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Opportunity & uncertainty in VOD

Dec 2, 2002  •  Post A Comment

Cable’s early experience with video-on-demand gets a thumbs up from most system operators, programmers and consumers. It is still early in the game, however, and the success of VOD is hardly a sure thing.
The idea behind it is simple. Offering an on-demand product, cable operators believe, could solidify cable’s position as the top provider of multichannel video entertainment. VOD can help differentiate cable from satellite providers, which have siphoned away 18 million would-be cable customers.
Above all VOD could be a huge revenue producer. A recent study by The Yankee Group forecasts VOD sales of $2.6 billion by 2006.
Still, many unanswered questions remain. One of these is whether VOD over cable will be offered on a subscription basis or sold more like traditional pay-per-view, in which a customer pays a separate fee for each transaction.
Comcast Corp., now the biggest cable operator in the country thanks to its merger with AT&T Broadband, embraces a model in which most VOD content is offered free to subscribers who purchase a digital cable package.
“The strategic value of VOD is that it will drive digital penetration and will decrease digital churn, and that is worth money to us,” said Andy Addis, Comcast VP, marketing and new products. Comcast has about 5 million VOD-enabled homes and expects to add 2 million more by early 2003.
Starz Encore Group, a subsidiary of Liberty Media Corp., has established itself as a major supporter of the concept of subscription VOD, whereby subscribers can access on-demand programs from premium services such as Starz! Encore, Showtime or HBO.
“The subscription model is the most successful product extension that cable has ever developed, and VOD is the perfect platform to extend subscription television,” said Greg DePrez, VP, subscription video, Starz Encore.
“People would rather pay a single monthly fee for their movies on demand or sub-niche stand-alone programming than pay each time they use the service,” added Starz Encore founder John Sie.
The success of the SVOD model, Mr. Sie said, will be driven by the availability of hot movie titles. But with a profusion of movies already available on television, and with consumers accustomed to renting or buying videotapes or DVDs, on-demand movies may not present a compelling enough argument to make VOD take off.
Little original content
As with cable programming in the early days, the VOD world offers little original content. Mag Rack, the VOD-only service from Rainbow Media Holdings, goes against the grain by offering a collection of 30 or so special-interest “channels,” ranging from bird watching to basketry to Shakespeare. The service is available to about 2.7 million cable households.
Producing or acquiring original content for such a small potential audience does not deter Matt Strauss, Mag Rack’s executive VP and general manager.
“We believe that VOD is going to grow exponentially, so for us, getting in on the ground floor now and establishing our brand now will bring us a pretty good return on investment down the road,” he said.
Mr. Strauss’s faith notwithstanding, Mag Rack has been slow out of the gate. Since its launch in September 2001 only three multiple system operators-Insight, Cablevision and Charter-have signed carriage agreements. (Mag Rack parent Rainbow Media is a Cablevision subsidiary.)
Still, consumers seem to like the service. More than 85 percent of Cablevision subscribers with access to Mag Rack used the service at least once between February and August 2002, customer surveys showed.
Whether VOD is just a novelty that consumers like to toy with or the beginning of a new cable juggernaut, it appears to be catching on.
Cox Communications, which has rolled out its pay-per-view VOD service in San Diego and Hampton Roads, Va., has seen a 25 percent jump in the number of households that purchase movies. Moreover, those households are spending more.
“Movie revenue per digital household per month increased by about 50 percent,” Lynne Elander, Cox VP for video product management, told analysts and reporters last month.
Marketing is key
The ultimate success of VOD may depend as much on great marketing as on great programming.
“The worst thing for people in the industry to think is that this is a gimme,” warned Bruce Leichtman, president of Leichtman Research Group in Durham, N.H. Cable operators, he said, must put some weight behind their marketing efforts, something they failed to do in the early days of pay-per-view.
“Pay-per-view was an afterthought for most operators,” he said. “If they devote the same level of spending and marketing to VOD, they will miss a grand opportunity.”
Marketers may also face another dilemma. While consumers like the idea of VOD, they are frequently confused by it. Research commissioned by Starz Encore Group found that changing TV viewers’ channel surfing habits may be more difficult than first thought.
“Suddenly, you’re offering them a menu of new choices, and that requires a behavioral change in the way they view television,” Mr. DePrez said. “That is something we have to work on with cable operators, to teach people how to use a menu and take a more active role in choosing what they want to watch.”