Empty Promise

If you believe the hype, video-on-demand is digital cable's secret weapon. VOD gives subscribers instant access to content on a free or subscription basis. Best of all, it is a technology toy that satellite can't offer.

But VOD is firing more blanks than bullets.

Cable operators boast different offerings and pricing models, while programmers debate how much effort VOD is worth.

"VOD is what everyone is talking about, but no one has the answers," says one network executive.

"Two years ago, people said VOD would be the great application, the new renaissance of content. We all believed it," said NBC Cable President David Zaslav at the National Cable & Telecommunications Association convention last week. "We want more consumers, but we need an economic model."

How can programmers fund their VOD?

Whether repackaging library shows or making new content for on-demand consumption, networks want to generate revenue from VOD. It can come from cable operators' fees or from ad sales. It's too early to tell whether either will be reliable.

What is clear is that this wasn't how the VOD dream was supposed to play out. After two years of deployment, VOD isn't a revenue generator. Comcast likes to brag how one-third of its subscribers with access use it regularly. What it doesn't say is that the bulk of that is for free product or video for a pay-movie service they already subscribed to. It's not about paying $4-$5 for a movie or an episode of The Sopranos.

So what is a realistic financial projection? Sanford Bernstein media analyst Tom Wolzien estimates that revenues from combined VOD and pay-per-view will rise from $1 billion to $2.5 billion in five years. Not a financial knockout in a $60 billion-plus cable industry.

MSOs had planned to use theatricals as the big driver for VOD—and put video stores out of business. But studios haven't given them an earlier window than video stores, and that has left cable operators hungry for programming. To grow VOD, they need content.

Established networks are willing to turn over some library fare to keep operators happy. Newer channels see VOD as a way to make inroads with distribution. "We're in a marketing game," says Oxygen chief Gerry Laybourne, "and we have to try harder because we're an independent."

Discovery Networks jumped into the fray a few years ago with subscription and free VOD packages. But operators weren't ready. Recently, Discovery is dipping in again. It still believes VOD can be a viable business. "If consumers are willing to pay $19.95 for one video we market," says Executive Vice President of Affiliate Sales Bill Goodwyn, "we think there is an appetite for the thousands of hours that we own." The big problem, he admits, is how to package and price it.

At Rainbow Media, parent of AMC and IFC, the company is building VOD-only brands, such as Mag Rack, free "videozines," and specialty content, such as sports instruction and international programming. Others are sticking with established product.

Turner plans to launch Turner Classic Movies on Demand and Adult Swim on Demand. Says Turner Entertainment President Mark Lazarus, "We're not giving up the branding we've spent a lot of time and money on."

VOD is suffering because it has been shoved from the digital limelight. The industry is focused on digital video recorders (DVRs).

Fox Networks Group CEO Tony Vinciquerra is preoccupied with DVRs. Fox is experimenting with VOD, such as a subscription offering for FX's The Shield and Fox's 24 with Cablevision. "I just don't see VOD as a big business," he says. "I see DVRs taking over that, and VOD will be a piece."

One way to grow VOD may be by offering exclusive content or early premieres. Imagine being able to watch the season finale of The Sopranos days before anyone in your office?

Disney Channel is already there. It plans to premiere upcoming original series, such as live-action comedy Phil of the Future, and original movies on subscription VOD before they hit the linear network. A Cablevision test starts next month.

"There is a business here," says Albert Chang, ABC Cable senior vice president of distribution strategy. "We want to invest and find new ways to expand."