Cable Operators

Cover Story: Failure To Lift Off

7/12/2009 8:00 AM Eastern

Even as cable operators firmly embrace video-on-demand as a business, recent research shows that the platform still falls short of expectations.

VOD usage rates continue to grow at a healthy clip, and cable operators have deployed on-demand services in more than 90% of their footprint. On the other hand, VOD continues to lag behind the rates of both digital video recorder usage and Web-video adoption.

Perhaps even more problematic: The industry has yet to develop VOD advertising models that could make on-demand content much more profitable for operators and programmers.

“The growth in VOD has been steady because digital cable growth is relatively steady,” said Magna Global global director of forecasting Brian Wieser. “The VOD libraries that the MSOs offer are certainly popular and they may be contributing to churn reduction, but they still don't account for a significant amount of time spent with TV. … VOD advertising is still very difficult to buy and it doesn't account for a significant quantity of consumption, so there are better alternatives for most large advertisers.”

Cover image July 13, 2009As a result, Magna estimates that advanced advertising — which includes VOD as its largest component — will grow to only $161 million in 2010, up from $138 million this year.

Slightly better news on the economics of VOD comes from PricewaterhouseCoopers' Global Entertainment and Media Outlook: 2009-2013. That recently released report predicts that VOD revenues for operators will reach $4.5 billion in 2013, up from about $2.8 billion this year.

Consumer-usage data is also mixed. Use of VOD continues to lag behind both live-TV and DVR viewing, according to survey data from Horowitz Associates.

“If you look at each demographic, DVR usage is 30% to 50% higher than VOD,” said Howard Horowitz, the research firm's president. “VOD has a lot of cable business momentum driving it into consumer homes and consumers are responding, but not in an overwhelming kind of way. It is another useful, very convenient device, but not a killer app.”

VOD also comes up short compared to consumer adoption of online video. The April 2009 Magid Media Futures survey, by Frank N. Magid Associates, found that about 43% of the population is now watching online video. That's compared to 21% of survey respondents, who used VOD “frequently or occasionally,” said Magid senior vice president Jill Rosengard Hill.

“For consumers, on-demand is not top of mind,” said Rosengard Hill. “Operators must commit more marketing inventory and dollars to build awareness of on demand if they want to see usage increase.”

Still most analysts stressed that these issues should not obscure on demand's growth in recent years or its value to both consumers and operators.

“We have a tendency to forget that this is an evolutionary process,” said Bruce Leichtman, president and principle analyst at Leichtman Research Group.

“If we go back to 2004, the number of people using on demand on a monthly basis was only 6.5 million; but by 2008, we were talking about 23 million using it monthly. That is tremendous growth.”

That view is confirmed by a slew of data from Rentrak, which collects VOD usage data from most of the cable footprint.

Between the start of 2007 and the end of 2008 “we saw a 21% increase in the number of VOD orders and 11% increase in those using the platform,” said Sandra Kilbridge, vice president of operations at the Advanced Media and Information division of Rentrak.

Overall, about half of those who have access to VOD use it every month, and those viewers spend significant time with the platform, calling up about 18 programs each month.

Virtually every other possible metric has also shown growth, Kilbridge added: The amount of time viewers spend watching VOD is up 23%; 24% more free on-demand titles are on offer; and subscription VOD titles are up 14% throughout 2007 and 2008.

High-definition choices have grown particularly rapidly. “In 2008 alone we saw a 175% increase in orders and a 91% increase in unique HD set-top boxes” capable of accessing HDTV content on demand, according to Kilbridge.

VOD VIEWING AND USAGE
VOD viewership continues to climb, with 788.9 million orders in the first quarter of 2009 — up from 435.2 million orders in the first quarter of 2007, according to Rentrak.

Unique Quarter Orders* Set-top Boxes*
* In millions.
SOURCE: Rentrak OnDemand Essentials, excludes adult and RTE content. Includes only MSOs with full reporting across full time frame. The date listed for each quarter is the first date in the three-month period it covers. So the Jan. 1, 2009 data covers from Jan. 1 through the end of March, 2009.
Free Video On Demand
1/1/2007 435.2 15.1
4/1/2007 518.4 16.5
7/1/2007 611.1 17.5
10/1/2007 656.4 18.5
1/1/2008 667.5 19.3
4/1/2008 674.6 19.2
7/1/2008 723.1 20.6
10/1/2008 763.2 21.6
1/1/2009 788.9 22.3
Subscription VOD
1/1/2007 176.1 10.7
4/1/2007 205.4 11.6
7/1/2007 223.3 11.8
10/1/2007 221.2 11.9
1/1/2008 224.3 12.4
4/1/2008 207.5 12.0
7/1/2008 215.2 12.4
10/1/2008 217.1 12.7
1/1/2009 199.6 12.4
Transactional VOD
1/1/2007 23.7 7.2
4/1/2007 23.9 7.3
7/1/2007 24.8 7.6
10/1/2007 27.2 8.1
1/1/2008 29.4 8.6
4/1/2008 28.7 8.5
7/1/2008 24.1 8.0
10/1/2008 25.7 8.3
1/1/2009 28.8 8.7