09:18 AM Mountain Standard Time on Thursday, September 15, 2005

By David Koenig / AP Business Writer

DALLAS -- Movie-rental giant Blockbuster Inc. continues to take small steps toward a rollout of online video-on-demand in the United Kingdom while rival Netflix Inc. plans a small-scale test in the United States this year.

Blockbuster demonstrated an online video service at a trade show in Europe last week and has completed a test involving 5,000 British households, but officials downplay talk of service in the very near future.

"We are keeping a close eye on new and developing technologies," said company spokeswoman Karen Raskopf. "When and if we see a model that's economically viable, we believe that Blockbuster is well-positioned to be a force in the VOD arena."

Netflix plans to test video-on-demand this year but won't say when, where or how many households will get the set-top boxes they could use to order movies instantly.

Video-on-demand has long been touted as a touch-button technology that could make movie-rental stores obsolete. Cable providers are rushing to add video-on-demand service- customers can start, stop, pause and rewind a movie they rent for 24 hours - to pay-per-view schedules.

But video-on-demand has been hindered by questions about technology, cost and the lack of recently released movies. Even when combined with pay-per-view, it accounted for only 6.1 percent of the home video market in the first half of this year - the same as a year ago, according to media researchers NPD Group Inc.

The movie-rental business has also slowed - Blockbuster and Movie Gallery Inc. both lost money in the second quarter - but sales of DVDs have remained strong, helped by deep price-cutting.

"Consumers have decided what the real video-on-demand is, and that's owning it," said Tom Adams, president of Adams Media Research.

Last week, several vendors that are developing a Blockbuster-branded video-on-demand service demonstrated the technology at a broadcasting convention in Amsterdam, Netherlands. The companies said in a release that they expected it to go into service next year. Blockbuster has about a dozen technicians who work part-time on development of online video.

The trade show demonstration followed last year's trial in the northern England town of Hull, in which Blockbuster gave set-top boxes to about 5,000 households. The boxes were connected to high-speed phone lines.

Raskopf said the test taught Blockbuster the skills and marketing prowess it would need run a video-on-demand service. She added that the Dallas-based company was not prepared to announce a U.K. rollout.

In addition to competition from cheap DVDs, video-on-demand faces other problems, including that movie studios generally won't allow cable operators to air movies until 45 days after the DVDs go on sale.

Netflix's test of video-on-demand this year will be "very modest," said spokesman Steve Swasey.

"It will be limited mostly by content for the reason that the studios are not licensing that many titles for electronic delivery," Swasey said.

Studios typically earn only $1 or $2 from each movie rental but can make $12 or more from each DVD sale, giving them a short-term incentive against supplying recent movies to video-on-demand services.

Russ Crupnick, a media and music analyst with NPD Data, said video-on-demand is likely to grow only slowly until it solves the problem of limited movie selection - cable operators are typically offering only recent releases and few classics.

"Until you get to the point where video-on-demand has Netflix-like ability to order anything, and maybe when the pricing comes down a bit, it's going to be relatively flat," Crupnick said.

Adams said movie studios and video-on-demand providers should follow the music industry's recent lead by letting consumers download a wide selection at reasonable prices.

"The on-demand that makes sense to me," Adams said, "is to have every movie ever made, and you buy it, not rent it for 24 hours."

(Copyright 2005 by The Associated Press. All Rights Reserved.)