To hear cable operators talk, video-on-demand is the future of television: any movie, news, event, sitcom or concert whenever you want—for a price, of course.
But you won't find cable's hottest shows on VOD. Of the thousands of hours of programming available on cable operators' growing video-on-demand services, very little of it is TV's top and freshest product. TNT On Demand, for example, doesn't offer hits such as Steven Spielberg-produced epic Into the West or police procedural The Closer, but made-for-TNT movies such as 1995's The Avenging Angel (starring Tom Berenger as a Mormon commando) are on the menu. There's NFL Network's Lost Treasures but not ABC's Lost, Bravo's Queer as Folk but not NBC's Will & Grace.
VOD—long pursued as the killer application of cable television—is at a strange crossroads. Even as most TV executives agree that a technology that frees viewers from the shackles of the schedule is a sure-fire success, nobody can yet figure out how to make a dime off of it. Even so, a fight has already broken out between content providers and distributors, each fearful of setting bad financial precedents that they'll suffer with for years. While programmers and cable operators bicker over how the new service should be marketed, priced and sold, some worry that the cable industry may be passing up a golden opportunity.
“It's a great opportunity to change the way we watch television,” says David Zaslav, president of NBC Universal's cable division, “but it's in danger of becoming an also-ran.”
Of course, pay channels, such as HBO and Showtime, sell big movies through VOD as an add-on to their subscription fee. But VOD is largely hitless.
Why the disconnect? Cable operators are salivating over the prospects of VOD, in large part because they stand to gain the most from it. The benefits are substantial: Advertisers, which are just beginning to experiment with VOD programs, would know for the first time whether their commercials were actually watched and could eventually tailor their pitches virtually household by household. VOD reduces customer churn, and it's an individualized product that DBS rivals simply can't offer on their national satellites.
But national programmers, including both cable and the Big Four broadcast networks, are less excited because they don't see a business model. TNT and others complain that operators aren't willing to pay much for on-demand content. Also, networks can't generate much ad revenue, in part because the system to measure audiences is still primitive.
Many network executives fear that feeding strong product to VOD will cannibalize their main networks and give them little in return. “You can't put any food on the table now from VOD,” NBC Universal Chairman Bob Wright declared last spring.
Cable executives dismiss that skepticism, saying that, at just two years old, VOD is young but surging. The technology works, and thanks to the $80 billion rebuild over the past decade, no major expenditures are required. Comcast, the largest U.S. cable operator, reaches a third of the nation's 24 million VOD subscribers. According to President Steve Burke, each VOD home watched around 6 hours of on-demand programs last month, calling up 125 million different programs. That's more than double the 50 million “streams” summoned monthly last year. By year-end, traffic should hit 200 million.
“This product is in the third inning, and people love it,” Burke says. “What will happen when it's in the sixth inning or ninth inning?” More than 53 million homes are expected to have access to VOD by 2009.
Operators argue that, if hit shows are available on VOD—where operators can make it tougher for subscribers to skip through commercials—viewers will gravitate away from TiVos and other digital video recorders, on which ad-skipping power is a central feature. They also argue that programmers can use VOD as a brand extension, promoting their main networks.
Comcast is the most aggressive of all cable operators, leaning hard on cable networks to acquire better programming. One of the major reasons the system operator attempted a hostile takeover of Walt Disney Co. last year was to secure premium VOD content. Even so, says Burke, “we'll get it someday. Do we need it? No.”
PAY TWICE FOR CONTENT
Still, the shallow programming slate is evident to cable customers. Greg Bertler, a computer tech in Green Bay, Wis., taps Time Warner's VOD just a few times a month. “The programming content is somewhat limited,” he says, adding that “the programs that I want to watch most of the time are already loaded in on my DVR, so there is no need to look further.”
VOD has long been a dream of the cable industry. Since the days of Time Warner's much hyped “Full Service Network” in the early 1990s, operators have talked of empowering subscribers to call up a movie or sitcom on their TV as easily as they summon a Web page on their computers. The mantra is: Whatever they want to watch, whenever they want to watch it.
Upgrading systems took years longer than predicted, but cable has delivered on its promises. Today, cable systems serving 56 million basic subscribers offer VOD services, says Brian Wieser, director of industry analysis for ad buyer MagnaGlobal. About 24 million of those customers actually pay $10-$15 monthly for a tier of digital cable services that includes VOD.
The hottest VOD products are kids shows and home-grown music-video services: AOL Music on Time Warner Cable and Music Choice on Comcast. (Three videos by hip-hop's Ciara were summoned 6.5 million times this year on Music Choice.) And Time Warner reports that VOD users buy 69% more movies than subscribers limited to pay-per-view schedules. Still, research firm In-Stat (owned by B&C parent Reed Elsevier) estimates that VOD will generate only $1.3 billion in revenue in 2008, a blip in a $70 billion industry.
