Free VOD Will Be Key

Jan 9, 2005  •  Post A Comment

if Challenges Are Met

At Magna Global, we believe it is in advertisers’ interest to actively experiment in on-demand environments by working with networks, multiple system operators and agencies to support the growth of free video-on-demand. That’s because FVOD will provide an environment that best enables national advertisers to effectively reach mass audiences via television in the on-demand world of the near future.

However, to make cable operators’ investments in network-centric solutions successful, programmers must be able to secure VOD rights. This will happen on a wide scale only if advertisers make sufficient commitments to the new medium. We expect that today’s other obstacles-ratings measurement, rights management and fee arrangements between cable operators and programmers-will ultimately be overcome if sufficient interest from advertisers is demonstrated. Combined, these efforts will help ad-supported FVOD become the dominant on-demand platform.

We expect that viewers will become acclimatized to this variant of time-shifted viewing. FVOD offers the beneficial combination of increased television viewership (due to the flexibility of time-shifted viewing) and an environment that is more conducive to advertising than what DVRs provide.

For a sense of scale of these technologies, Magna Global forecasts that by 2010 there will be 24.9 million DVR subscribers (up from 5.3 million as of the end of the third quarter of 2004) and 41.8 million VOD-enabled digital cable subscribers (up from 15.9 million as of third quarter 2004).

A “best of cable” model with substantial content from across broadcast and cable networks will both constrain the growth of DVRs and simultaneously develop a superior environment for marketers to interact with consumers on their terms. Not only will FVOD be a “good-enough” product for most television viewers but contrary to a widely held point of view we expect this will occur because the majority of DVR subscribers will be forced to pay incremental monthly equipment fees to MSOs. We note that the long-promised “free” DVR with no subscription fee has yet to arrive; with the competitive dynamic between cable and satellite approaching stability toward the end of the decade (primarily due to cable operators’ telephony deployments), we expect service fees to remain the norm.

Cable operators will not pursue the FVOD model out of deference to advertisers (who will benefit from embedded messages within FVOD content) or program creators (who will benefit from a reduction in piracy if programs are served from the network rather than its edge). It will occur because cable operators want to capitalize on the almost $80 billion investment they have made in their systems and wish to avoid becoming a “dumb pipe.” The DVR empowers consumers over MSOs and draws them away from the operator. The more a consumer is drawn away, the less the customer relies on the cable operator.

Fortunately for advertisers (and the American ad-supported broadcast system), FVOD is slowly but surely taking a foothold. Time Warner Cable has launched a number of FVOD “channels” in most of the country, and Comcast is doing the same on an even wider scale (with 3,000 to 4,000 hours of free content).

On the flip side, we have observed plateauing interest in subscription VOD (or SVOD), where incremental fees are paid or allocated for on-demand television programming. This past quarter Time Warner Cable and Cablevision both reported results indicating that SVOD’s penetration rate among digital cable subs is holding at approximately 30 percent (almost entirely due to packages of HBO and Showtime on Demand).

Time-shifted viewing is an important benefit for consumers, and advertisers must work with products that enable this behavior because consumers want to take advantage of these life-improving technologies. The media industry’s concern associated with shrinking mass audiences is a real one, but the problem can be mitigated through continued experimentation with the new media by all players in the industry and their whole-hearted support and investment dollars.

An optimal approach to advertising in an on-demand world includes the development of highly targeted campaigns that make advertising as endemic as possible or that cause viewers to seek out commercials directly through interactive applications.

At the same time, advertisers have new opportunities to create branded content for distribution as FVOD. Long-form programs or music videos with joint sponsorship are among the best-known examples. Concurrently, advertisers should consider whether branded entertainment customized for VOD is an appropriate medium.

The importance of learning how to work in an on-demand world will only increase: witness Hewlett Packard’s new Media Center PC, now available for under $1,000. Devices such as these will allow consumers to seamlessly integrate content from the Internet (audio and video files), a self-contained DVR service and a full-screen television set. Although consumer use of the Internet bypass is far from widespread, this technology reflects the on-demand nature of the future. Advertisers, MSOs, programmers and content creators alike will only benefit from learning how to interact with it. n

Brian Wieser, a certified financial analyst, is VP and director of industry analysis for Magna Global USA.