Much of what the world now knows about VOD came from Sioux Falls.

Stewart SchleyUnlike New York City, Los Angeles or Silicon Valley, Sioux Falls, S.D., seems an unlikely spawning ground for a highly disruptive television technology. But in the early 1990s, from the smallish city on the plains, much of what the world now knows about video-on-demand viewing habits, buy rates and economics germinated.

There were more adventurous trials elsewhere, like Time Warner Inc.’s futuristic Full Service Network in Orlando, Fla., in the mid-1990s. But much of the hard work of proving out the VOD theorem – the combination of investment capital, content, viewer appetite, pricing and ordering frequency that makes the category’s numbers work – would be conducted from Sioux Falls by a little-known company formed in 1991 to pipe TV signals into hotel rooms.

LodgeNet Entertainment Corp. started life early in the 1980s as Satellite Movie Co., a feeder network for subscription TV services. But it found its calling with the realization that a growing universe of U.S. hotel operators was hungry to build additional revenues by selling in-room entertainment – and not just the pornographic kind. In 1991, Satellite Movie reincorporated as LodgeNet Entertainment.

LodgeNet’s big idea, predating the commercial introduction of residential VOD, was to move beyond the hotel industry’s prevailing pay-per-view windowing scheme. Like cable companies, hotel video systems offered PPV movies with pre-determined “start” times. If you missed the prescribed start time for Fox’s “Independence Day” (1996’s top-grossing film), you were out of luck until the next one came along. And forget pausing mid-stream. Like the cable version, hotel PPV was a linear experience: You started the movie, and it played from there, regardless.

VOD, of course, offered a more personalized experience, inviting viewers to press play anytime they felt like it and to pause whenever they wanted. For years, proponents had theorized that VOD’s convenience and control features would improve PPV’s economics. But beyond expensive gambits like Time Warner’s FSN, there was little empirical evidence to back the dream.

Enter LodgeNet. Its closed world of hotel rooms was in some ways the perfect crucible for understanding how VOD might work in a broader arena. There was an easily defined universe (3.6 million serviceable rooms in the U.S. by 1996) and a simple, handy calculation that went like this: occupancy rates x VOD buy rates x movie pricing = monthly revenue per room. The critical part was the delta between revenue per room from VOD versus revenue per room from the old-style PPV movie scheme. If VOD, as LodgeNet theorized, produced a meaningful improvement, hotels could justify the additional capital expense of moving to a novel new way of serving video content.

And novel it was. For many years, until VOD began to achieve deployment scale as part of cable’s digital video transformation, it was the in-hotel experience that provided consumers their first taste of what video’s brave new world might look like. It was a completely original experience: roaming through a menu of VOD film titles, selecting one to watch, tapping a remote control button or two to affirm payment, and then, like magic, seeing the movie appear on the screen.

Behind the scenes, or more accurately, down in the hotel basement, a relatively crude system of videocassette players spat out video streams under the command of LodgeNet’s proprietary control system. Early on, because each videocassette could serve only one stream, there was the problem of avoiding guests’ ire if an advertised movie was unavailable. LodgeNet solved it in a brilliant stroke: If all three copies of “Independence Day” happened to be in use concurrently at the Ritz Carlton, the movie simply wouldn’t show up on the menu.

The steady hand behind LodgeNet, CEO Scott Peterson, resigned last month after running the company for 25 years. The technology came a long way under his guidance, with the videocassettes and monthly Federal Express deliveries supplanted by digital servers and MPEG files.

Peterson and LodgeNet weren’t alone in introducing VOD to road warriors. A rival, On Command Corp., did much the same thing. Together, though, the two companies made a convincing case for VOD. By 1997, half of LodgeNet’s hotel rooms were rigged for VOD, owing to the medium’s superior ROI. Today, an onscreen menu of VOD movies is as familiar to hotel guests as the “Do Not Disturb” sign hanging from the doorknob. A good part of the credit for that, and for VOD’s prominence in the television world at large, traces directly back to Sioux Falls.