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Time Warner Also Eyes 'Free' On-Demand Fare

3/17/2002 7:00 PM Eastern

Comcast Corp. isn't alone in its desire to provide "free" on-demand content within its digital tiers. Time Warner Cable last week confirmed its plans to implement a similar strategy, and programmers believe it could happen as soon as this summer.

Given Comcast's pending acquisition of AT&T Broadband, that would put more than half of all U.S. cable subscribers in the hands of MSOs that would fundamentally change digital-cable's value proposition to offer not just more basic networks and premium channels, but on-demand content and functionality.

And Cox Communications Inc. is making similar noises, industry sources said.

The sudden emphasis on free on-demand, or FOD, would do more than reshape digital-cable's selling proposition. It might also add a new variable to operator-programmer relations.

The goals for such FOD content are to reduce churn among digital subscribers, increase digital-cable penetration among subscribers who take only basic service, offer a value-added component to cable service and provide a competitive hedge against the digital video recording (DVR) technology being deployed by direct-broadcast satellite operators.

The "free" component also is seen as a means of getting consumers to sample on-demand functionality. That could boost usage — and revenue — for premium subscription VOD packages and transactional hit movies, he said.

"What consumers want is control over the choice," Time Warner Cable executive vice president Fred Dressler said March 8, during the closing session of the Cable & Telecommunications Association for Marketing Digital conference in Los Angeles.

While Dressler didn't directly address Time Warner's strategy, he said, "getting people to use the technology and fall in love with it is the key."

Such "free" on-demand content could include episodic TV shows, sporting-event replays and music videos, Dressler added.

BALANCED SUITE

It's clear from discussions with programmers that Time Warner is working on a balanced, comprehensive suite of on-demand content.

The MSO hopes most major studios will supply hit movies: Sony Pictures, Universal Studios and DreamWorks SKG have already inked VOD output deals. Time Warner also hopes to include premium content from Home Box Office and other such programmers, and a substantial base of "free" content from basic networks and other suppliers.

Programmers are reacting with caution. Some wonder whether the rush for free on-demand content will forestall revenue opportunities down the road.

They also worry about cannibalizing traditional TV ratings in a tough advertising market. Even repeats of programs shown months after their initial play can still drive ad revenues.

Others see value in the FOD strategy. They also see it as a vehicle to get more of what they want from negotiations with MSOs.

"We have defined parameters associated with our linear analog product, from which we can support an MSO's request to waive VOD license fees on certain original titles through this critical start-up phase," said Court TV executive vice president of affiliate relations Bob Rose.

Rose said viable basic-network VOD economic models will develop.

"I want to help our partners impress Wall Street," he said. "We have an ambitious VOD content strategy and we plan to deploy it."

Comedy Central senior vice of affiliate sales Brad Samuels would also like to be a part of that push.

"We're real interested in the promotion of our on-air franchises to drive viewership and ratings," said Samuels, who noted that the network is working on a proposal for Time Warner.

At the same time, Samuels said: "We are concerned about erosion. We'll be very careful about the amount and nature of our product [on FOD]."

PREMIUM PRICE TESTS

Buy-rates for individual South Park
episodes — sold through Diva Systems Corp. and in hotel tests — have picked up, Samuels added.

Premium programmers have already engaged in the debate over FOD, although their issues are somewhat different than those of the basic networks.

Some MSOs are testing on-demand subscription VOD packages with add-on price points. HBO On Demand has been tested at $3.95, $6.95 and $9.95 per month.

Adelphia and Cablevision Systems Corp. provide SVOD content as an extension of their existing premium tiers, for no extra charge.

MSOs believe premium on-demand content at no extra cost will drive up premium penetration. Executives with HBO, Showtime Networks Inc. and Starz Encore Group LLC don't disagree, but they believe additional charges could be instituted over time.

Offering VOD content for free with a purchase could mean MSOs are "walking away from a large revenue stream," Showtime senior vice president and general manager of digital media Gene Falk said at the CTAM conference. "I hope we can back down from that. Why say it has no price value to the consumer?

"We're a big advocate for category pricing," Falk continued. "We want to encourage multipay. Why swap one revenue stream for another? From the consumer point of view, it's way easier."

Perhaps not surprisingly, HBO partially disagreed.

"HBO On Demand is a viable product as a stand-alone service," said vice president of interactive services Sara Cotsen. "It's nice to be able to offer it à la carte, as well as a bundle."

BASIC OPTIONS

One basic-network programming executive said: "If we can get value back [from FOD], we're going to be fine."

They could recoup that value through channel positioning, long-term rate deals or overall marketing tactics, he said.

Another programmer said networks might not give their "best" content to FOD, reasoning that a "best of basic" on-demand content package — or some other SVOD model for which consumers would willingly pay extra — could be created.

But at CTAM, Dressler said that on-demand content "will be complementary to [programmers's] business."

"People need to know what's good," he said, suggesting that on-demand content can lead to sampling of network fare.

Dressler also said that he expected more Hollywood studios to join the VOD fold in the wake of the conference.

"We will have a critical mass of product," he said.

And studios that don't sign VOD deals soon could see MSOs turning their attention to other programmers, he warned.

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