More Viewers, Better Shows, Advertisers

How Video-On-Demand can save itself in three simple steps

There's one thing virtually every TV executive can agree on: Video-on-demand will permanently change the way people watch and buy television.

Here's the thing few in the industry can agree on: a standard way to market, sell and ultimately profit from the hottest movies and TV shows now playing.

Cable operators and programmers disagree widely on such issues as pricing, advertising and marketing in the VOD business, which is only a decade or so old. Although many of these problems will ultimately be resolved, they're keeping business down.

For starters, cable operators could benefit greatly from more unity. Comcast, for example, is hyperaggressive, chasing broadcasters and putting thousands of hours on VOD servers for free; Cablevision, in contrast, is reserved, charging extra fees for VOD packages. Another complication: Comcast is working with one company, Rentrak, to develop ratings, while Time Warner is working with another, TNS.

Perhaps the most glaring obstacle is the dearth of hot content. Says David Zaslav, president of cable and new media distribution for NBC Universal, “When we lead [viewers] to the basket, the basket for the most case doesn't have the stuff that most people want. I think that's pretty dangerous. If you lead them to VOD and it has a lot of old movies and lot of old TV series and doesn't have 90% of what consumers want, they might not come back.”

TV executives identify three important steps necessary to turn VOD from a fledgling business into a profitable enterprise:

1. Bring more subscribers to the show. VOD is still short of critical mass. Brian Wieser, director of industry analysis for ad buyer Magna Global, estimates that around 26 million cable subscribers have bought digital-cable packages that include on-demand service. That's around 23% of the 110 million U.S. television homes.

That subscriber count is double since 2003's, but it's not quite the mass reach that will let operators pay for better programming or encourage advertisers to swarm in.

By comparison, executives at basic-cable networks, consider 50 million homes their threshold for success. Wieser predicts that virtually all 65 million subscribers to have access to VOD by 2010 as operators push more customers to digital service that uses the system capacity more efficiently, but that's an aggressive estimate. Morgan Stanley analyst Richard Bilotti, among others, is far more conservative, predicting slow growth over the next four years, hitting just 28 million by 2010.

A major impediment to VOD penetration is satellite TV. DirecTV and EchoStar serve 29 million subscribers but simply don't have transmission capacity to offer real VOD. They imitate VOD by “pushing” 20 or 30 hours of movies and shows to subscribers' digital video recorders, but they can't offer the rich library of shows that will truly transform TV.

2. Start offering better shows and movies—faster. VOD servers are stuffed with shows like Style network's A Hilary Duff Inspired Sewing Room and rather light on hits like Lost or Desperate Housewives. Even basic-cable hit The Closer isn't available on-demand, aside from a behind-the-scenes interview promo.

Operators can readily strong-arm shows out of small cable networks, which need distribution and promotion. But systems have less leverage getting top product from broadcasters or even big basic-cable networks, which have a lot to lose if VOD cannibalizes their audience and advertising and they need to be compensated.

Right now, the most popular fare for VOD subscribers is HBO On Demand—which they get only if they already pay for HBO's conventional network—followed by music videos, kids programming and sports.

Network affiliates have limited the migration of top broadcast shows to VOD. Right now, Comcast is offering CBS and NBC primetime shows only in markets where those networks own and operate stations. In markets where the network outlet is owned by a Hearst Argyle or Gannett, cable systems get nothing. But CBS is working on a deal to cut affiliates in for a piece of VOD revenues.

The big money will come from more-favorable movie “windows.” Cable operators don't get films until after their DVD release because studios worry about their $14 billion home-video business.

Moving the cable window to the same “day-and-date” would juice sales. The breakthrough may come with Comcast, which has made movie windows a major point of negotiations to renew Disney's cable networks.

3. Create an advertising model. Top programming won't come until networks generate more revenue from VOD. Advertisers love VOD's promise of narrowly targeting audiences and tracking what viewers actually watch their commercials. That should command fat ad rates, but the VOD universe is still rather thin and audience measurement too limited. Research companies such as Rentrak measure some VOD watching but still can't give advertisers the minute data they really want, such as whether an ad was played back or simply skipped.

Still, advertisers are starting to experiment. General Motors has been the sole sponsor of CBS' cable on-demand programs. Gatorade and sneaker company New Balance sponsor Comcast VOD fitness channel ExerciseTV. Cox has worked with Wal-Mart to promote records.

More than anything, VOD offers advertisers flexibility. A car advertiser could tease viewers with a 30-second spot, then prompt them to click for a longer, 2- to 10-minute commercial packed with many more details and messages than could be run on a conventional network. Or the product could be woven very tightly into the programming itself, as Gatorade is doing in sports segments for ExerciseTV.

“The consumer behavior change is a big opportunity,” says NBC U's Zaslav. “We're flirting with missing our opportunity.”