V.O.D. confidential off the record, on the QT & very hush-hush...
Video-on-demand is the future of cable, but, please, don't ask too many questions
By John M. Higgins -- Broadcasting & Cable, 3/3/2002 7:00:00 PM
Ask anybody in the cable business: Video-on-demand holds the potential to alter television more dramatically than anything since HBO aired its first theatrical movie, Sometimes a Great Notion, in 1973.
VOD could be about much more than reselling theatrical movies. Its deployment could obliterate what lies at the heart of a TV network: the schedule. Viewers could dictate what prime time is, watching Friends with breakfast instead of while the NBC sitcom is competing with Survivor on Thursday nights. Nature fans could stretch Discovery's Shark Week into Shark Month or compress it into just a couple of Shark Days.
That would alter the financial underpinnings of television, both remaking ad strategies and creating new revenue streams for both networks and producers. Cable operators sit in the middle of it all, happily controlling the platform and the toll booth that will make all this possible.
After first deploying VOD in 1999, cable systems were expected to put the service into a third of cable homes within a couple of years. It was the next big thing.
So how is the revolution going? Who knows? Cable operators may talk big about VOD, but, when it's down to dollars and cents or what they're learning about viewers' wants from VOD, they barely talk at all.
Some key Wall Street players express annoyance that operators won't provide real details that can be used to assess VOD sales.
"The companies haven't given us any results, so how do we know what VOD is doing?" said Sanford Bernstein & Co. media analyst Tom Wolzien, who has been taking up his irritation over the issue with cable executives in public, during companies' investor meetings. "They say, 'We wouldn't want people to use numbers that are premature.' But we're all big boys. What do they have to hide?"
Morgan Stanley media analyst Richard Bilotti concurs. "You can't squeeze it out of them."
Securities media analyst Doug Shapiro is a bit more sympathetic to mute operators: "It's way too early, and they're not marketing it. ... obviously, the numbers don't look good, or they'd be disclosing them."
Cable operators will point to the performance of all sorts of subsets of customers. Or they'll wax enthusiastic over anecdotal data about how eager customers swamped a server in one system or another. MSO executives also like to emphasize how customer satisfaction improves when VOD is thrown into the mix.
But then they say it's too early in the game to make purchase data public. For example, Cox Communications executives contend that the business is too rough to release sales results. Its VOD rollout in San Diego is still too young, and, because the service reaches only part of the market, the company can't really advertise it widely. Another problem: Cox has only a limited slice of the best theatrical movies to offer, films from Sony, Vivendi, Arista and DreamWorks.
The hush-hush treatment doesn't bother Cox Chairman Jim Robbins. "We're not in the business of telegraphing competitive intelligence to the satellite business. Let us get this thing going. Let us get some serious numbers on the books."
Cable operators say they don't have enough key pieces in place to paint a fair picture. But, when the cable industry might be fighting in Hollywood to get the same release window that video rental stores have, many MSOs are still toying with pricing plans instead. Marketing plans are still in test.
The product that could bring the greatest changes to TV networks—reselling TV shows à la carte through monthly subscription-VOD (SVOD) packages so that you could buy an episode of ER whenever you wished—is very foreign to subscribers.
The few numbers available can be read two ways. Charter Communications Chief Technology Officer Steve Silva, for example, is excited that 20% of digital customers with access to VOD product use it, making about 2.5 purchases monthly. Charter has launched VOD in eight markets serving about 1.3 million basic subscribers. "It's a very high usage," he said. "A 20% adoption rate this early in the product life cycle is very good. Once we start marketing it, we have higher hopes and expectations."
Another way of reading it: Charter's VOD customers purchase on average just half a title monthly, for a buy rate of 50%. That's half the company's monthly 90% buy rate for conventional pay-per-view movies.
No one is truly worried that those buy rates won't improve. But neither do they take seriously operators' favorite counterpoint, the launch of HBO's SVOD service. When AOL Time Warner's Columbia, S.C., system started offering HBO shows like Sex and the City and The Sopranos to 26,000 subscribers last July, eager customers tried to draw down so many packets of video bits that they crashed the system. That would tell you something, except that the service was offered for free, so, for consumers, it was a no-brainer.
What lies in the middle? "That's the question everybody is asking," said one MSO executive. "When are we going to make money on this?" Operators are pushing ahead to find out. At the end of 2001, Bilotti estimates, about 1.5 million cable subscribers could access some sort of VOD service. That's about 10% of operators' base of digital subscribers, customers who have moderately sophisticated digital set-top converters that allow direct interaction with their system's headend. But it's just a sliver of U.S. operators' 67 million basic-cable subscribers.
Expect VOD to be accessible by the end of 2002 to about 6 million digital subscribers and 13 million at the end of next year. That would be 53% of digital subscribers and 20% of all basic subscribers.
Grabbing business from the Blockbuster Video store is the operators' first target. The home-video–rental market takes in $8 billion annually. Last year, conventional pay-per-view cable generated about $900 million in sales (including adult and events), according to an annual study by PPV distributor Showtime Event Television.
DBS services DirecTV and EchoStar do far better—$1.3 billion in PPV sales last year—because they allocate 40 channels to it, which lets them start hit titles every 15 minutes. Analog-cable systems average just three PPV channels; digital-cable packages allocate 32. Viewers don't have to wait around as long for the movie to start.
Operators are toying with other product, too. The pay-movie networks like HBO and Showtime are the most natural for subscription-VOD because they have recognizable brands. But there are other avenues. Charter is offering a $9-per-month subscription to a slate of kids video product. Cablevision's Rainbow Media unit has an ambitious project, Mag Rack, which offers subscription video packages focused on very narrow interests, from vegetarianism or photography.
The ultimate—something that is years away—would be to sell programs from networks after they air in their normal slots. So, for example, 60 Minutes would no longer be a Sunday-night show. CBS could sell it for $1 or give it to viewers who take commercials with it. (And, since cable operators will know so much about their subscribers, those commercials could be carefully targeted and fetch a higher price.)
That's in the future. Today's about rollouts, fixing glitches, getting better movies.
Steve Brenner, CEO of VOD and PPV movie clearinghouse In Demand, says improving the movie product is critical, but he feels he'll nail down the right deals with all the studios in short order. "It's a little bit like chicken-and-egg," he said. "Studios want cable to make all the capital expenditure. Operators said why am I rushing into this thing when I can't get all the product? We're there to break that."
The promise for operators lies in the reaction of one Cablevision Systems customer, who was initially angered by the VOD system's glitches and poor customer service but is now an avid fan.
In two months, he said, "I've seen 34 episodes of the Sopranos, six Band of Brothers, all kinds of movies, including pay-per-view and free selections. It's amazing how much there is actually to watch. I couldn't give it up at this point, that's for sure. I think that this is how TV will eventually be watched—except for news. It's so convenient and practical that it's even better than DVD."
| Who's got the digits? | |||
|---|---|---|---|
| Digital video subscribers (in thousands) | |||
| 2000 | 2001E | Chg. | |
| Source: Morgan Stanley Reseach |
|||
| Adelphia | 723 | 1,484 | 105.3% |
| AT&T | 2,430 | 3,500 | 44.0% |
| Cablevision | 0 | 29 | NA |
| Charter | 1,070 | 2,150 | 100.9% |
| Comcast | 1,216 | 1,875 | 54.2% |
| Cox | 842 | 1,375 | 63.3% |
| Insight | 152 | 262 | 72.4% |
| Time Warner | 1,564 | 2,976 | 90.3% |
| Other | 569 | 1,041 | 82.9% |
| Total | 8,566 | 14,692 | 71.5% |
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