of 2000.

Around the same time, Intertainer acquired another key ally. In January 2000, Microsoft purchased a 20 percent stake in the company for $57 million. Microsoft engineers then started a full-court press to lower the bandwidth demands of IP video. In the course of what became a yearlong experiment, Intertainer, Zoomtown, and Microsoft managed to lay a number of technical concerns to rest. They had demonstrated, says Will Poole, the head of Microsoft's Windows Media division, that with the right server configuration, ordinary DSL "can pump out a tremendous amount of very high quality video very effectively."

By April of this year, Zoomtown believed it was ready to offer the service to all 40,000 of its DSL subscribers. It was, in Baskin's words, the "first large-scale Internet Protocol delivery of video on demand anywhere in the world." One satisfied customer is David Wiser, a Cincinnati-based executive-search consultant. Wiser and his family have watched a couple dozen movies and TV shows, including old Saturday Night Live episodes and "other stuff that you won't find at Blockbuster," he says. On a practical level, Wiser likes the freedom to pause the program and go make popcorn or respond to sounds from the bedroom of a putatively sleeping offspring. With VOD, he points out, there's no time lapse between the rental act and the viewing act, and no opportunity for something else to come up. "We must have spent $140 on The English Patient without ever seeing it," Wiser says. "I swear to God, we've rented that thing five or six times."

There's still plenty of debate about the ability of the industry as a whole to replicate Zoomtown's achievement. Even in Cincinnati, the image can be on the grainy side -- not always attaining the VHS quality that Intertainer claims it has achieved so far. Technical problems aside, there are questions about the marketability of video delivered to a PC. Cable people ridicule the notion that people will want to watch Gladiator, say, with their nose pressed up to a 17-inch computer monitor. (Customers can choose from a variety of prepackaged or jury-rigged methods of porting video from the PC to a TV, but only a few customers -- Wiser among them -- have been willing to go to the trouble.) On the other hand, Microsoft's Poole says, the population accustomed to thinking of a PC as an entertainment appliance is growing. That attitude is particularly common among high school and college students. Many of the latter -- some 4 million in all -- enjoy subsidized broadband courtesy of their schools. "That's a lot of dorms," he observes.

At the very least, the burst of renewed interest in the DSL camp could help light a fire under the cable industry. Comcast is already moving toward a full-scale deployment of Intertainer's service in all of its markets, including Baltimore and Philadelphia. Another cable provider, Adelphia, has scheduled launches in Cleveland, Colorado Springs, suburban Pittsburgh, and Los Angeles. And WinFirst is preparing to introduce the service in Sacramento, Calif., and Dallas.

Of course, VOD's prospects are one thing and Intertainer's are another. Several of the major cable companies are backing a VOD initiative put together by an industry pay-per-view consortium, which recently changed its name to In Demand. Although this effort has met resistance from studio executives (who feel that the cable companies already have too much clout), Cox Cable plans to deploy the service in San Diego, and Time Warner is running trials in Honolulu and Columbia, S.C.

The movie studios themselves, meanwhile, have announced a pair of ambitious VOD schemes that, in theory, threaten to bypass two whole layers of middlemen. But one of these ventures -- involving Sony, Paramount, Warner Bros., and Universal -- relies on downloading rather than streaming technology, and even some customers with high-speed connections could face waits of an hour or more before they can view what they've ordered. In any case, the licensing arrangements are nonexclusive, so Intertainer should at least be able to hold its own when it comes to content. And while the studio ventures are still in the planning stages, Intertainer is up and running. "Intertainer really is the pioneer here," says Joseph Laszlo, who follows the broadband world for research firm Jupiter Media Metrix. "It is the company that has managed to bridge the gap between the distribution guys and the content guys. Maybe by virtue of being small and not having a very threatening brand, it's been able to construct a set of relationships that others may not be able to match."

The selection at the local Blockbuster still dwarfs Intertainer's offerings, which are currently limited to about 800 hours' worth of content at any one time (out of the roughly 75,000 total hours). But the Intertainer crew envisions a day when they can supply almost anything. "Three to five years out," Baskin says, "all the major media companies will have begun to digitize their stuff, and they will all have their own servers" in addition to arrangements with aggregators like Intertainer or directly with cable companies. "I'll get an urge to watch that Lassie show that I remember as a child," he says, "and Intertainer will be there to fetch it for me."