Can cable operators, programmers, advertisers design a VOD model that works?
By Jon Hemingway
When it comes to video-on-demand (VOD), cable operators, networks and advertisers are a lot like eager summer tourists on a road trip: They know where they want to be but can't agree on how to get there.
Most TV executives agree that watching favorite primetime shows whenever you want will be a reality within the next few years—or sooner. According to a recent study by the Leichtman Research Group, the portion of U.S. digital-cable households that have used VOD grew from 25% in 2004 to 60% in 2006. And a study by PricewaterhouseCoopers (PwC) reveals that, although VOD represents a fraction of end-user spending on television distribution, the segment is by far the fastest-growing.
Viewers will spend $2.1 billion on VOD services in 2007, a 23% rise from 2006. PwC projects such spending will double by 2011, to $4.2 billion, a compound annual growth rate of 19.5%. No other service element available today will grow as fast. But cable operators and advertisers are still trying to figure out the right advertising model, as networks begin to experiment with putting popular programming on VOD. There's no big rush from programmers because the audiences—and fees—are still so small. Cable operators find themselves in need of more television programming to feed a hungry audience.
Viewers have shaped the evolution of VOD in no uncertain terms. Early deals with broadcasters to carry content on a transactional on-demand basis were scrapped when viewers balked at paying for the content. Free, ad-supported offerings became a focus. Cable operators are growing this category at a rapid rate to distinguish themselves in the eyes of the consumer. Free content represented 67% of total first-quarter orders tracked by Rentrak, which measures VOD usage.
Says Comcast VP of New Media Matthew Strauss, “[Video-on-demand] is no longer new. It is now integrated into how people watch television.” Comcast, the nation's largest cable operator, has nurtured its VOD into a business that registers 250 million views a month. “That's 250 million times that viewers are not watching traditional television,” he says.
Viewers have become so accustomed to VOD offerings that Time Warner Cable is reaching out to linear viewers with VOD functionality. Its Enhanced TV suite allows viewers to start at the beginning of a program if they tuned in late (Start Over function) or view programs that aired earlier in the day if they missed them (Look Back). It doesn't, however, allow the viewer to fast-forward.
Cable operators—and competing telephone companies—have not charged consumers directly for most VOD because the service has been used “as a tool for retention,” says Tricia Lynch, director of Verizon FiOS TV programming, noting that it increasingly shows up on consumer checklists. Many cable operators believe that, once viewers are hooked on using free on-demand, they will gravitate toward the premium content.
Increasingly, the big broadcast networks smell opportunity. Cox Communications and Disney-ABC Television will run a trial this fall in which Cox will provide four primetime shows and other content on-demand the day after it premieres.
To lure advertisers, Cox will disable the fast-forward function on its system, and the two companies will test dynamic ad insertion. With dynamic insertion, operators can offer targeted ads to be swapped in and out of content as it is delivered. Usually, ads are inserted in advance and cannot be swapped out once the content is on the operator's network. Dynamic targeted ad insertion is the linchpin that operators hope will bring all parties, content and advertising, to the table.
“We need to make sure the next move in advertising has incentives for everybody involved,” says Verizon's Lynch, whose company is testing dynamic insertion through year-end and expects to implement it in 2008.
Cable operators are still considering revenue-sharing plans and operational tolls per ad and per insertion. Advertisers are attracted to the targeting potential of dynamic ad insertion, which will give them the ability to accurately measure viewer response to advertising and address ads to viewers based on preference and behavior, far more specifically than the data relied on now.
“It all comes down to the fact that, with VOD, you have a unicast connection to the customers,” says Jim Owens, solutions marketing manager for Motorola's home and networks mobility division. “In [delivery over the cable plant], you can make some distinction between service groups, ZIP codes and ad zones. But with VOD, you have a one-to-one relationship with a person that's time-specific. You have this live connection with them.
Such targeting, however, is still a ways off, cautions Owens: “It is technologically possible, but there are a lot of challenges and a lot of changes on the sales side and the systems side in how you manage the inventory and sell it.”
Moreover, advertisers point out that the audience for VOD represents under 5% of total viewership. “They still need the impressions,” says Maria Mandell, executive director of digital innovation, Ogilvy Interactive. “The CPMs are high at about $50, compared to $25 for online, due to limited impressions.” She notes that, while advertisers have participated in some ad-insertion trials, no one is actively pitching it to the ad community.
James McQuivey, principal analyst covering media and entertainment technology at Forrester Research, says momentum toward expanding VOD has never been stronger. “It's good for the advertisers, it's good for the operators, it's good for the networks,” he says. “The only one we have to wait and see on is the viewer.”
While the network operators work feverishly to expand television content, they are also working to squeeze shut the window between DVD release and VOD availability. Operators are conducting day-and-date trials. “We think it's inevitable,” says Bob Benya, senior VP, on-demand product management, Time Warner Cable, referring to the eventuality of day-and-date release. Time Warner Cable has been in trials with Warner Bros. Studios and Lionsgate Films. The studios, wary of cannibalizing their existing channels, are taking a cautious approach.
