Cable Operators Still Trying To Figure Out VOD

Approaches to pricing, packaging and marketing vary widely; 'making it up as they go along'

Heavy user" doesn't begin to describe Rick Partlow's appetite for video products. In his Lakeland, Fla., home, he has an HDTV set (including a subscription to the local Advance Newhouse Cable HDTV package). He owns around 250 movies on DVD. His Replay is the third personal video recorder he has owned (in the five-year life of that business). He describes recording shows and football games, then burning them onto disc—sans commercials—via his DVD recorder.

Good Omen for VOD
As cable and DBS operators have offered more channels of movies and adult programming, subscribers' PPV spending has increased.
1995 1996 1997 1998 1999 2000 2001 2002*
Total Annual Gross Revenue (Millions) *=estimated
Source: SET estimates, Kagan Pay TV Newsletter
Total PPV6849591,2351,2451,4421,7132,0562,446

As early an adopter as Partlow is, though, he has never, ever used the video-on-demand services available through his digital cable converter. "I thought about doing it once," he said. "The first time I tried, I didn't find anything I wanted." He describes VOD as "an answer looking for a question."

Clearly, cable operators have a bit of a selling job to do with video-on-demand. Even though VOD services are being widely rolled out around the country, cable executives sharply disagree on how to price, package and market the product. Some operators see VOD as a premium product that should be a revenue source. Others believe the right approach is stuffing it with "free" product at little or no additional charge to keep digital cable subscribers happy and thwart DBS, which can't really offer VOD.

"Nobody knows what they're doing," complained an executive at one network. "Cablevision started out packaging lots of programming together, then moved to à la carte. Comcast started out as packaged; now they're moving to free. Time Warner was free; now they're moving to packaging."

Said Bear, Stearns & Co. media analyst Ray Katz, "Basically, you think everybody's making it up as they go along. They haven't figured out how to monetize it."

There seems to be one point of consensus forming, but it's not an exciting one: Operators aren't counting on VOD to be the source of giant growth they once expected. Initially, operators spoke of VOD (which cable executives are starting to use as a word rhyming with "pod") as snatching a big slice of the $11.6 billion home-video industry.

But studios are still delaying cable's VOD and PPV windows 30-45 days after Blockbuster and Wal-Mart get to rent and sell titles on video.

Now, however, the most aggressive operators speak of VOD and similar "subscription" video-on-demand not as a primary driver of revenues but as supporting penetration of digital cable or reversing the drain of customers away to DBS. The MSOs emphasizing revenues are putting the least product up on VOD servers.

Steve Burke, president of No. 1 MSO Comcast's cable division, considers VOD part of a mix of new products keeping subscribers away from DirecTV and EchoStar. The DBS services don't have the bandwidth to offer the fat packages of HDTV and VOD product that cable can deliver. Comcast is starting to offer TiVo-like PVRs integrated into digital cable tuners, playing catch-up to DBS.

"In the near term, we're primarily doing VOD for strategic reasons," Burke said. But he noted that the product is evolving quickly. "There may be revenue models that we have not thought of."

Time Warner Senior Vice President of Marketing Brian Kelly
said the company puts a little more emphasis on direct revenue, but he agrees with Burke. "It tends to get lost on folks" that a "top priority in introducing VOD product is content to distinguish ourselves from satellite."

Some MSO executives caution against underestimating the financial potential of VOD, both directly and from side effects on customer churn.

"We're already well past any point where it's a disappointment," said Cablevision Vice President of Digital Product Management Kristin Dolan, who is focused on getting cash out of VOD service. "We believe that it has a positive impact on the business."

The starkest contrast is between Comcast and Cox. Like other operators, Comcast sees three primary VOD "buckets." The first is movies on demand, similar to the existing pay-per-view business but far more flexible for consumers, who can buy a movie or adult-video package, pause it, rewind or fast-forward it, and watch it for up to 24 hours per purchase. (Movies account for about 60% of current PPV revenue; adult channels, about 20%, wrestling and boxing events, the rest.)

The second bucket is SVOD, generally packages of movies and series from an existing pay network. Subscribers can get HBO, Showtime or Starz! SVOD only if they also subscribe to the underlying network.

The third is "free-OD" (a term that makes marketing execs cringe). To consumers, Time Warner Cable Kelly calls it "favorites" on demand. That's generally anywhere from a smattering to several hundred hours of product from basic, ad-supported cable networks like Discovery, HGTV and Comedy Central.

Comcast sells movies like everyone sells movies. It's much more aggressive in SVOD, though, offering them to subscribers at no additional charge rather than at the $5-$7 monthly some other operators levy.

Comcast also offers 600 free VOD programs not just from basic-cable networks but from aspiring networks that don't have other distribution. That includes the Anime Network, backed by a company that has a strong home-video business in Japanese animation, and Varsity Television, a teen-targeted channel.

Comcast acquired systems from AT&T Broadband that have been decimated by DirecTV and EchoStar. Comcast Executive Vice President of Marketing Dave Watson said the package is aimed squarely at DBS. "We felt that, when you just did a movie-only version, the results were fine, but it wasn't enough to really move the needle against the competition. It wasn't enough to address what we thought we really needed, which was to drive competition."

In metro Philadelphia, about 30% of Comcast subscribers take digital. So far, about 50% use some VOD service at least every 90 days; about 30% use it every 30 days.

Cox is different. Usually the most aggressive in deploying new products, it is taking its time in VOD. The company offers movies on demand in just two markets, San Diego and Oklahoma City, and hasn't yet launched any SVOD.

That's because Cox wants VOD to clearly generate revenue, said Director of Marketing for Video Services Kevin Hill. "We love this product. We love it more than any other MSO. This thing needs to be a very strong revenue stream on its own."

Cox has a luxury that other operators don't, he added. The Atlanta-based MSO has always spent more money on system upgrades and customer service and, hence, hasn't lost as many subscribers to DBS as other operators. "We've been very successful with our bundle, so there's not as much of a driving need for reduction on churn."