XonDemand's Start
Founded by an anonymous group of investors in 2003, XonDemand is a relative latecomer into the field. Ryan says he and his partners decided to crash the party after coming across an AEBN exhibit at an Internext trade show.

"We're in the hardware business, so we could already see where the hardware was heading," he says. "We put a few people on the [AEBN] business model to analyze it. They came back and said it was a great concept, a growing market, insatiable demand and the form of delivery was unique. That's when we decided that we wanted to enter."

Ryan predicts his company will reach profitability by the end of the year, about 18 months after processing its first viewer transaction. After that, it's a matter of building market share and waiting for a bigger fish to buy its way into the market.

"Our objective is to run this for 10-15 years and build it into a merger or consolidation target," he says.

Robert Sons, sales executive for AEBN, doesn't mind the competition. "You just have to have something a little different or better," he says. "I still think the market's open for new players."

AEBN got its start in Internet-distributed video back in early 2000. The early start has given the company a chance to build relationships with more than 1,000 movie studios and build a library containing more than 40,000 titles. In fact, the AEBN library has gotten so large, he says, the company is already looking past content acquisition to the next major challenge of the business model: content deletion.

Companies that strive to make it as an Internet-based content provider need to be careful of what they throw away, warns Mike Voss, vice president of business development at the rival West Coast firm Game Link. Voss says his company is pursuing a "long tail" strategy when it comes to content. The term, borrowed from a 2004 Wired magazine article of the same name, refers to the demand curve for book and movie titles.

Line up a year's worth of titles by sales rank and chances are you'll get something like a skateboard ramp: a few hot sellers tailing off to a majority of low sellers. Hence the term "long tail."

Where Hollywood studios and record labels historically recouped their costs in the steep "hit" region, Internet companies, because they pay less in the way of real estate, shelf space and labor costs, don't have as much pressure to ignore less popular titles. If anything, they earn a premium off such titles because they're cheaper to acquire and demand only a little bit of marketing intelligence to move.

"Let's say somebody is a John Holmes fan who rents 'Autobiography of a Flea,' " says Game Link vice president of business development Mike Voss, citing an example of long tail marketing. "They say, 'Who is this John Leslie guy?' If you've tracked their purchases, you can suggest other John Leslie films that they can reach with a single click. With just a little bit of clicking, they go from John Holmes all the way to Evil Angel."

Providing that sort of continuity is no easy task. With 20 terabytes of movie data in storage, Game Link's back end server network rivals that of most Fortune 500 companies. Layer on the database technology to track each individual account's billing status, purchase history and peculiar tastes, and you're really running with the big dogs.

What the big-name Internet VOD players currently lack, however, is an eye on their audience. That's where affiliate marketing comes in, says AEBN's Sons. His company is pouring its marketing efforts into a "white label" program in which affiliate partners simply take in AEBN streaming video feeds and package them under their own brand name.

"They pay us just a flat rate percentage to maintain everything for them and they do their own billing," says Sons.

Affiliate Marketing
Dennis Woo, co-founder of the San Francisco independent DVD rental company GreenCine and a Game Link marketing consultant, sees affiliate marketing as the current growth opportunity in Internet VOD. That's because, in order to avoid choking on their own data, VOD providers need to offload the customer relationship management tasks to the third-party companies that make it their business to track viewer demand.

"It's a matter of business focus," says Woo. "Our affiliates are able to do the niche marketing that either we don't want to do or are just completely unaware of. We run a general catalog, and they invest in the mailing lists and brand building."

Such comments sound appealing to Lisa Lawless, owner of the above-mentioned Holistic Wisdom.com website. Game Link-provided streaming video previews have not only helped draw traffic but also build a consumer-friendly brand identity for her site.

"People know what they're getting," Lawless says. "They know this is what they're looking for, as opposed to buying it, feeling disappointed and never buying through our online shopping center again."

Looking down the road, Lawless sees additional opportunities to strengthen the trust relationship bolstered by VOD. These opportunities include movie reviews with direct purchase links, a ratings system geared toward women and couples, as well as a spam-free mailing list soliciting viewer feedback.

Most important in building that trust factor, however, is the nature of streaming video itself. Although her site offers movies in the downloadable DivX format for customers who seek immediacy, recent concerns about spyware, adware and user privacy have made DivX a much harder sell.