Puttin’ on the Hits

Two deals finally give VOD a taste of TV's most popular shows
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I’m always wary of hype from media executives. But Comcast President Steve Burke’s assessment of his company’s deal to offer CBS hits such as Survivor on its new video-on-demand (VOD) service comes close to genuine fact: “Every now and then, you stop and say that 'the business changed today.’ This is a day the business changed. And the innovation is not going to stop.”

Cable operators have been clamoring for better programming for their VOD services from both broadcast and cable networks ever since they began filling them with thousands of hours of programming two years ago. Hit shows were kept off the service because of operators’ firm stance: They didn’t want to pay twice for the same content.

If a show or movie is already airing on a network, operators figure, they’re already paying for it either through a straight license fee to a cable network such as MTV or via a retransmission consent deal with a broadcast network such as ABC. They believe they shouldn’t have to pay to use the same product in a different format.

WILLINGNESS TO PAY

Comcast says their stance was more flexible when it came to broadcasters’ top shows, but it seems to me the cable operator blinked.

The momentous part was not CBS’ agreement to allow some of its best content to be shown on-demand. It was Comcast’s willingness to pay. The company is willing to sell the broadcasters’ top shows and split the revenues. This is a good thing for television because it means the on-demand revolution can move forward by strengthening the VOD lineup.

CBS Executive VP Marty Franks sees VOD as the beginning of the end of broadcast networks’ complete reliance on the volatile advertising market: “This is an important step in the long-awaited second revenue stream.” OK, but it remains to be seen how big that revenue stream will be.

Comcast’s deal to sell episodes of four CBS prime time hits came the same day DirecTV announced a similar deal with NBC. In each, the operator gets high-quality shows to sell at 99¢ per episode. Executives familiar with the pacts say both call for splitting revenues roughly 50-50. They come on the heels of ABC’s equally momentous agreement to allow prime time shows to be sold online via Apple’s iTunes.

The timing of the NBC and CBS announcements was no coincidence. CBS and Comcast were planning a splashy announcement when NBC Universal Cable President David Zaslav gave Comcast advance warning of the DirecTV deal. Comcast and CBS rushed out an announcement.

These agreements are breakthroughs because they address a central problem with VOD: lame programming. In September, I wrote that cable’s weak programming lineup was crimping VOD (B&C, 9/19, “Empty Screens,” p. 14). The 24 million cable subscribers capable of getting VOD were saddled largely with basic cable’s lesser shows, and networks balked at putting on their hits.

Both operators and programmers were fearful of setting bad financial precedents that they would suffer with for years. Instead of working on how to market, package and price VOD, they bickered. Now the operators and networks have started down the path of really establishing VOD as a product.

Cable operators badly need to energize VOD. Their initial vision that VOD would be a tremendous moneymaker has sputtered because they couldn’t get movies until well after DVDs hit Wal-Mart’s shelves. So their recent strategy has been primarily to use VOD to keep their customers from defecting to satellite.

Cable has far more capacity than DBS, offering thousands of hours of current shows, movies and other niche product on-demand. DirecTV and Echo­Star can only emulate VOD by “pushing” about 60 hours of content to subscriber DVRs. That may give subs some hits, but it doesn’t give them much flexibility.

DirecTV’s deal with NBC is much more limited than the Comcast-CBS deal. First, VOD won’t be available in many of DirecTV’s 15 million homes anytime soon. The VOD service will be available only to subscribers who own the company’s new advanced DVR. How many homes is that? Zero, unless there are enormous lines outside Best Buy this week. The new DirecTV-Plus units just reach the retailer’s shelves Nov. 14.

By comparison, Comcast will put CBS shows in the homes of 4 million subscribers on January and can ultimately offer 9 million.

WILL CONSUMERS BUY?

Sanford Bernstein media analyst Craig Moffett estimates that DirecTV is adding new DVR customers at the rate of 300,000 per quarter. Even assuming that 100% of the new DVR sales are VOD-capable, it could take DirecTV a few years to get to 3 million-5 million customers. By that time, VOD cable could be in 30 million homes.

But here’s something Comcast will have to sort out: If users already have a DVR, won’t they record Law & Order: SVU rather than buy it? “I think it remains to be seen if customers will pay 99¢ for a delayed show that they just have to press a button to receive for free,” says Charlie Ergen, CEO of rival DBS operator EchoStar.

He may have a point, but now that TV’s schedule is cracking, choice is the only thing that matters to the consumer. Whether you TiVo it, pay 99¢ to get it on VOD or watch it on your iPod, shows on all of these new delivery methods promise to boost profits for programmers. The real issue is: how much?

E-mail comments to jhiggins@reedbusiness.com

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