News

Free or Not, VOD Steamrolls Ahead

5/12/2002 8:00 PM Eastern

The video-on-demand train now rumbling through the cable industry has picked up steam — and it's starting to send shockwaves through the film, broadcasting, advertising and equipment industries.

VOD was certainly the subject of some of the better debates — and a handful of the most inspired pitches — at last week's National Show here.

The ability to do "file-served television" will reshape the industry, Discovery Communications Inc. chairman John Hendricks predicted.

And Insight Communications Co. president Michael Willner called the genesis of on-demand technology and services as seminal an event as the introduction of satellite distribution 27 years ago.

Those are big predictions, but there are indications that time-shifted television — whether done via VOD or digital video recorders — could indeed reshape the television landscape.

In September, Comcast Corp. will launch VOD on its Philadelphia system. It will have 1,500 hours of storage space on its service, 750 of which will be earmarked for "free" content offered on its digital tier. The other half will hold fare slated to be by subscription or on a per-program basis.

Comcast has a deal through which NBC will provide Today, the NBC Nightly News With Tom Brokaw
and other content via VOD, soon after the news shows initially air. And News Corp. said it will offer FX's The Shield
and Fox TV's 24
to Cablevision Systems Corp. for free as part of a VOD test, although Fox executives openly talked of offering a program for a month for $1.

News's Twentieth Century-Fox studio also signed a deal with In Demand to provide hit movies to VOD. (See story, page 54) That leaves only Warner Bros., Paramount Pictures and The Walt Disney Co. as the remaining studio holdouts.

But with Disney chairman Michael Eisner on the show floor and Time Warner Cable close to an aggressive rollout of VOD, industry observers believe those two studios — as well as Viacom Inc.'s Paramount — could soon be in the fold.

BASICS IN MIX

The biggest change in VOD since January has been the inclusion of basic networks in the mix.

Ever since Comcast and Time Warner Cable announced efforts to put together free on-demand content — or VOD programming bundled into the digital tier — as a means to drive digital penetration, basic networks and other content suppliers have been developing proposals to fill that need.

That's prompted great public and private debate over how much content MSOs should provide to consumers for free, how programmers will get paid for such content and what upside programmers should enjoy once MSOs drive digital penetration.

Questions of how good the "free" content should be have also been raised, as have concerns over whether technology can be developed to prevent consumers from skipping the ads — and whether a ratings system that can satisfy Madison Avenue will ever be developed for the platform.

"We're very excited about VOD," said Comcast Corp. president Brian Roberts during the opening general session on May 5. "The ability to take Internet functionality, where Web sites are free, there's no friction in that transaction.

"That can be replicated with file servers and digital boxes. We are in constructive dialogue with programmers on how to make it a win-win."

Comcast is looking at content that doesn't produce revenue in reruns, such as perishable news and talk shows, he said. MSO executives also plan to talk to local broadcasters about encoding local news shows, and placing them on file servers after they air.

The MSO also owns the National Basketball Association's Philadelphia 76ers and the National Hockey League's Philadelphia Flyers. It plans to encode games this fall and place them on servers as soon as they are over.

The games would be available until the teams play their next contests.

Roberts said programmers could leave ads in on-demand content and accumulate the ratings. That way, there's no cost to the consumer, but the advertisers still pay their share, he said.

Free on-demand content also provides a promotional and sampling opportunity for programmers, Roberts said. It furnishes access to greater audiences than the programs might normally garner.

"The entry-level experience for us is the interactive technology," he said, discussing VOD's three buckets: free, subscription and à la carte.

Once consumers are acclimated, operators can sell them subscription tiers of Home Box Office or hit movies from Hollywood, he said. "It creates a revenue stream for both sides."

'FREE' SKEPTICS

Programmers remain a bit more skeptical. Any plans that provide consumers with free on-demand content — with the intent of charging at a later point — will hit a dead end, several executives said.

"You can't bait and switch," one top-level programmer said.

Added another, "Sample now and pay later is a disaster."

Other cable operators are concerned about the "free" connotation as well.

"If you set a price expectation on a new service too low, people will believe that's all it's worth," Willner said. "Every stream costs money."

Insight generated two to three times typical pay-per-view buy rates when it had large amounts of hit movie-studio product coupled with Diva Systems Corp. content that included a subscription VOD children's package and titles from ESPN and others for 99 cents to $1.99, Willner said.

