Verizon’s VOD Horizon

Feb 21, 2005  •  Post A Comment

On the heels of the deal-making it did late last year and early this year with Discovery Networks and Court TV, Verizon Communications has struck a deal with video-on-demand aggregator TVN to distribute movies, adult content and kids programming.

The agreement is noteworthy because it’s a clear indication the telco plans to be aggressive with its VOD strategy and is lining up the troops needed to battle the incumbent cable operators on their terms.

Verizon doesn’t plan to match Comcast with the number of VOD titles it offers, but it does intend to offer a range of VOD options, including movies, subscription packages and free content. The big advantage for Verizon lies in its fiber-to-the-premises network, which will be nearly all digital from the get-go. That means that about 95 percent of its subscribers will be digital and thus will receive VOD. By contrast, cable companies can deliver VOD only to digital customers, or about one-third of their subscriber base.

“We will bring VOD to 95 percent or more of households that subscribe to the Verizon VOD service, and no other distributor can do that right now,” said Terry Denson, VP of programming and marketing for Verizon FiOS TV, the brand name for Verizon’s video and data service. In addition, when Verizon begins its launch of video service in the second half of this year, it will simultaneously introduce VOD in each market.

Of course, cable operators have the distinct advantage in being first to market. According to Kagan Media, VOD is now in nearly 20 million homes, thanks to cable operators, whereas Verizon has yet to launch its video service.

Some industry observers are skeptical of telco video plans in general. “I really have a wait-and-see approach,” said Bruce Leichtman, president of Leichtman Research Group. “We’ll see how quickly and profoundly it comes to fruition.”

Nevertheless, when Verizon does deliver video signals for the first time later this year, it will do so with a full complement of advanced video services, including VOD and the new-release films that TVN transports and aggregates for the telco. Movies are not the most-watched portion of an on-demand service, but movies and adult content are moneymakers, since viewers actually pony up for the content through transactional fees.

TVN currently aggregates movies from seven distributors, including Paramount, New Line Cinema and 20th Century Fox. Verizon will still need to cut direct deals with certain studios, such as Warner Bros. and Disney, Mr. Denson said.

In any given month, theatrical releases offered on-demand will number about 35 or 40, with some months hitting as high as 60, Mr. Denson said. Another eight to 10 titles will be movies that were intended for theatrical release but went straight to video. Verizon won’t carry movies that were solely intended for direct-to-video distribution.

Verizon also plans to develop tiers of service that are interconnected with companion VOD products. For instance, the telco plans to launch a “movie tier” separate from the premium channels and integrate the tier with those same movie titles in a related on-demand package.

Mr. Denson won’t disclose the number of titles Verizon is aiming for in its VOD service, but he said the offering won’t be as extensive as Comcast’s. “We don’t necessarily believe that maximum tonnage means maximum satisfaction. We are trying to be a little more artful. It will grow over time, but we don’t see any reason to create a whole mansion of VOD content,” he said.

That artfulness includes using Microsoft’s interactive program guide for its linear channels and also for VOD. The guide should enable consumers to search for titles on-demand and on linear networks.

Comcast, by contrast, is a proponent of a big bucket of free content as a draw for consumers. The operator offers 1,700 hours of programming at any given time, or about 2,500 programs. About 95 percent of the on-demand programs viewed are free. But the buy rate on movies has increased 63 percent compared with pay-per-view buys since free content was added to the offering. In December in Philadelphia, Comcast’s flagship market, 67 percent of its digital cable customers used on-demand, and the average VOD user used it 23 times per month.

Like Comcast, Verizon will use a “walled garden” approach, which means it will offer a VOD portal as the central entry point for all on-demand content.

While Verizon has its work cut out in catching up to cable operators’ lead in VOD, it can look to its competitors’ roadmap. “They can learn a little bit from cable operators,” said Ian Olgeirson, senior analyst with Kagan Media. For instance, operators generally build their VOD systems with the expectation that no more than 8 percent to 9 percent of digital customers will use VOD at any given moment. “I don’t see any reason why [telcos] wouldn’t face similar types of usage patterns,” he said.

While the TVN deal provides Verizon a core component of VOD, Verizon still needs to fashion deals with linear networks for their related on-demand content. TVN has relationships with more than 70 content partners, and as Verizon negotiates deals with those content providers, TVN will transport that content for Verizon, said Doug Sylvester, chief operating officer for TVN.

The telco did a deal late last year with Discovery Networks for carriage of all 13 analog and digital networks, HD service Discovery HD Theater and Discovery VOD. That’s the ideal, Mr. Denson said.

“Our preference is when we talk to content providers is to have deals that address all the services, standard definition, high definition, VOD, if they offer it,” he said.