Banking on a VOD Future


Shortly after the much vaunted and rather speedy integration of AT&T Broadband was completed, executives at Comcast Corp. were faced with a slight dilemma: What do we do next?

The answer was pretty simple: Grow the video business. And the quickest way to do that, they determined, was to aggressively push video on demand.

That was a bit of a departure from the rest of the industry, which seemed to focus most of its energies on high-speed data, new telephony products and technologies like digital video recorders. Comcast president and chief operating officer Steve Burke says it made the most sense for the MSO.

“If you look at our company, the vast majority of our revenue, despite the tremendous growth of high-speed data and the fact that we have a large telephone business, comes from our video business,” Burke says. “Therefore, the No. 1 priority in the company becomes growing our video business.

“When you look at all of the different ways you can do that, in terms of product enhancements, we think the best is video on demand for a variety of reasons,” Burke adds. “First of all, consumers love the ability to time-shift; that’s going to be a big part of the future of television. There are a variety of ways to time-shift, but video on demand, we think, is the most compelling for consumers, because it doesn’t require any prepurchase planning.

“It’s not a planned purchase; it’s an impulse purchase. It’s also the most attractive for copyright owners because it’s extremely secure as opposed to recording with a DVR. And it should be most attractive of all the time shifting methods for advertisers because we’re trying to offer VOD in an advertising friendly way. Last but not least, satellite can’t do it.”

Comcast also took a novel approach to its VOD offering. Instead of charging for selected VOD programming, as some of its peers have, Comcast has pursued a free VOD strategy aimed at driving digital-cable growth.

The free VOD model is a simple one — offer a compelling product (VOD) only through the digital tier, and reap the benefits in the higher price of that tier, usually about $14.95 per month more than basic service. But Burke says Comcast’s robust VOD offering has greater value than just increased digital revenue.

“First of all, it adds value to our product at a time when we need to add value to our product,” Burke says. “The fact of the matter is, we’re facing very strong competition from [DBS providers] DirecTV [Inc.] and EchoStar [Communications Corp.]; they’re adding new products all of the time. We expect the speed of evolution of their product to increase in the future, not decrease.

“The payoff is in the form of more basic subscribers, more digital subscribers, and reduced digital churn,” Burke says. “The business model is like any other product. I don’t care if you’re selling automobiles or you’re selling consumer electronics: You have to continually improve the value side of your product, and that is what we’re all about.

“That value, in our minds, dwarfs whatever we could be leaving on the table by not charging for the product,” he adds.

Sanford Bernstein & Co. cable analyst Craig Moffett says that Comcast’s VOD strategy makes sense in that it also further differentiates the cable offering from direct-broadcast satellite service.

“Comcast is looking out to the day when you interact with your TV set by first going to the VOD menu and browsing through a library of thousands of titles and deciding what you want to watch and where the schedule is increasingly an anachronism,” Moffett says. “You’d like to be able to interact with your TV in the same way you interact with Google.

“Comcast loves that, because no matter how big your DVR hard drive gets to be, you’ll never be able to do that with a DVR,” Moffett adds.


So far, Comcast’s VOD strategy seems to be working extremely well. Comcast has about 4,600 free VOD titles available each month, ranging from stalwarts like Discovery Networks U.S.’s “Discovery on Demand” and an assortment of kids programming from Nickelodeon, PBS Kids and Noggin; to sports packages like NFL Replay (highlights of NFL games) and NBA Highlights On Demand; on-demand movies; and shows from popular cable networks like A&E Network, Court TV, National Geographic Channel, Comedy Central and The History Channel.

Usage of Comcast VOD service has nearly tripled since the beginning of the year, from 20 million streams in January to about 58 million in October. Comcast’s goal for next year is to have a total of 1 billion streams.

Customers also are coming back to VOD programming regularly. In October customers, on average, used the VOD service 23 times.

VOD also has driven digital subscriptions. In the third quarter, Comcast added 341,000 digital customers, well above analysts’ expectations of 230,000 to 300,000 additions. It is on track to add between 700,000 and 1 million new digital customers for the year.


Unlike its peers, Comcast has been aggressively adding to its VOD content library. Virtually all of its linear programming deals include rights for VOD. Additionally, earlier this year Comcast agreed to invest in a partnership, headed by Sony Corp., that purchased movie studio Metro-Goldwyn Mayer Inc. for $4.9 billion.

