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Is VOD cable’s satellite killer?

Mar 4, 2002  •  Post A Comment

In the race to provide cutting-edge, highdemand services like digital channels and first-class sports packages over the past several years, cable had been running in the footsteps of satellite companies. But now that the cable industry is aggressively rolling out video-on-demand services, multiple system operators may finally have the inside track.
Satellite providers could stumble as they try to keep up with the new pace set by VOD, because the chief offering satellite has to counter VOD is the digital video recorder, which, while sharing some of the features and strengths of VOD, lacks the spontaneity and selection VOD offers. Both services offer VCR functionality that allows a user to pause, fast-forward and rewind content, but DVR memory is limited and the device does not deliver films on demand.
“I think it’s going to be very difficult for satellite to match cable with video-on-demand,” said Adi Kishore, analyst with the Yankee Group in Boston. Most current DVR models allow for 30 to 35 hours of storage at any one time, he said. “Compare that to 400 titles that cable operators can offer with VOD,” he said. “Will every single satellite customer cancel service because they can’t get VOD? No. But it’s a competitive advantage for cable operators.”
Mr. Kishore estimates that 3 million digital cable homes have access to VOD services today and 20.5 million homes will have access by the end of 2005. DVR penetration will reach 18.6 million at the end of 2006, he said.
“It’ll be awfully hard for DBS to be competitive. I think we’ve got a real head start,” said Steve Brenner, president and CEO of VOD provider iN Demand in New York. “With VOD, it’s the first time since DBS launched that cable is in the position to say we’ve got the better mousetrap.”
The satellite industry isn’t ready to concede victory just yet, however.
DirecTV’s Larry Chapman readily admits that VOD is a compelling product. “VOD presents a much higher competitive challenge to us, and we think there are a combination of things we can do to meet that challenge, all of which play to our strength,” said Mr. Chapman, executive VP of marketing and product development for DirecTV in El Segundo, Calif.
While a DVR is certainly not the same product as VOD, Mr. Chapman believes it can be integrated with the company’s pay-per-view offerings to create a near-VOD service. Since 80 percent of VOD buys consist of 20 percent of the titles, satellite providers could push the most popular content from their PPV service to a consumer’s DVR and have it available for on-demand viewing, allowing customers to take advantage of many of the most attractive VOD features, mainly the VCR functionality. “That solves a psychological hurdle,” he said.
DVRs have been available for about three years but have yet to take off in numbers. About 350,000 EchoStar and DirecTV customers have the devices, Mr. Chapman said.
However, he believes DVRs will penetrate 25 percent to 50 percent of DirecTV’s customer base within three years. The company currently counts 10.7 million subscribers. To reach that goal, a vast overhaul of DVR marketing is needed. The company is devising new marketing tactics that it plans to test, but Mr. Chapman would not divulge details. He did say that lowering the price point for DVRs is necessary to achieve the widespread adoption that he forecasts. He believes it is possible to lower the cost from $399 to $199 for consumers while maintaining the same robust features.
Though downloading 10 or so hit flicks to a DVR is not the same as offering a slate of 100 titles or more from a VOD service, the distinction is in the investment that cable operators make in a VOD service, Mr. Chapman said. They need to upgrade their plants and size their networks to handle the demand on a rainy Friday night. “In our world, we may not have the ability to offer 100 movies, but we do it on a broadcast basis-no contention, no degradation,” he said. “Our only cost is getting the PVR into the household. I like our economics in this business.”
And cable operators like theirs.
Preparing a cable system to offer VOD involves an incremental cost on top of rebuilding plants to deliver voice, video and data, as cable operators have done over the past several years, said Lynne Elander, VP of video product management for Cox Communications in Atlanta. The cable operator spends about $60 to $70 per VOD home, or $600 to $700 per stream, since a stream can serve 10 homes, to outfit a plant for VOD, she said.
“I do think that VOD is a critical counterpoint to all that new, sexy stuff DBS has been able to deliver,” she said.
Besides, offering VOD doesn’t preclude cable companies from also offering DVRs. Cox is scheduled to conduct technical trials of set-top boxes with DVR functionality incorporated into them later this year.
There’s still another way that satellite providers can compete head-to-head with a VOD offering, said Stephen St. Marie, president and chief operating officer of Culver City, Calif.-based Intertainer, which provides on-demand content for broadband platforms. He predicts that 12 months from now, set-top boxes will be available that contain IP connections, which would enable customers to plug a DSL connection into the back of their satellite receivers and receive streamed, on-demand content from broadband-based on-demand service providers such as Intertainer, he said.
While DirecTV’s Mr. Chapman agrees that a DSL line plugged into an IP-enabled box could prove a viable path for on-demand content delivery, the issue persists that availability is on a market-by-market basis, because it’s tied to DSL availability. “It’s something we will do, but I’m not predicating our response to VOD on that,” he said.
While many cable operators and researchers are heady about the growth prospects of VOD, there are a few skeptics. The potential for VOD is still unknown, and the capital costs for cable operators to make it available en masse are daunting, said Hal Richardson, head of TV distribution for DreamWorks. Still, the studio recently signed a deal with iN Demand and is eager to explore the potential of this new revenue stream. If predictions for VOD’s growth prove true, studios stand to make a lot of money, since their compensation is tied directly to the number of consumers who order the product. If the forecasts don’t pan out, the studios make a little change, and they haven’t spent much more than the cost of duplicating a digital master of each film, he said.
Jim Stroud, analyst with the Carmel Group in Carmel-by-the-Sea, Calif. is a VOD doubter. “I don’t see VOD being a success for either cable or satellite,” he said. “I would be shocked if it’s a great consumer success in 12 to 18 months.”
Mr. Stroud does not believe the service is sufficiently different from PPV to justify the expense in rolling it out so aggressively, and PPV hasn’t proven to be a cash cow either, he said.
“I don’t necessarily think [satellite providers] need to combat VOD in the next 12 to 18 months. Consumers like the idea of having hundreds of channels, but studies have shown they only watch a handful of channels,” he said.