Cable Operators

MSOs Revamp VOD Strategies

4/28/2006 8:00 PM Eastern

In the dogfight between cable, satellite and the telephone companies, a stray cat called Jake may provide an unlikely illustration of how cable-system operators are revamping their video-on-demand services to strengthen their competitive position.

The mischievous looking grey-haired feline, abandoned by his owners and brought to the Humane Society in Salt Lake City, is one of about a dozen animals featured in a two-minute video at the Pet Adoptions section of Comcast On Demand. The service has been good for the local Humane Society — dogs and cats featured on the VOD platform now account for 10% of all adoptions — and good for the pets, who are eventually euthanized if they don't find a home.

“So far, every one has been adopted,” Comcast Utah area vice president Scott Tenney said.

UTAH CASE STUDY

As cable operators, direct-broadcast satellite platforms and telcos fight each other to be adopted by more homes, the VOD strategies of Comcast's Salt Lake City system also illustrate how MSOs are revamping their on-demand offerings.

Besides the pet-adoption services, the Utah system is working with about 50 local high schools, providing training and sometimes equipment so students can tape and Comcast can air about 300 local games on demand this year. The system has cut a deal with ABC affiliate KTVX and the CBS affiliate, KUTV, to offer local newscasts on-demand. In a city known for its religiosity, it offers services from 7 or 8 denominations each week. It's also working with local bands and filmmakers to add their content to the VOD platform. One independent film got over 1,000 buys.

Overall, the local on-demand content now gets over 100,000 streams per month, up from only 3,000 to 4,000 before Comcast started expanding its local offerings. That makes the local fare more popular than a number of national networks, Tenney said.

Using VOD to differentiate cable's video products from satellite is, of course, nothing new. But as competition heats up, the distinctiveness that on demand once offered cable versus its competitors is blurring, making local programming and other newer VOD services increasingly valuable.

EchoStar Communications Corp.'s Dish Network and DirecTV Inc. have both announced plans to bundle some on-demand video, made available via high-speed Internet connections, with their DBS offerings. They're quickly adding new interactive TV services to strengthen their competitive arsenal, as well.

Meanwhile, telcos are preparing to roll out packages of channels that will feature VOD and programmers are strengthening their broadband video offerings. The CBS Television Network's decision to stream its National Collegiate Athletic Association Men's Basketball Tournament game coverage on the Internet and ABC's decision to offer on-demand repeats of Desperate Housewives and other popular shows on its Web site have both helped hype the potential of broadband video.

Some numbers are also worrisome for cable: There are already 50 million subscribers with high-speed connections, double the 25 million U.S. homes with VOD, according to Magna Global. And the $13.3 billion Internet ad market dwarfs VOD revenues, which will total only $1.6 billion in 2006, according to PricewaterhouseCoopers.

Robert Benya, senior vice president of VOD product management at Time Warner Cable hotly disputes the notion that VOD has not lived up to expectations or that cable risks losing its competitive advantage with on-demand video.

“The perception that VOD hasn't been a home run is wrong,” he said. “Usage is sky-high. More than half of the customers are using it 25 to 30 times a month. It has been a clear differentiator for us, and will continue to be, as we roll out newer services that satellite and telcos can't compete with.”

Time Warner Cable is now offering local programming in about two-thirds of its systems, as well as adding interactive features. It is rolling out “Start Over,” a feature that allows users who tune in to the middle of selected programs to restart them from the beginning. And it will soon be testing “Look Back,” a feature that allows viewers to see programming from selected networks that aired earlier in the week.

“We want to expand the way people think of VOD,” Benya said.

That effort is being waged on a number of fronts, from adding tons of more content and improving its quality to developing new services with interactive features. (See VOD Scorecard on page 42 for a summary of VOD data, strategies and plans of the top five operators.)

Comcast, for example, increased the number of programs available each day from about 1,400 in December 2003 to 4,000-plus today, with more than 7,000 different programs available over the course of the month, said Comcast On Demand vice president and general manager Page Thompson.

FREE VOD 'ENGINE'

“Free VOD is really the locomotive that pulls the whole engine,” Thompson said. Comcast had more than 141 million views in March 2006, up from 74.5 million at the end of 2005 and 21.2 million in December 2003. “Expanding free VOD has been our key initiative because it encourages people to try VOD and has allowed us to grow revenues [for subscription VOD and movies on demand],” he said.

