Home Box Office found out this summer that if you offered a subscription-video-on-demand package to HBO subscribers for free, demand would overwhelm the cable system.
The lesson came when more than 3,000 requests came in from 26,000 HBO digital subscribers on Time Warner Cable's Columbia, S.C., cable system during a 90-minute period soon after launch.
But what happened when all those HBO subscribers, used to cruising the SVOD menu for free, had to pay $3.95 a month? They all came back.
HBO said it has more than 3,000 subscribers in Columbia paying for HBO On Demand, all without much marketing. "It's been incredibly well-received," said Sarah Cotsen, senior vice president of HBO Internet Ventures. "We're actually beyond 3,000 at this point, and we haven't started full-scale marketing."
To gauge the full impact of what those results could mean, consider this: Suppose HBO, with marketing and strong word of mouth, can achieve a 30-percent SVOD penetration rate at $3.95 a month. At 20 million HBO subscribers, that's another $288 million in annual revenue, split between HBO and cable operators.
And SVOD costs are increasingly negligible. Operators are already installing servers to handle video-on-demand. HBO is encoding content once and distributing it via satellite. There are some marketing costs, but most of that possible $288 million stands to drop directly to HBO's and the cable operator's bottom line.
Now add in other services from Starz Encore Group LLC, Showtime and basic networks, as Starz chairman John Sie has done, and Sie estimates operators could add $5 in cash flow per month from SVOD alone.
Scientific-Atlanta Inc.'s controller isn't the only thing smoking this year in SVOD. So too are chief financial officers' calculators.
HERE'S WHERE IT IS
At the moment, SVOD has been launched in four markets: Time Warner Cable's Columbia, S.C. and Cincinnati systems; Adelphia Communications Corp.'s Cleveland system; and in New York on Cablevision Systems Corp.
But there are perhaps as many as a dozen other SVOD trials or imminent launches in other cable systems across the country. All three premium networks are now testing pricing, packaging and content management scenarios in the brave new world of server technology.
More than two years after Sie began pitching SVOD to the cable industry, cable operators, fortified with hundreds of deployed servers and strong early consumer response, appear ready for significant SVOD launches in 2002 once pricing and contention schemes are thoroughly tested.
Not surprisingly, each premium network takes a different approach to SVOD.
For HBO, it starts with its hugely popular original series. Starz Encore counters that SVOD is more about a wide breadth of movies, rather than originals. For Showtime, it's a mixture of originals, along with a caution to operators warning of premium category cannibalization with SVOD.
"We're preparing to deploy in four more markets by the end of the first quarter," said Greg DePrez, vice president of SVOD at Starz Encore. He sees Starz's efforts tied closely to its premium packages.
In Cleveland, Adelphia Starz Super Pak subscribers receive the SVOD service free of charge. The typical package retails at $12 a month. Cablevision offers a similar bundling package with current Starz subscribers.
DePrez said his company rotates 30 movie titles throughout the month. About 25 percent of the content is refreshed each week. "At any given time, there are 24 titles on the server," he said.
Starz carries content from Walt Disney Co., New Line Cinema, USA Films and Revolution Studio. Although it carries Universal movies, it does not have SVOD rights to the studio's titles.
Unlike HBO, DePrez said, "we will premiere movies first on SVOD." That means a Starz movie may premiere on the network Jan. 5, but it would be available on SVOD beginning Jan. 1.
Starz breaks down its service into six categories: comedy, action, romance, family, drama and thriller. "We trying to mimic the home video store," DePrez said.
Although Starz isn't getting incremental SVOD revenue today, DePrez said, "We're building a license fee expectation into this," alluding to a value that Starz thinks could be in the $4 to $5 a month range. "We think it's a more valuable product at a slightly higher price to be determined."
In the early trials, DePrez said Starz is learning that subscribers scroll through the VOD menu as a "linear alternative" to television.
"People use it after they have gone through or watched the prime-time schedule," he said. Their thinking, he said, seems to be "I'll reserve on demand for later on. It's great to know I have choices. It adds value, but it's not the first place I go."
The typical Starz SVOD subscriber chooses "two views" per day, DePrez said.
Many people are finding out about the service through word of mouth, he said. But Starz plans to work with operators by first marketing to Starz subscribers, then move on to non-Starz subscribers, then on to basic-only homes.
