TVN has metamorphosed from a pay-per-view network beamed by backyard satellite dishes into a video-on-demand content aggregation and management service for the cable industry.
The privately held company’s restructuring, which was completed in March at the behest of financial backer Morgan Stanley, has repurposed TVN’s satellite technologies for the video-on-demand era. Now TVN’s satellites are used to send films in secure, encrypted form to server headends, where the content is then decrypted before being directed to digital cable customers’ set-tops.
Unlike the four leaders that have emerged in the cable VOD technology infrastructure space over the past several years-Diva, Seachange, nCube and Concurrent Computer-TVN doesn’t provide its own video servers to cable operators. But the VOD neophyte has formed alliances with three of those four mainstays-Seachange, nCube and Concurrent-joining the cavalcade of technology developers touting their services to cable operators as “end-to-end” solutions.
Now a partnership with Diva is possible, according to TVN President and CEO Ian Aaron. “We’ve been going back and forth with discussions and technical meetings,” he said.
Such maneuverings are important for TVN as it vies against well-connected VOD content aggregator iN Demand for multiple system operators’ business. iN Demand, unlike TVN, operates as a loss-leading puppet for the four MSOs-AT&T Broadband, Time Warner Cable, Cox Communications and Comcast Communications-who own it. While iN Demand exists primarily to provide cable operators with the enticing content they need to compete with satellite television and broadband DSL operators, TVN is under pressure from Morgan Stanley-which holds a 46 percent stake in TVN-to become a profitable enterprise in its own right.
With TVN’s recent reconfiguration into a VOD provider, Morgan Stanley has already transformed more than $160 million in junk bond debt on TVN’s balance sheet into equity.
“They [Morgan Stanley] want to see this thing succeed and provide some liquidity to shareholders,” Mr. Aaron said, noting that an initial public offering wouldn’t be out of the question once the retooled company wets its feet in the VOD arena.
“If I were Morgan [Stanley], I’d want a year of operating under my belt to see if people were meeting the expectations of the plan,” Mr. Aaron explained. “This is not a build-it-and-it-will-come business. It’s about layering revenue streams on top of the existing infrastructure.”
Like its cable VOD cohorts-iN Demand, Diva, Concurrent, nCube and Seachange-TVN is faced with the challenge of persuading MSOs to pay for a new service at a time when the cable industry is facing pressure on three fronts: competition from telcos, overbuilders and satellite TV providers; a decline in consumer spending as corporate layoffs continue to escalate; and the burdensome debt obligations MSOs have already amassed by expanding their customer base.
“[MSOs] cannot launch more than one [new technology] per year under the current market conditions, the cash crunch and the competition,” Carmel Group Senior Analyst and Vice President of Business Development Sean Badding projected. “They’re being very conservative now.”
Mr. Aaron, who is cognizant of the uphill battle that closely held TVN would face in supplying its high-powered VOD technology to MSOs while purchasing expensive film libraries from major studios, won’t rule out a possible merger with one of the big three server technology powerhouses-Sun Microsystems, IBM or EMC. Rumors have been circulating for months that one of those three publicly traded, well-financed behemoths, which ship stock servers to corporate clients, may purchase one of the privately held VOD server innovators. Unlike the big three in the server marketplace, TVN, Diva and company have developed expertise in tailoring VOD technologies to individual cable operators’ needs.
“While Hollywood is sexy,” Mr. Aaron remarked, “these companies [Sun, IBM, and EMC] are really getting back to operating efficiently.”
TVN is cautiously predicting that VOD won’t generate a windfall of profits in the immediate future. For instance, in TVN’s fiscal year 2002, which will end in March of next year, video on demand will account for only about 10 percent of revenues, while the company’s pay-per-view and near-video-on-demand channels (which allow customers to order programs at half-hour intervals) will produce 65 percent to 70 percent of its earnings.
Until the nascent video-on-demand marketplace matures, TVN is tending all of its revenue-generating gardens in non-VOD areas of the business. The company is expecting to soon acquire several pay-per-view channels geared toward a Hispanic audience.
In addition, TVN is hoping video on demand can create advertising income beyond the customary VOD transaction fees collected from audiences for ordering programs. For that purpose, it is considering establishing a partnership with ACTV’s SpotOn, which provides targeted advertising solutions for cable operators. SpotOn could grow into an additional vehicle for reaching VOD’s urbane, digital-friendly demographic.
Mr. Aaron is hoping some of the trials MSOs are running of TVN’s video-on-demand service will soon bear fruit by budding into more full-fledged VOD deployments as well as spawning additional trials. Aside from a recent trial with Cablevision Systems and a deployment by Adelphia Communications in the Cleveland area, “Many of the [MSOs] we’re trialing with are iN Demand owners,” Mr. Aaron revealed.
But aside from TVN’s deal-making initiatives, the company is busy with the day-to-day chore of formatting reels of video for VOD viewing in its Burbank, Calif., production facility.
In that control center, its software compresses video down at rates of 3.3 to 3.7 megabits per second. Such compact video feeds enable cable operators to store about 50 films per month at a given site before being refreshed with the next month’s selection of on-demand programming, according to TVN Senior Vice President of Technology and Product Development Dom Stasi.
The films are encoded in MPEG-2, a streaming video standard that allows shows to be played back at a resolution approaching the quality of live television, and are enhanced with digital “metadata” that allows digital cable audiences to manipulate shows via their remotes-converting the remotes into virtual VCRs. Textual information such as casting and genre are also added in the production process.
TVN’s acquired films can be shown to television audiences for VOD purposes during the standard pay-per-view window, which is about six months after a film’s first-run theatrical release, Mr. Aaron said. By contrast, cable subscription viewing networks such as Starz! Encore, HBO and Showtime are prohibited under their deals with the major studios from releasing films to VOD customers until about 12 months after a feature’s initial run in cinemas.