Despite the potential, no one is quite sure how to sell the service. The main problem is that cable still doesn't get recent movies quickly. Studios are so afraid of cannibalizing their lucrative DVD sales and more modest rental businesses that hit movies are on the shelves of Blockbuster and Wal-Mart 30-45 days before they show up on cable VOD (or old-school pay-per-view) menus.
Subscribers buy VOD services in several different ways. One is subscription VOD, in which they pay $5-$10 monthly for a regular dose of programming. World Wresting Entertainment, gay-movie channel here! and Howard Stern are launching SVOD-only “channels.” Some operators, like Cablevision Systems and Time Warner Cable, charge subscribers already paying for pay networks like HBO an additional $5 monthly for a package of HBO shows and movies. On others, Comcast among them, VOD is part of a pay-channel package.
The pay-cable networks aggressively program and promote their VOD feeds as a tool to retain subscribers. Time Warner Entertainment & Networks Group Chairman Jeff Bewkes gloats that HBO On Demand generates half of all VOD traffic.
Besides pay choices, digital-cable subscribers are offered thousands of freebies, such as bite-size celebrity profiles from E!, FitTV's Caribbean Workout or parenting lessons from VOD-only “channel” Alpha Mom.
Says CBS research chief David Poltrack, “There are hundreds and hundreds of things you don't want to watch.”
Broadcast programming is nearly absent, though, because networks see no money in it right now. Some Comcast systems get national and local newscasts from NBC and CBS stations. But that's disposable programming: It has nearly zero value as library product.
Why aren't major series available? In many cases, broadcast networks don't own the rights. Even though HBO started writing VOD rights into its programming contracts a decade ago, broadcast networks started doing so only in the past two years. So getting all the producers and talent involved in older hits like Law & Order and CSI opens up a can of contractual worms.
But even for programming they do own, networks say they don't get paid enough. Cable executives don't want to pay for VOD content the way they license networks or pay-per-view movies. They figure they're already paying for The Real World when they pay MTV a 50¢-per-subscriber monthly license fee. Why should they pay again to offer that show on VOD?
“When a programmer says we want you to pay twice for the content, it seems like it's a little unbalanced,” says Peter Stearn, Time Warner Cable executive VP of product development.
Moreover, it's hard to see significant advertising revenues. Networks say operators like Comcast and Time Warner require three to four weeks to ensure that a commercial is available to every subscriber—a lifetime compared with the day or two it takes to deliver an ad on a regular cable network. Why so slow? VOD was initially designed for movies and required just a handful of new titles monthly. The flood of new programming and advertising is more than the systems can handle.
The biggest impediment to advertising is the rudimentary measurement system for VOD audiences. Nielsen Media's ratings are based on a sample of only about 5,000 homes, whereas digital-cable set-tops are capable of providing an unprecedented census of each home and every click of a remote control affecting a VOD program. One major drawback: They can't tell the demographics of anyone who was actually watching. Man or woman? Old or young? For that, they need a people meter like Nielsen's. The ratings service says it will start tracking VOD viewing late next year.
“TERABYTES OF DATA”
Measurement service Rentrak monitors VOD for Comcast but currently reports just four pieces of data, including how many subscribers watched a particular show and for how long—data collected at a cable system's central server. The American Association of Advertisers is demanding much more detail from each individual set-top, including the amount of “trick play”: fast-forwarding and rewinding through commercials. Collecting and processing that data is a massive job—”terabytes of data,” says one cable ad executive—and Rentrak can't deliver that level of detail.
SOME NETWORKS ARE HAPPY
Industry executives believe that measurement issues will be resolved, but it may take a while. Says MagnaGlobal's Wieser, “It's hard to negotiate for the rights when there's no ad model. It's hard to negotiate an ad model when there are no standards yet.”
Not all programmers are griping. Discovery—which owns the bulk of its programming—is aggressively exploiting VOD's potential, using the service as a lure for upcoming premieres on its main networks. And Scripps Networks executives are using HGTV and Food Network VOD as leverage for wider carriage of startup networks Fine Living and DIY. “We traded distribution for product,” says Channing Dawson, senior VP, emerging media, Scripps Networks. “That's how we got distribution on Comcast. If you look at it, that was a pretty good business decision.”
Still, few programmers are willing to bite. Says NBC's Zaslav, “I'm convinced that, ultimately, the different political dynamics and struggles of who makes more money will be set aside.” Understandably, he's just not inclined to go first.