Comcast pledged about $300 million to the MGM purchase, and it will manage a content partnership that will provide it with movie and series content from both studios.

Sony has about 3,000 movies in its library; MGM has about 4,000 titles.

Comcast is set to receive about 25 movies a month from Sony beginning in January and another 25 per month from MGM once the deal is finalized later this year. About 30% of that content will be refreshed each month.

But perhaps the most compelling part of the deal is the vast amount of series content Comcast will receive. With access to more than 35,000 series episodes from Sony and another 10,000 program episodes from MGM, Comcast will have ample fodder to create new channels. No decisions have been made as to which channels to launch first, Burke says.

“We’re going to be in a position to make some announcements in the next few months,” Burke says. “[Executive vice president of programming investments] Amy Banse and her team have been hard at work coming up with ideas in conjunction with the Sony team.

“First thing is to get the MGM deal done, which ought to happen, hopefully, in the next month or so. And then, after that, I think you’ll see us make some announcements.”

Although many content companies have signed on to the Comcast VOD strategy, others have held back.

“Every major content company that we had a renewal negotiation with and many new providers, like the NFL and children’s, have all signed on — some wildly enthusiastic, like Discovery, and others with trepidation that the technology is potentially disruptive,” says Comcast chairman and CEO Brian Roberts. “I’ve thought back to having listened to [Turner Broadcasting System Inc. founder] Ted Turner talk when I was on his board [of directors] about how when technology changed with satellite, how many broadcasters mocked his efforts with TBS and later CNN and HBO.”

One FVOD holdout has been The Walt Disney Co., which has insisted in the past on being paid for VOD content. Comcast has resisted paying for VOD programs that it has already paid for, but has said it is willing to pony up for new content — and has — for such shows as its Dating On Demand channel in Philadelphia and various niche VOD programming like health and fitness.

In early December, at the UBS Warburg Media Week conference in New York, Disney president Robert Iger opened the door to possibly reaching a compromise with Comcast.

“We are engaged in discussions with Comcast about the distribution of all of our services,” Iger said at the conference. “As part of that discussion, Comcast has expressed a great interest in content for their video-on-demand platform. It’s likely that if we do a deal, it will include some video-on-demand component. How much has yet to be determined.”

But Iger hinted that Disney is not quite ready to give away the entire VOD store.

“One of the things we need to be careful about is protecting value,” Iger says. “We know the people who have TiVos watch more TV — I think that is going to be the case when there is more video on demand out there, but we want to make sure we are paid adequately for it.

“It’s unlikely we will be able to use it to just aggregate consumption and sell that story to advertisers. So I think we have to ultimately get paid. The question is how much we make available on a free basis to prime the pump in the marketplace, and then you up-sell the great stuff. We’re in discussions in that regard.”

While Comcast has had great success with VOD, it isn’t charging for it either. That appears to be OK, since customers have to buy the digital tier to get access to VOD. But what happens when digital penetration — currently at about 40% — reaches a ceiling?

“The whole idea of digital as a tier will become increasingly anachronistic over the next 10 years,” Moffett says. “Digital is simply another collection of premium channels. You’ve already seen Comcast in its thinking about digital simultrans as the solution to a whole host of problems. It allows you to start to build a more interesting and more compelling introductory service package that includes VOD.”

And even as Comcast moves toward digital simulcasting — scheduled to begin next year — which would put at least some VOD capabilities in the hands of all of its customers (including those not paying for the digital tier), Moffett says there are still opportunities for VOD revenues.

“[Customers] will undoubtedly order more movies via the on-demand platform than they would’ve on the pay-per-view platform, and so they will end up with higher a la carte revenues,” Moffett says. “And they will also generate a whole host of advertising opportunities through addressability, digital ad insertion and targeting that an analog customer simply can’t deliver.

“Is Comcast getting a return on that digital set-top box and the VOD platform? Well, maybe,” he adds. “Even if they don’t charge for it.”

Burke says it is likely that customers that don’t pay for the digital tier will have access to a limited number of VOD services.

“The idea will be that there are different levels of digital service, and eventually the most basic level, where you get a $70 digital set-top box, you get no programming but you get access to VOD,” Burke says. “You might get access to a smaller universe of VOD than you would get if you were a traditional digital customer who is paying $15 [more] a month.”