Films at our fingertips

A TV service offering movies on demand was close to collapse. Now it's back on track - thanks to a growing appetite for broadband. Raymond Snoddy reports

For the past decadeviewers have been teased with the prospect of having the contents of their local video store delivered into their living rooms at the touch of a button.

An "on-demand" movie service, whereby any one of thousands of film titles could be beamed down the telephone line and onto television screens, was going to transform leisure time. That is until the idea hit the rocks two years ago.

After an investment of £250m, the video-on-demand experiment HomeChoice faced such high costs that each new subscriber contributed to growing losses.

In a move of some desperation, Video Networks, the company behind the venture, called in an American, Roger Lynch, to rescue HomeChoice, which had 12,000 subscribers. What he has achieved is close to a miracle.

"The business really shouldn't have existed. It launched before the timing was right," says Lynch, a former merchant banker who was moving back to California from London when he was called in.

Lynch's advice to Chris Larsen, the main shareholder and one of the founding team at Microsoft, was stark. No new investors would put their money into such a venture. He must either restructure or stop funding it immediately.

Larsen asked Lynch to carry out the restructuring, which involved re-negotiating film deals with Hollywood studios and cutting staff by two thirds, or 450 people. The number of subscribers was deliberately reduced by increasing the price of the service. The company could only handle 4,000 subscribers while the network was being modernised. By the end of the process there were only 3,300 customers.

Lynch, who successfully floated internet companies in Silicon Valley during the dot com years, was so intrigued by the prospects for HomeChoice that he became its chief executive and brought the company back from the dead with a commercial launch this May.

"The economics are completely different. On a capital expenditure basis it costs us about 1 per cent what it costs a cable company to build a network. It is a very, very compelling service," Lynch says.

HomeChoice offers a package starting at £27.50 a month which includes a digital television service, video-on-demand access to a library of more than 1,000 movies and fast internet access. Additional services such as subscription movie channels, Sky Sport and Sky Movies and internet access at up to 40 times the speed of dial-up rates can also be added. Many of the BBC's programmes over the previous seven days can also be called up.

Lynch believes his main group of customers are seeking a cost-effective way of receiving high-speed broadband combined with digital television. "Pay TV is growing slowly but broadband is growing very rapidly with 50,000 new broadband customers a week in the UK," he says.

The HomeChoice service is able to connect to 1.25 million homes in London and will expand to 4 million in the capital by the middle of next year. The aim is to raise an additional £80m to expand to 10 million homes by the end of 2006, extending the service to cities such as Birmingham, Manchester and Glasgow.

Lynch, who commuted between California and London for a year before moving his family back to the UK, says HomeChoice is now on track to have between 20,000 and 25,000 subscribers by the end of the year - although he will not reveal current numbers. He insists costs have now been so reduced that the company could break even on less than 100,000 subscribers.

The behaviour of other big media players suggests that they believe HomeChoice can survive and expand after its near-death experience.

Shareholders such as Disney and Warner Brothers have continued to back the company and the decision by BSkyB to make its premium channels available was also significant. Larsen remains a believer despite his losses.

Now Lynch, the former banker, believes that from being a financial basket case Video Networks should be able to float on the stock exchange in two to three years.

"It is the most extensive video-on-demand system in the world and it is a real business with real customers and cash flow," says Lynch who now just needs to find more of those customers.