Warner Bros. began testing day-and-date release with Comcast last November in Denver and Pittsburgh and will extend the run through the coming November. What the studio sees in the results is a sharp spike in VOD usage of 52% versus comparable non-trial markets and a strong, 10% increase in DVD sales with just a marginal, 2%-3%, hit to rentals. In its trials with TWC in Austin, Texas, and Columbus, Ohio, the studio says, the early numbers show increases across all indexes.
IFC is finding success with a different model, simultaneous VOD and theatrical release. Launched in March of last year on Cablevision and Comcast, IFC's In Theaters proved a unique opportunity for the less commercial, or specialty, independent titles in the company's stable, allowing them greater reach than they would otherwise receive.
IFC's In Theaters introduces two films a month on-demand as they hit the big screen. The price per 24-hour viewing period can vary but averages about $5.99 per film, and the films are receiving 50,000-75,000 views a month each.
“The theatrical distribution model for specialty films was not viable anymore,” says IFC President Jonathan Sehring, “We saw what a great technology VOD had become.”
Cable Vendors Predict Surge
Vendors tweak old platforms for new applications
By Glen Dickson
VOD technology vendors are forecasting a surge in sales as cable operators upgrade their existing infrastructure to support more VOD content, including bandwidth-intensive high-definition fare, and new applications such as timeshifting and targeted advertising. Providing a better VOD experience generally means both adding storage capacity and expanding the number of on-demand “unicast” (i.e. delivered to a single set-top) streams that can be delivered simultaneously to subscribers.
New applications such as providing the timeshifting capabilities of a digital video recorder (DVR) through VOD, sometimes known as “network DVR,” require a dramatic expansion in the number of program streams that can be ingested at one time, as operators will need to record and store the most popular shows in real-time. And delivering up-to-date and/or targeted commercials within a VOD program, a technique known as “dynamic insertion,” necessitates heavy software integration between the VOD platform and existing traffic systems.
Cable operators and competitors aren't facing a full-scale swap-out of existing infrastructure, but instead incremental upgrades and expansions. As a benefit, some of the network upgrades for VOD can also be used to deliver more linear HD channels and faster high-speed data service.
This upgrade investment will be far less than the massive infrastructure buildup in the mid-90s. “On an order of magnitude, we're talking hundreds of millions” of dollars, says Ferris Baker Watts analyst Murray Arenson, who covers leading vendors SeaChange, C-COR and Concurrent.
Basil Badawlyeh, VP of on-demand strategy for C-COR, says that competition is driving cable's investment on VOD infrastructure, whether it is DirecTV's planned expansion of high-definition programming, Verizon's new fiber-optic-based television service or Amazon's plan to sell movie downloads through TiVo digital video recorders.
“The biggest catalyst is the fact that competition is heating up in a very big way,” says Badawlyeh. “The other piece of this is that the type of content historically available on video-on-demand is catering to different demographics of people than what the industry was originally pushing towards.”
As the content mix shifts, “broadcast on-demand” services like Time Warner Cable's Start Over, which lets viewers tuning in late to a primetime show jump back to the beginning by initiating an on-demand stream, are the biggest current driver of VOD investment.
Most VOD systems were initially designed as simply a better form of pay-per-view; that is, they were intended to deliver premium movies on a transactional basis. So most of the existing systems were designed to deliver VOD streams to about 10% of the VOD-capable homes within a given service area, sometimes less than that.
But with Start Over, Time Warner has found contention rates jumping to 40-50% as subscribers discover a more convenient way to watch the most popular shows. “The networks are being designed for a lot more concurrent stream usage,” says Badawlyeh.
Concurrent, which is one of Time Warner's key vendors for Start Over, has focused on the reliability of its MediaHawk 4500 platform as more brand-name network content moves to VOD, says director of marketing Tim Dodge. “Session success rates in the low 90s used to be acceptable, now they're asking for 99.5%. VOD is really becoming a mission-critical product offering.”
Storage is also being increased, says Badawlyeh.
Time Warner has doubled the storage in many systems from 2,500 to 5,000 hours and Comcast, which was an early leader in promoting “free” i.e. ad-supported VOD content from networks like NBC and CBS, is specifying VOD systems with a minimum of 4000 hours of storage.
“We see a lot of interest in much larger content libraries,” adds Kip Compton, senior director/general manager of Video & Content Networking for Cisco, which entered the VOD game last year with its acquisition of Arroyo Video Networks. Compton, a former Comcast executive, says that while a 5,000-hour VOD system might have once seemed to be very robust, “we see 50,000 and 100,000-hour libraries in the not-too-distant future.”
The way operators are storing on-demand video is also changing, as they move toward distributed architectures that place content on different types of storage, depending on how often content is accessed. Cisco uses varying types of storage: SATA drives for low-cost storage, SCSI drives for low-cost streaming, and some RAM (random access memory) storage to hold the most popular content.