"This is a matter of degree," he added. "You can fix digital churn with compelling services" other than large amounts of free on-demand content, he added.

Case in point: At the show, Insight signed a deal to offer Rainbow Media Group's Mag Rack collection of special-interest diginets as part of its VOD offering.

"It sends a big signal, directionally," said Mag Rack executive vice president and general manager Matt Strauss of the five-year deal.

Strauss said Insight is paying Mag Rack a license fee, but will offer the content at no extra cost to its digital subscribers. Insight plans to launch Mag Rack company-wide, including on its Louisville, Ky.; Bloomington, Ind.; Columbus, Ohio; and Rockford, Ill., systems.

Programmers are treading into the space warily. Discovery is offering a 10-hour free package, plus an SVOD package of content.

"We have to ease in to it," Hendricks said. "We need some content packaged with the equipment as a first step.

"We need to have other ways to recapture the revenue," he added.

HOW TO PROTECT ADS?

If ratings fall because consumers watch content on a VOD basis, Discovery loses ad revenue, said Hendricks at Tuesday's opening general session.

"What happens to the ad subsidy?" he asked. "That's taking up a lot of debate time."

One problem is that there's been little discussion about accumulating ratings from VOD platforms from which commercials can't be eliminated.

And programming executives at NCTA said the VOD industry shouldn't count on Nielsen to move quickly to meter VOD services. But server vendors say crafting software to prevent or slow down the elimination of commercials isn't difficult.

"We can put in trick files" to prevent complete ad elimination, said Concurrent Computer Corp. vice president of market development Joe Parola. "We only have to figure out how to tell the difference between the advertising and the video," and then apply the right techniques to protect the advertising.

Parola also said it wouldn't be difficult to collect data on aggregate VOD viewing by title. "We have some of that data today," he said.

Following the show, Wall Street analysts also expressed cautious optimism about VOD.

"Industry fundamentals, which generally remain quite good, are expected only to get better with wide-scale deployments of VOD in 2002-03," Niraj Gupta of Salomon Smith Barney wrote in a research note.

Gupta said Comcast Corp. cable unit president Steve Burke has suggested VOD could "allow Comcast to recapture up to 500,000 to 1 million cable subscribers over time," which would be music to Wall Street's ears.

Certainly, VOD has caught Hollywood's eye. News Corp. president and chief operating operating officer Peter Chernin, said "there's no reason we can't be packaging local content" for VOD, including traffic cameras, local weather, local culture, high school sports and backstage footage from professional sports teams.

The TiVo Inc.-ReplayTV phenomenon adds to Hollywood's interest in VOD, because content providers don't get paid for any digital video recorder usage.

VOD provides that avenue, said Turner Broadcasting System Inc. chairman and CEO Jamie Kellner, who has been very outspoken about the inherent danger of ad elimination.

"TiVo and Replay have greased the wheels for VOD," he said, noting that it would be a mistake to put DVRs in set-tops.

The Walt Disney Co. president and chief operating officer Robert Iger said, "We have to migrate slowly in the VOD direction and get paid for it."

If advertising is "devalued" in a VOD environment, "one way to make up for the loss is SVOD," said Iger.

ESPN is Disney's lead candidate for on-demand services. The programmer is discussing several options with MSOs, including an ESPN SVOD package, a sports tier SVOD package and even a basic/digital tier wide VOD offering.

CONTENT DEALS

Cablevision and Insight have agreed to carry ESPN's current "ESPN Today" on-demand service. Subscribers will have access to sports scores, news, stats, highlights, commentary and analysis. Cablevision will incorporate ESPN Today in its iO package, while Insight will use the content in its Local Source offering.

Under this model, programmers are paid for VOD content according to the amount and popularity under a model that's not unlike basic cable, in which 30 percent of an operator's fee is remitted to programmers.

Other VOD content deals were also done. AT&T Broadband signed one with In Demand for VOD programming; it replaces the financially ailing Diva Systems Corp. in the handful of systems that have launched VOD.

Busy Insight — whose president, Willner, was re-elected National Cable & Telecommunications Association chairman during the show — also announced a deal with PBS to carry digital high-definition feeds from 31 public TV stations. And AT&T Broadband said it will launch DTV in its Chicago market this summer with feeds from HBO, Showtime, NBC and Fox.

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