SVOD Giving Way to Ad-Paid Model

Nov 29, 2004  •  Post A Comment

The future of video-on-demand is likely to be ad-supported.

A new report covering on-demand television finds that subscription VOD appears to be leveling off while VOD that is offered free to the consumer appears to be advancing.

“For all the interest in a paid model, it seems pretty clear that’s not the way the industry is going to go,” said the author of the report, Brian Wieser, director of industry analysis at ad buying giant Magna Global.

“One of the most surprising things in this most recent quarter is that no compelling SVOD products, aside from HBO, Showtime and Starz!, have been developed yet,” he said. “The problem is the subscription model deters usage.”

Mr. Wieser supports his view with statistics from Time Warner Cable and Cablevision Systems showing that in the third quarter, SVOD penetration leveled off at about 30 percent.

He estimated that about 4.2 million households have SVOD services now. That will grow to 6.4 million next year and to 13.5 million in 2010.

Instead, the free-to-the-customer model for VOD favored by Comcast appears to be a winner. And since it’s free to the consumer, ad support will sustain it. Mr. Wieser estimated that 18.2 million households are VOD-enabled. That will grow to 21.1 million next year and hit 41.8 million by 2010.

“Every new medium develops most when supported by advertising,” Mr. Wieser said. “It offsets most of the cost consumers would otherwise pay and helps in developing content that is better tailored to specific consumer interests. VOD is a perfect match for that.”

At this point, VOD advertising is in its early stages. Major advertisers, including General Motors, The Walt Disney Co., Xerox, Visa, Kellogg’s and Nintendo are working with several networks on their VOD packages.

“Expenditures on video-on-demand advertising may represent a rounding error today for many advertisers,” Mr. Wieser said. But he expects it to grow. “It certainly will follow the eyeballs as measurement techniques are improved.”

VOD should also be attractive to advertisers because “it’s a much more highly targeted media and you could do more with it. It does not necessarily take away from existing budgets. It complements what advertisers are doing today.”

In the report the forecast for DVR penetration was adjusted. “The combination of faster-than-expected [direct broadcast satellite] growth in 2004 and near-term signs of accelerating DVR deployments from cable operators have led us to raise our end-of-2005 forecast from 10.1 million to 11 million subscription units.”

And while satellite operators have yet to offer free DVRs-a move he expected to happen by the end of 2004-and cable operators plan to charge for DVR service, the long-term outlook also increased. He now forecasts 24.9 million DVR subscriptions in 2010, compared with 24.7 million in Mr. Wieser’s previous study in the second quarter 2004.