Motorola, which entered the VOD business with its acquisition of Broadbus Technologies in Sept. 2006, thinks it has an edge in handling the explosion in VOD content through its solid-state server architecture. The company, which is supplying the servers for Time Warner Cable's Start Over deployment in San Antonio, uses dynamic random access memory (DRAM) storage for content ingest and streaming, as well as storing the most popular content. It relies on hard disk for storing the much greater volume of content that isn't accessed as frequently.
In order to serve a greater number of streams more efficiently, SeaChange has developed a new VOD server that uses flash-memory storage instead of hard disk and is designed to share high-demand content.
Another exciting prospect for VOD is expanding the amount of high-definition programming. To date, there has been very little HD content available on-demand, due both to concerns about copy protection and the relatively small number of HD-enabled homes. But with flat-panel HD sets flying off store shelves, the cable industry knows that hi-def VOD will soon be a requirement for customers. There is also the looming specter of satellite operator DirecTV, which has heavily promoted its plans to broadcast some 100 HD channels by year end.
Comcast has taken the lead in providing hi-def content through VOD, including movies from premium networks HBO and Cinemax, primetime fare from A&E, and even hi-def artwork and fine photography from Seattle-based Gallery Player. Cox has added HD movies to its on-demand library, and other operators are also expected to soon bulk up their offerings.
“The number one priority for most cable operators out there is expanding their hi-def offerings, as there is a lot of competition from satellite guys advertising 100 HD channels,” says SeaChange's Phil Simpson, director of product marketing for on demand solutions. “HD VOD is a strategic opportunity for cable, but it requires more streaming capacity and more storage capacity.”
With HD streams coming in at 15 megabits per second (Mbps) compared to the 3.75 Mbps required for standard-definition VOD, the bandwidth implications are pretty easy to comprehend.
Some operators will be grabbing more bandwidth by upgrading their hybrid-fiber-coax plants from 750 or 860 megahertz (MHz) to one gigahertz (GHz). Many others will rely on the relatively new transmission technique of switched digital video (SDV), which conserves network bandwidth by delivering linear program channels in unicast form, much like a VOD stream is delivered. Some operators will employ a combination of both solutions.
“The beauty of switched digital video is it really blurs the linear stuff with the nonlinear stuff, and it's totally transparent to the viewer experience,” says David Price, VP of business development for Harmonic. Harmonic sells both VOD software (it acquired VOD specialist Entone Technologies last year) as well as the “EdgeQAM” devices that are used to transmit digital video and data down cable pipes.
When cable operators look for new revenues to recoup their VOD investments, targeted advertising is the hot topic. Traditionally, inserting commercials in VOD content was a time-consuming process that required re-encoding the content to insert new spots. That meant spots might be several weeks old before they aired, thus limiting their appeal to advertisers. But through the new technique of dynamic insertion, fresh spots can be spliced into compressed VOD content as it streams from the VOD server, and more importantly, targeted spots can be delivered to individual set-tops.
C-COR played an instrumental role in one of the first trials of dynamic advertising insertion with Charter Communications in St. Louis. The trial successfully delivered dynamically-inserted spots to some 250,000 digital subscribers.
SeaChange has also experienced success with a dynamic insertion trial with small Kansas-based operator Sunflower Broadband. The trial, done in partnership with Atlas, MTV Networks and Mediaedge:cia, runs on SeaChange's AdPulse software.
Harmonic's Price thinks that targeted advertising will show up alongside premium fare as well as free VOD, particularly as the windows for VOD movies get closer to the DVD window. He says that operators are mulling the idea of selling a new theatrical release on-demand for perhaps $7.99 for a commercial-free version, and $5.99 with five minutes of ads running before the movies. Says Price, “If you know a person bought 'Talladega Nights,' then you know they are interested in watching a NASCAR promotion and you know they are interested in the latest oil from Pennzoil.”
In order to pursue such targeted advertising opportunities, integration between VOD and existing traffic and sales software is crucial. Compton and others point to the Society of Cable Telecommunications Engineers' DVS-629 standard as a likely interface between the VOD platform and ad decision systems.
The continued march of popular content to the on-demand platform is inevitable, says Jonathan Bokor, VP of business development for Tandberg, which provides its AdPoint on-demand advertising software to Comcast. But while most VOD advertising trials have experimented with pre-and post-roll ads, Bokor doesn't think that the basic look and feel of VOD commercials needs to be different from what people are used to in linear TV.
“I don't see why the ad breaks should be much different than when you turn on the TV today,” he says. “I know it's a bit of a clean slate, and most of the high-value content hasn't been there yet. But why should there be a different ad load in on demand than in linear?”
Video-on-demand could be called child's play at the moment. Kids' programming represented 24% of total free VOD orders in the first five months of 2007, behind music and movies, according to Rentrak. TV executives believe this is the start of something big. Viewers are eager to see the primetime shows already appearing in cable systems' VOD packages. Equipment makers predict a surge in the hardware needed for storage and dynamic ad insertion. But VOD ad dollars represent a fraction of advertiser spending on TV. Can networks, advertisers and TV distributors make VOD profitable?