DePrez believes SVOD services will help premium networks prevent downgrades. Subscribers who felt they didn't have enough time to watch the service, or who missed movies they wanted, now find SVOD addresses that problem, he said. "Broadband is giving them control."
HBO's SVOD launches in Columbia and Cincinnati feature the same, constantly refreshed lineup in both locales that "combines the best on HBO that month as well as high-value stunt packages," said Cotsen.
The lineup includes 150 shows, which are refreshed weekly and delivered by satellite provider N2Broadband. About 85 percent of HBO's SVOD content is original while 15 percent consists of theatricals.
At the moment, consumers can see the entire season of Arliss, Sex in the City
or The Sopranos. About 60 to 70 episodes of original programs are on the server, according to Cotsen.
HBO also carries 40 titles from the kids, specials, documentaries, late-night and comedy categories. Of the 45 movies on the service, 20 are Hollywood theatricals while the rest are HBO original movies, Costen said.
When HBO launched, it planned to refresh content each month. That changed after several months in the field. "They [customers] wanted to have content constantly refreshed," Cotsen said.
"If a show is in season, you'll always be able to get the last episode," she said. "There will be a rolling inventory." For instance, Curb Your Enthusiasm
is in its first run, so viewers can see the last four episodes, Cotsen said. Once a new episode premieres the oldest of the four episodes rolls off the service.
All premieres occur on the linear service, she said. New shows are added on Wednesday of each week.
Cotsen said HBO is careful not to disrupt linear viewing patterns. "Ours is about event programming," she said, such as HBO's Saturday-night programming "guarantee."
"There's no question our series are our most popular piece of content, and stunts play incredibly well," Cotsen said. In addition to packaging entire seasons of Sex
and Sopranos, HBO has reached into the archive and placed its Earth to the Moon
mini-series on the server in September.
"We bring back some fabulous programming," Cotsen said.
Although HBO typically won't carry more than four episodes of a series that is playing in first run, it's made an exception with Band of Brothers, carrying all episodes from the Tom Hanks-Steven Spielberg miniseries that is currently airing. "We made an exception because it continues to build an audience," she said.
Cincinnati launched on Oct. 2 at $9.95 per month, $6 more than the Columbia service. Cotsen said its still too early to determine buying patterns at the higher price point, "but the response in soft launch has been amazing."
Time Warner Cable put up a screen in Cincinnati asking for test participants, but took it down several days later to avoid overloading the system. Even in Columbia, promotion has been limited to telemarketing to ensure the system can handle all the subscriptions it generates.
Cotsen said HBO is planning to test other price points, including $6.95 a month, in an effort to determine an optimal price. Adelphia, at the moment, isn't charging extra for HBO On Demand, but it's only available to HBO digital customers. Cablevision is similar, where the package is in a premium tier.
It's also too early to determine if SVOD is an effective tool against digital churn, although operators and programmers hope that is the case. Cotsen said HBO is also prepping a Cinemax On Demand service.
Showtime has been testing SVOD with Cablevision along with cable systems in two other undisclosed locations, according to Mark Greenberg, executive vice president of corporate strategy and communications for Showtime Networks Inc.
The tests include about 100 titles per month, Greenberg said, with 60 percent being movies, 35 percent original series and 5 percent boxing. For instance, every episode of Queer as Folk
is on the server in test markets, Greenberg said.
Showtime is using two unspecified pricing models, he said.
Showtime is taking a more cautious approach, expressing concern about finding the right pricing model to avoid hurting the existing premium revenue, even though, Greenberg said, "we're very optimistic about the potential of SVOD."
"We don't want to break out too fast that we leave business on the table," Greenberg said. "We want to be careful how to optimize it from our client's vantage point."
One of the traps he wants to avoid is underpricing the service. "The industry has to look at pricing. You don't want to cannibalize your business."
The test also should help operators determine utilization levels at various price points, Greenberg said. The more streams and bandwidth subscribers use, the higher technological and operational costs for operators.
Greenberg is wary that premium subscribers, in a tight economy, might drop a pay network to "pay for" another network's SVOD service. "We want to encourage tighter bundling and packaging and the growing of revenue for our clients."