Blockbuster Taps VOD Startup

Blockbuster and Enron Broadband Services have tapped a Seattle startup as an initial partner to deliver movies on-demand.

ReFlex Communications began offering movies on-demand to about 150 people in Seattle and Portland, Ore., as part of ReFlex's package of Internet broadband services nearly two months ago. The company is now expanding that initial rollout.

The nearly 4-year-old company offers high speed Internet connections to apartments and condominiums around the country by marrying the latest wireless technologies to fiber-optic networks. ReFlex teamed up with Pagoo to offer voice-over-IP services to its West Coast markets as well.

The company is on a quest to become a national player and, at the end of last year, had 7,000 subscribers in 251 buildings scattered about the nation.

ReFlex's customers are among the first in the nation to be able to "rent" movies over the Internet from Blockbuster as part of that company's partnership with Enron Broadband, a subsidiary of Houston energy trader Enron, which is now brokering telecommunications bandwidth.

Teaming up with Blockbuster and Enron might give ReFlex a leg up in an emerging market, since offering such services could entice cable and other Internet subscribers to switch to ReFlex's offerings.

ReFlex is targeting a market segment that Cahners In-Stat Group predicts will grow from sales of $165 million this year to $1 billion by 2004. The multi-unit dwelling market is a nascent market with no clear leader, said Amy Helland, who tracks the market for Cahners.

The challenge for all new broadband access providers is to offer a compelling package of services that will draw them away from their cable and Internet service providers, Helland said.

Every market player needs "to offer subscribers a compelling reason to change, and thus they need to do whatever they can to juice up their offerings," Helland said.

On the edge

The Blockbuster deal gives ReFlex that initial edge, she added.

ReFlex's customers aren't the first to get movies delivered online. Cable companies have been offering such services in a handful of cities for at least a year. But ReFlex, Enron and Blockbuster's other partners -- SwitchPoint Networks in Salt Lake City and Verizon Communications, which is conducting technical trials in New York City -- are delivering movies over phone lines.

Doing so means cable operators instantly have many new competitors, and those competitors have the ability to reach parts of the country that cable doesn't. Only 50% of today's cable companies' networks can handle movie rentals, thanks to digital upgrades.

"Our [movie rental] results have been exciting and extraordinary," said Dennis Muse, who signed on as chief executive of ReFlex a year ago. "The probability is high that we'll expand the trial, which runs through the end of March."

"We're really just gauging the market, how its being received and what customers will pay," said Shelley Mansfield, spokeswoman for Enron Broadband. "So far, the launches are going great with only a couple of minor problems."

ReFlex's Muse hopes to roll out Internet services to 900 buildings this year and at least continue the current subscriber growth. Assuming that the company targets similarly sized complexes with similar demographics, this could equate to 22,500 subscribers by year's end.

ReFlex's technology expertise is in bypassing the typical bottlenecks of local phone and Internet connections, as well as offering a wireless solution, which also doesn't require any building rewiring.

In the current set up, Blockbuster is offering 150 movies. Enron then converts them into digital files, stores them on their servers and sends them out over its broadband network to Seattle.

ReFlex, with help from Tut Systems and InterNap Network Services, then streams a movie to a subscriber's television through a set-top box.

Through the trial, subscribers get two free movies a week, and after that, they pay $4.99 per movie.

Long-term highs

Although a startup, ReFlex is enjoying high penetration rates for its Internet services in buildings that have been on its system for a while. The 17 buildings that have been receiving service since the end of 1999 have a 21% penetration, while those with service turned on in the first half of 2000 have about a 17% penetration rate.

Overall the company's penetration rate is 14%, but that figure takes into account the 15 buildings that were just turned on within the past three weeks, Muse said. The industry averages a 15% penetration rate, said analyst Helland, adding that the 20% mark is only being hit by a few.

Helland expects ReFlex will see competition from both Sprint and AT&T Broadband.

"They've been very quiet, but I've heard they've both started new business units targeting the multi-tenant market," she said. "They've been very secretive."

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