Cable Operators

Business Model A Work in Progress

6/22/2007 8:00 PM Eastern

After several years of starts, stops and speed bumps — from back-office issues to a lack of content to viewer-navigation challenges — the business model for video-on-demand is showing signs of clarity and viability. But several details concerning advertising and content continue to get worked through.

With nearly 30 million households now with access to some type of on-demand service — and with the expansion of HD content and a raised level of acceptance for the on-demand process — the business side of VOD is gaining momentum, as well as the attention of consumers and service providers alike.

“We believe the market dynamics are about to change. Studios are testing better windows, i.e., VOD to be day and date with home-video release; cable operators' improved infrastructures allow them to carry an enormous amount of product; and digital-cable penetration is growing rapidly. We estimate the VOD market could surpass $6 billion if average monthly buy rates reach 2.5 units, with 100 percent of cable subscribers having VOD capability by 2009,” reported a recent Merrill Lynch study on on-demand.

Strong on the Upside

Yet perhaps even more telling, according to LRG Research president Bruce Leichtman, is on-demand's retention upside. “It's more about retention and added value. About 85% of digital homes have some form of on-demand [programming] available.

“It's a nice tool because subscribers think their providers are better because they have VOD. That's truly a differentiator,” Leichtman said. “But the VOD business offers lots of opportunities, starting with glue for the best customers, so it's not a revenue generator first. Advertising represents an opportunity as well. VOD is clearly evolving.”

Evolving indeed. Comcast, the country's top multiple-system operator, is reporting 9,300 shows on VOD per month, 95% of which are free. It will also reach 200 million total views per month. And that's just the beginning.

“We've passed the novelty stage and have integrated VOD into the way people watch TV,” said Comcast senior vice president of content acquisition and development Mark Strauss. “Now, we're aggressively moving to more HD content on VOD. That is a top priority for us.

“And the advertising model is more relevant now with dynamic insertion. We're also structuring deals with studios and content providers. That's the VOD model we've built,” Strauss added.

The Comcast model, Strauss added, will contain shorter windows for content and VOD-specific programming, most notably local fare. “It's been very successful and we're getting our arms around local opportunities like news, sports and events,” he said. “In many local markets, it's a top service. So, we're moving to personalized, localized TV.”

Local content is just one component of the on-demand model, however. “VOD is a very strong, growing business — especially Free on Demand, which grew 11% the last two quarters. Music programming and children's content are driving it,” said Cathy Hetzel, president of advanced media and information for Rentrak Corp., a research-and-reporting company that tracks the VOD business. “The trend is towards broadcast primetime content on VOD. There's extreme growth in this category, with 13.3 million views in Q1 of 2007, compared to 15 million total views in 2006.”

HD is setting a torrid pace as well, and has emerged as a key component to the VOD business model.

“There's a 950% growth curve in HD usage from 2006, and HD orders grew 56% between March and April of this year,” said Hetzel. “It's all being driven by more HD sets and more content on demand.”

And the outlook for VOD? “The cable industry wisely recognized its pipe could offer VOD. Now, the goal is to provide multiscreen content. That's where the industry is headed. And cable is positioned well,” she maintained.

Yet for Cox Communications and other operators, the on-demand enterprise is an evolving business requiring some model building.

“It's taking time to develop and to manage the economic model, which to date has been supported by the advertising model,” said Cox senior vice president of programming Bob Wilson. “We're still figuring out that model and how to monetize content in VOD. Clearly, it's an evolutionary business.”

Cox is experimenting with several VOD models, Wilson added, most notably “day-and-date” releases of theatrical films, which makes titles available on-demand the same day they hit video-rental shelves; shows from broadcast networks; and, in the longer term, cross-platform content.

“As the business evolves, we'll probably have to be competitive in that world. Given the size of the video business, VOD is a significant piece of the customers' video world, and we want to be there,” Wilson concluded.

The company is heading into the VOD business by tracking on-demand activity, which Wilson said is dominated by premium services and music videos.

“Those two video assets make the business model work for the VOD platform. We've always had an idea the VOD platform allows best access to the best content,” he said.

Cox, ABC and ESPN recently struck a deal which allows Cox to make shows from The Walt Disney Co.-owned siblings available one day after airing, and will disable the fast-forward function. The company will also trial dynamic ad insertion technology in its Orange County, Calif., system, Wilson noted.

For the on-demand business model to fully bloom, however, the pesky user-interface and navigation issue must be resolved. “It's the most critical piece of our platform and it's how we'll differentiate ourselves from the competition,” said Wilson. “We have a lot of work to do in this category.”

Navigational issues aside, top cable operators expect the VOD business to flourish once the user interface challenge is settled and the advertising model is solidified, and once content — particularly HDTV programming — is widely and readily available.

Building a Better Interface

“We know we can make interfaces better, and HD demand is growing, which is an incredible differentiator for us,” said Time Warner Cable senior vice president of VOD and interactive TV Bob Benya. “We're bulking up our HD programming with over 100 hours in most systems and will increase that number several times over. And now, we can take existing content and get it across other platforms. The revenue trajectory for VOD is healthy.”

Time Warner's three-pronged on-demand model consists of several key components, Benya said. “It's a differentiator from our competition, it glues the bundle and introduces cross-platform services, and it's growing in double digits in Q1 of '07. We'll build in subscription VOD and ad sales too.”

The VOD business as a whole is expected to build on those assets as well. According to Leichtman, “[Time Warner] is on track for a billion sessions in 2007, but there's still a mindset out there that may not be wholly formed. Right now, you have to look at VOD's stickiness as its most important asset. Cable subscribers with VOD know its value.”