Cable operators are hoping that when it comes to the new services video-on-demand and digital video recorders, the whole is greater than the sum of its parts.
Many operators are aggressively rolling out DVRs and VOD simultaneously across their markets. The most progressive operators view them as complementary, yet a perception still exists in some parts of the industry that it’s a race to acceptance, and that the service that gets there first prevails.
Cable operators insist that’s not the case and make sturdy arguments for why not, but some corners of Wall Street, watching confusing messages from the competition and the consumer uncertainty that often surrounds new services, grumble that cablers still need to eradicate the perception that it’s an either-or world. EchoStar, after all, markets its DVR service as DISH Video-on-Demand, an irony because satellite technically can’t offer VOD service.
In fact, at the National Cable & Telecommunications Association Show in New Orleans last May, many cable executives lamented the sluggishness by which VOD had rolled out and noted that DVRs had gained ground and might prove to be a better business proposition in the end. Such sentiments lent further credence to the notion of a battle between the two.
However, the latest research suggests that in fact the opposite may be true. Each service creates stickiness in the other and engenders usage of both.
Chuck Ellis, chief marketing officer for Time Warner Cable, said 81 percent of homes that have DVRs also use VOD, compared with a 51 percent usage rate for VOD service in non-DVR homes.
Comcast has introduced DVRs to about 65 percent of its customers to date and should reach its entire footprint by the end of this year, while VOD should reach 80 percent of Comcast homes by that time.
Based on the rollouts to date, Comcast has found that when a customer gets a DVR, the usage of on-demand programming rises by 40 percent, said Page Thompson, VP, marketing, new video products, at Comcast. “I think the customer has a pretty clear understanding of the two,” he said. “I think when you get on-demand you want to get TV on your own terms. So once people get a taste of it they want to continue to have their TV their way.”
A June report from TV research firm Lyra Research bolstered the claims of Time Warner and Comcast. Based on a survey of 350 VOD users, it found that DVR users do indeed watch more VOD programs, both paid and free, than do non-DVR users. The study found DVR users watch 53 percent more free VOD programs, and watch 69 percent more pay-VOD programs than do non-DVR users.
The findings may be surprising to cable operators, since they challenge “a widespread industry assumption that DVR and VOD technologies are competing for viewers’ usage,” the research firm noted in the report.
Steve Hoffenberg, Lyra’s director of electronic media research, said some consumers also have the impression the services are competitive, but that perception usually comes from consumers who aren’t using them yet. “So there is a level of education that needs to go on in the industry,” he said. “The more I see, the more I believe that they are truly complementary technologies, but that’s not necessarily self-evident until consumers experience using both.”
`Agents of Change’
While the research does seem to indicate the two services work in tandem, the perception of competition persists. That comes in part from the analyst community, said James Kelso, VP and general manager for broadband systems at SeaChange, a VOD services and equipment supplier.
“The perception that they are competitive is from people who say there is a limited amount of capital dollars that cable operators have to spend,” he said. “I think it’s an overplayed issue of will PVR win or VOD win. The two are going to radically change television. They are agents of change, and the question is which companies will make the most of it?” Mr. Kelso said.
The fear from the investment community is that rolling out two services, in addition to the other new services such as high-definition television and telephony, simply drains more capital, explained Murray Arenson, senior analyst with investment bank Ferris, Baker Watts. “I think there is a concern that they are competitive, and it makes the street view it as a risk,” he said.
The two services also serve different purposes for cable operators. DVRs are a must-have to help them compete with satellite operators that also offer DVRs. That’s why multiple system operators, which need answers immediately on the competitive front, are tending to deploy DVRs a little more aggressively at the moment.
“I think the near-term need is DVRs. I think anyone who is doing any strategic planning is focusing on VOD,” Mr. Arenson said.
The two aren’t racing each other to acceptance; they are racing toward different goals. DVR is a race for cablers to catch up to satellite, while the introduction of DVR service is a race to offer a product that satellite can’t deliver, Mr. Hoffenberg said.
Cox, for one, is pumping more fuel into its DVR deployment, with plans to be in 95 percent of homes by the end of the year. By contrast, Cox will launch only its eighth VOD market this fall, reaching 40 percent of its homes passed with VOD, representing 48 percent of its digital subscribers.
“I think the business case is clearer for DVRs,” said David Pugliese, Cox VP of product marketing and management. “There is a monthly subscription fee, and consumers have demonstrated a willingness to pay for it. DVRs, from a capital standpoint, [are] an easier thing to implement. VOD requires a more significant capital investment.”
Mr. Pugliese said the business model for VOD isn’t clear. To clarify it, Cox plans to test several models later this year, including a VOD offering with a “good degree of free content” and a model with more subscription content. Some of the subscription content would come from basic networks such as Turner and Fox, which are both proponents of a subscription model for some of their VOD content.
Cox also plans to add SVOD services from the premium channels to its current VOD offering this fall, and they will be included in the cost of the premium channel, as in the Comcast model.
Despite the greater current concentration on DVRs, Mr. Pugliese said, VOD and DVRs coexist nicely because they ultimately fulfill the same consumer desire-ultimate control over the TV viewing experience. “It’s hard to imagine that 10 years from now, the majority of consumers aren’t using both,” he said.
The two products are very different, though, Comcast’s Mr. Thompson said. A DVR is like a digital VCR that time-shifts programming, while VOD is more in synch with how consumers already watch TV-they come home at the end of the day and see what’s on. “A DVR is a much more active experience, where I say, `I am never going to miss another episode of “The Amazing Race.” One is a pre-planned event and the other is a `Rescue me when my plans fall through,”‘ he said.
Because offering VOD is a competitive advantage, Mr. Thompson said he believes the cable industry will ultimately focus more energy on on-demand services.
Creating a Debate
Not all sectors of the cable industry are convinced of the yin-and-yang relationship between DVRs and VOD. “It’s completely inconclusive at this time which will prevail,” said David Nathanson, VP of broadband strategy and channel development at Fox Cable Networks. “We believe there are unique opportunities in both mediums, and we will work with both,” he said.
The key will be to promote both services effectively to monetize both, said Mark Greenberg, executive VP, Showtime Networks. “It isn’t about the technology. It’s about the consumer benefit of control and convenience,” he said. “Premium products [and] digital tiers provide more consumers choice, and if you package and price and promote it appropriately, the consumer will find those values.
“There are different benefits to both, and I think that’s where we as an industry need to say we are trying to create a debate that doesn’t exist, and if we continue to do that, we
will create confusion,” Mr. Greenberg said.
PricewaterhouseCoopers projects that by 2008, 23 million homes will have DVRs, up from about 4 million to 6 million today.