The four companies have formed a consortium to promote the service, which according to the most optimistic forecasts might be capable of generating annual sales of up to pounds 1bn by the end of the decade.
Exponents believe that provided the price can be made competitive, Video on Demand will largely wipe out the traditional video rental and retail market. It could also undermine and unsettle the expansion plans of cable TV operators as they begin a round of heavy financing in the City.
BT plans to begin testing the new services next month among employees of its Martlesham research and development facility in Suffolk. A larger trial involving up to 2,000 homes is planned for the autumn, with the service likely to be launched formally next year.
Initial trials have shown that most telephone lines are capable of delivering pictures of a similar quality to video, though they fall some way short of broadcast television. In theory, a subscriber would be able to dial up a favourite movie, TV programme or video database and see it played over the telephone wire via a decoder. The facility would permit simultaneous use of the telephone for ordinary voice communications. BT also foresees significant opportunities for home- shopping services via the telephone line.
Talks are in progress over the exact structure and function of the consortium, which one source stressed was still at an extremely early stage. The idea is that the new partners would provide, buy and manage the video material but that BT would be left in sole ownership of the means of delivery.
BT believes that if the supplier of the material is kept at arm's length via an independent consortium, it might help ease regulatory worries over the service.
The company is banned from offering broadcast entertainment over its telephone network until at least 2001, under an Oftel ruling designed to encourage cable TV operators to develop in competition with BT. Cable TV companies are allowed to offer subscribers both TV and telephone services.
However, cable TV franchises in Britain have come to be dominated by big American telephone companies, and ministers are increasingly sympathetic to complaints that the playing field has been unfairly tilted against BT.
The Independent Television Commission indicated late last year that BT would be free to offer Video On Demand provided it steers clear of 'broadcast' entertainment and news material. This would appear to rule out the transmission of any 'live' TV but would allow the subscriber to call up as much historical material as he wishes.
Oftel, the telecommunications watchdog, has also indicated it is not against Video on Demand, provided BT makes its network available to any independent company that wants to offer a similar service.
Cable TV companies are becoming increasingly alarmed at the prospect of a full-scale Video on Demand service from BT. According to research by Kleinwort Benson, the securities house, the combination of telephone revenues with those from TV transmission transform the economics of cable franchises from marginal to outstandingly attractive.
Cable operators have therefore being laying increasing emphasis on developing the telephone product - taking customers and revenues away from BT.
The KB research shows that as the construction rate of cable accelerates rapidly from now on, it will have an increasingly adverse effect on BT's revenues and profits. BT believes that Video on Demand could help stem the inroads cable companies are making into its traditional market.
It will also make it harder and more costly for the cable operators to raise money in the City for expansion plans. The Cable Television Association is considering whether to mount a court challenge to BT's plans.
Pearson and LWT can bring considerable programming expertise to the new consortium as well substantial TV and film libraries. Kingfisher is already Britain's largest retailer of videos.
The attitude of the big Hollywood studios to telephone delivery of movies is still unclear. Most of them have been substantial beneficiaries of the video rental and retail markets.Reuse content