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Comcast betting big on free VOD

May 6, 2002  •  Post A Comment

Comcast Corp., which is about to morph into the largest domestic cable operator, is pushing the envelope on video-on-demand adoption, with plans to make half of what it carries free of charge in hopes of doubling its digital subscriber base by year-end.
It’s a radical idea, given that cable operators are eager to cover their multibillion dollar system upgrades with revenues generated by high-margin digital businesses such as VOD, subscription VOD, high-speed data and Internet protocol telephony.
But Comcast is convinced that if it can entice digital subscribers to click and watch, then it eventually can get them to click and buy, Comcast President Brian Roberts said.
In what is the first public demonstration of how a combined AT&T-Comcast will keenly leverage its newfound clout, Mr. Roberts has set the ambitious goal of blanketing more than 6 million of its nearly 13 million homes passed with free VOD options this year by putting digital set-top boxes in homes and giving viewers on-demand access to 750 hours of brand name news, sports and entertainment at no extra charge.
Mr. Roberts generally mentioned his free VOD intentions last week in presentations to analysts at Cable Labs and during Comcast’s quarterly earnings call. But the undisclosed details of Comcast’s free VOD game plan, which it is testing, are all the more intriguing.
`Best of’ programming
High-level sources said Comcast will roll out an intense, free VOD mass-marketing campaign in its hometown of Philadelphia in September, aimed at 100 percent digital penetration, or 2 million subscribers. Digital subscribers will continue to pay $14.95 a month for access to 1,500 hours of digital product, half of which will be time-shifted existing programs from broadcast and cable networks in the daypart categories of news, kids, sports and general entertainment.
Comcast already has a handshake agreement with NBC to provide some of its newscasts, including “Nightly News With Tom Brokaw,” for on-demand replay and soon expects to have similar one-year carriage agreements with The Walt Disney Co., Viacom and News Corp.
The new arrangement will allow broadcast and cable networks to sell off a broader cumulative rating, which eventually could translate into higher rates, since all the programs will air with their original advertising intact, sources said.
The onus is on broadcast and cable entities to participate. “If you’re ABC and you participate, you have the chance to cume your ratings. If you’re ABC and you don’t participate and CBS does, and 20 percent of the people served by AT&T-Comcast time shift, you just took a 20 percent haircut in ratings-and you’ll never get it back,” said one high-level industry observer.
Comcast also has lined up 25 hours of “the best of” programming from both A&E’s Biography and Discovery. It plans to do the same with the History Channel, its own Golf Channel and genre music videos. Comcast’s majority-owned QVC will provide an on-demand shopping component for the free VOD service, sources said.
Timely broadcast and cable network programs such as newscasts will be available for “a cycle,” or until the next new episode of the program airs. Other programs offered on a “best of” basis will be archived. Local time-shifted offerings will include local TV newscasts; Philadelphia 76ers, Flyers and Phillies games; and high-definition broadcasts.
Comcast will provide personal-video-recorder-style functionality to existing leased or purchased digital set-top boxes from the headend, allowing subscribers to arbitrarily select, pause, forward, rewind and stop programs.
Slicing churn
Program service providers, who generally receive 5 cents to 10 cents per digital subscriber, will benefit from the new program by making more money from the sale or lease of more digital set-top boxes. Comcast is close to signing its first movie VOD pacts with studios that could call for more theatrical-like sliding scale splits.
With four analog channels already allocated to VOD, Comcast will continue to recapture analog spectrum to support its VOD initiative, sources said. The company also plans to offer some cable-only special events to stimulate VOD and SVOD use, such as movie and HBO series sneak previews. “But in order to do that, we have to get the product going,” Mr. Roberts said.
The goal is to attract noncable subscribers, slam the brakes on digital churn (hovering at 6 percent) and win back former subscribers who defected to direct broadcast satellite services in Philadelphia and its other markets, the latter of which could total 5 million homes. Just wooing one-tenth of those satellite customers back to cable could represent $2.5 billion in additional business, sources said.
Clearly, Comcast is taking its cue from Charter Communications’ recent success with VOD, which has boosted digital penetration over 50 percent and sliced digital subscriber churn in half in markets where it has been rolled out.
Sanford Bernstein analyst Tom Wolzien conservatively estimated a successful VOD rollout could add several hundred million dollars in earnings before interest, taxes, depreciation and amortization to his $45 million 2004 estimates for the company.
“The whole game here is to drive digital box penetration to 60 percent from nearly 30 percent,” Comcast Cable President Steve Burke said. “Just think of how much more exciting HBO would be if you can watch five `Sopranos’ episodes in a row whenever you want to.”
While the upside seems huge, there is the potential difficulty of eventually getting consumers to pay for the on-demand services they learned to love for free. Moving from free to pay services is a tricky business, as witnessed by Yahoo!’s current migration from a free business model to a 50-50 mix of advertising and subscription-supported services.
Comcast’s VOD move also comes at a time when industry analysts and investors generally have lowered their expectations for new digital services due to what generally has been their slower-than-expected rollout. Cable digital net additions in the first quarter declined 22 percent from fourth quarter 2002 and declined 25 percent from a year earlier, according to Jessica Reif Cohen, analyst at Merrill Lynch.
Still, analysts predict that long-term, the cable industry overall-driven entirely by new digital services such as VOD-can grow earnings at a rate of 12 percent to 14 percent, compared with a historical 10 percent annual growth rate.
To that point, if Comcast succeeds with its VOD experiment during the second half of the year, it will have accomplished an important task that will have profound implications for the entire cable industry. It will pick up the pace of gently and steadily pushing passive TV viewers over the convergence line to become interactive consumers.
When that occurs-and it will-cable becomes the pre-eminent gatekeeper and winner in TV interactivity. How fast and effectively that takes hold in this volatile economic environment is what is at stake in Comcast’s free VOD initiative. It’s certainly worth a try.