Most other major operators have also been bulking up their VOD offerings. Robert Ladd, director of marketing for on-demand and pay-per-view services at Charter Communications Inc., said the operator has added over 20 content providers in the last two years, with the largest growth in the last year. Charter currently has about 1,200 hours on VOD.

That has helped quadruple the number of programs ordered between the fourth quarter 2004 and the fourth quarter 2005.

At Cox Communications Inc., director of new video services Bob Nocera said expanding the amount of content was a key initiative over the last year.

“We now have about 25 content providers for VOD and 1,300 hours,” he said.

But the operator has also been focusing on local content. Its New Orleans systems offers a wide variety of local sporting, music and cultural programming, while its San Diego system offers the Stan Humphries Celebrity Classic golf tournament, the Miramar Air Show and Baseball Night in San Diego, which features Padres Major League Baseball games from the previous season.

QUALITY CONCERNS

Time Warner Cable and Comcast are also pushing heavily into newer services that enrich the VOD experience with interactive elements, such as karaoke or eBay on TV. Time Warner is working on ways to make on demand programming more widely accessible with its Start Over and Look Back services. (See story on page 47 about the test of Start Over at the Time Warner system in Columbia, S.C.)

The biggest issue, however, remains the quality of programming. Brian Bos, convergence director at JWT Detroit, who has handled VOD campaigns for such clients as Ford Motor Co., noted that “you're still not seeing a lot of the blockbuster TV programs in this space [VOD.] You don't have American Idol on VOD. The networks are still looking to find the right business model” so that putting programs on VOD won't hurt the ratings of their linear channel.

Those worries remain but some movement is being made. After years of negotiations, some of the big operators have cut deals to gain access to at least a limited quantity of popular broadcast and cable programming. This spring, for example, Comcast began offering such CBS shows as CSI and Survivor on demand for 99 cents an episode, and sometime in May, the MSO will roll out product from NBC Universal's broadcast and cable networks, also for 99 cents.

“People keep talking about the potential of VOD, but in terms of actual product it's only now that some of the top-rated product that advertisers really want to associate with is becoming available on VOD,” said Jean-Briac Perrette, senior vice president of new media and chief financial officer of NBC Universal Cable. “The advertising and business models are still being developed.”

AD CHALLENGES

In recent years, several factors, including limited data, the inability to rapidly insert ads, and the relatively limited number of homes using the service on any one MSO, have all limited the potential of VOD sponsorship and advertising. Operators are hoping to change that over the next year by testing and deploying products that will make the whole process of inserting, targeting, selling and tracking VOD much easier. (See separate story on VOD advertising, page 44.)

“Developing a robust advertising model will be the key to the future of VOD and the development of better content,” notes Comcast's Thompson.

Smaller operators are also working to improve their VOD lineups. Steve Brookstein, executive vice president of operations at Bresnan Communications, noted that his MSO began rolling out on-demand in 2004. By the end of this year, it plans to have VOD available in about 78.7% of digital-cable subscribers' homes, up from about 62% today.

The company has also ramped up its programming offering quickly to about 1,200 hours, which has helped expand usage. “We had 491,000 total VOD orders in March and that's up about 30% from the previous month” said Bresnan vice president of operations Jim Gemmill.

So far, the strategy has also helped reduce customer disconnects. “We saw a reduction in digital churn of 23% from the fourth quarter of 2004 to the fourth quarter in 2005,” noted Brookstein.

Overbuilders are also adding VOD content and revamping their strategies. RCN made a major shift earlier this year when it added Showtime, Starz, Encore and Cinemax to digital basic, which includes about 60 channels. That means subscribers can get all those premium channels and their VOD product for an additional $19.95, on top of the $49.95 regular charge.

“Growing the VOD product is a very strong initiative for us this year,” said Lynne Buening, programming consultant at RCN Corp.

Tim Dunne, executive vice president and chief technology officer, added that it is too early to report any results but he argues that the lower priced digital basic tier with premium movie channels and VOD product will help “differentiate us in the market.”

If so, that is likely to put more pressure on incumbent cable operators to continue to expand and develop their VOD offerings.

March