In January, Comcast Corp. Chairman and CEO Brian Roberts gave a presentation to a group of investors in Phoenix during which he highlighted his company’s rapid development of video-on-demand services. Hailing it as “the big differentiation” against the satellite operators, Mr. Roberts said VOD had proven so successful in the markets where it was available that customer defections, also known as churn, fell by as much as 30 percent and subscribers were watching an average of 12 hours of VOD programming a month.
“We are changing television,” Mr. Roberts told conference attendees, “and we believe that this is just the beginning.”
That’s just what some network executives, and the owners of TV and movie content, are worried about.
As VOD finds consumer acceptance, a growing number of network executives-particularly at the cable channels-are privately expressing an uneasiness about VOD, saying that what is shaping up to be a boon for cable operators has the potential to be a problem for networks and copyright holders.
At issue is the business model for VOD-or, rather, the lack of one. While cable operators can boast that VOD helps them retain customers, some network executives lament that VOD as it stands today provides virtually no money-making opportunities for them and could become a drain on existing revenue streams.
Sources said that independent cable networks are feeling especially vulnerable since they lack the kind of leverage held by some of the larger media players, which own multiple cable networks and perhaps a broadcast network as well.
Making matters worse, cable operators aren’t exactly eager to compensate content providers for the use of their programming in VOD, arguing that they’ve paid the networks once already and are simply repurposing material already included in their original carriage agreements.
“As a developer and distributor of content, we love the development of VOD programming,” said NBC Universal Cable Senior VP Jean-Briac Perrette. “But this is a new use of content. You’re asking for a new window to be inserted in the product life cycle. And the more exposure the content gets upstream, the more you lose downstream. Finding a business model [for VOD] is a strategic imperative.”
Compensation for Content
So far, the issue of compensating networks for VOD content has not boiled over into an all-out fight akin to the programming-fee battle two years ago that pitted some distributors against programmers. Further, no one on the cable network side is pooh-poohing VOD; indeed, most network executives are as keen on VOD as the cable operators. However, that enthusiasm could change if first-run series, including premium network shows such as “The Sopranos,” become hugely popular on VOD, cut into first-run ratings or pay-network subscriptions and networks aren’t somehow compensated for the loss of revenue.
“Everybody in the business is dedicating themselves [to VOD] because this is not going to go away,” said Channing Dawson, Scripps Networks’ senior VP of emerging media. “Viewers are getting used to the idea of taking their media when they want it, not when programmers want it.”
The content found on VOD services ranges from movies and television series to sports clips and news broadcasts. Some networks are exploring content that complements programming found on linear channels. Turner Broadcasting, for example, worked with Comcast to offer a behind-the-scenes look at its reality series on TBS, “The Real Gilligan’s Island,” including footage from the casting calls.
But with each strategy deployed by the programmers comes a cost. For example, supplying VOD services that have run on linear channels affects the network’s ability to generate revenue from syndication or DVD sales. If a network produces original content for a VOD service, network executives said, it needs to be compensated for the associated production costs.
In some cases, there are questions about whether networks have the rights necessary to supply VOD content to the cable operators. “We look at VOD as a promotion tool,” said Bill Goodwyn, president of network sales and marketing for Discovery Networks. “We can do clips of what’s airing in the next couple weeks to give viewers a taste of what the show is about. It can be a driver to help drive promotions and ratings at the linear channels.”
That’s exactly the message that Comcast, which is leading the push to deploy VOD, is sending to network executives. “[VOD] provides an outstanding marketing opportunity for a network to promote its shows,” said Page Thompson, Comcast’s VP and general manager of On Demand, the cable giant’s VOD product, adding that the service also enables viewers to “build a deeper involvement with the show.”
Slow Digital Sub Growth
Despite all the attention, VOD’s slice of the cable universe is nascent. One reason is that consumers have been slow to jump on the digital-cable bandwagon (access to VOD services requires digital-cable subscriptions). JupiterResearch estimates that of the 74 million cable households in the United States, 30 million will subscribe to digital cable services by the end of 2006, growing to 43 million by 2009. While that number is significant, industry players acknowledge that consumer acceptance of digital cable has moved more slowly than expected.
Even in households with digital cable and access to VOD, the penetration rate is lower than many industry players expected. A study conducted last September by JupiterResearch found that 50 percent of the respondents surveyed have not yet sampled VOD services. Another 12 percent hadn’t even heard of VOD.
Said Todd Chanko, an analyst who conducted the JupiterResearch study: “I am bullish on VOD in the long run of two to five years, but I don’t think that VOD is going to explode anytime soon because it’s hamstrung by the limited number of digital cable subscribers.”
Nevertheless, cable operators are betting big that VOD will provide them the edge they need to more effectively compete with satellite. With the satellite companies offering their own version of video-on-demand, the cable operators have no choice.
DirecTV Group has conducted VOD tests since 2002, while EchoStar Communications likewise is developing its own version of the service. Both solutions are tied to digital video recording devices that once a month allow programming to be downloaded onto hard drives, which then can be accessed by subscribers. The satellite services so far don’t offer real two-way interaction.
Meanwhile, modern cable systems, with digital technology and fiber-optic networks, do have interactivity and can offer literally thousands of choices. An earlier version of VOD sold as pay-per-view was more limited in selection and lacked technical options such as pausing and fast-forwarding. Digital cable offers all that and more.
Various VOD Products
VOD works by enabling digital-cable subscribers to call up programming stored on headend servers whenever they want. Within the VOD category are different types of products, with different kinds of price structures. Some services allow consumers to pay a one-time fee for one-time access to content. Others, such as the subscription-based VOD service offered by premium channels such as HBO, offer unlimited on-demand access for a monthly fee charged to subscribers.
A third, fast-growing product is a no-fee VOD package, which allows digital cable customers to access content at no extra charge. Comcast is a leader in this area, offering 3,000 hours for free at the start of the year. It plans to raise that total to 10,000 hours by the end of 2005.
The free area includes sample shows, which benefits the cable programmers, and increasingly long-form advertising, which has strong appeal to Madison Avenue. VOD enables advertisers to “create more than traditional [30-second spots],” said Discovery’s Mr. Goodwyn. That usage can be tracked and measured. That in turn could command higher costs per thousand because consumers are opting to click either long-form commercials or programming sponsored by an advertiser.
u’ve got to experiment and hope it’s something that is going to work for advertisers, consumers and distributors,” Mr. Goodwyn said.
“VOD, because it’s important to our [cable] partners, is important to us,” said Coleman Breland, Turner Network Sales’ executive VP of sales and marketing.