A few years ago — when it became evident that video-on-demand would be a natural adjunct to the digital set-top business — cable accountants took out their spreadsheets and calculators and began plugging in revenue numbers based on buy-rates, penetration and other factors.
But as video-on-demand stands on the threshold of substantial deployments in 2002, the key economic metric isn't buy-rates and VOD revenue — at least for the short-term.
Among the core economic benefits MSOs expect to reap from VOD are an increase in digital set-top penetration, as well as improved subscriber retention. Operators are also beginning to take hard looks at what VOD can do to boost basic and digital penetration.
MSOs that have offered VOD for several years, such as Charter Communications Inc. and Insight Communications Co., say they've collected hard evidence that the product reduces digital churn, or the number of people who give up on digital cable after trying it out. Charter has provided the most precise numbers.
"In regions where we've launched VOD for over 18 months, we see [digital churn] diving well below 4 percent" per month, compared to typical digital churn rates in the range of 6 to 8 percent per month, said corporate vice president of product marketing Rick Lang. "We're extremely encouraged."
Comcast Corp. cable unit president Steve Burke took that line of thought a step further recently in talking to financial analysts about digital acquisitions.
While early VOD adopters may be heavy television users who already take premium services, Burke believes the technology could appeal to basic-only subscribers.
"We believe it has appeal to people that don't take premium services," he said.
Comcast has rolled out VOD in 16 markets, and is testing subscription VOD in a handful of systems. "The initial test results are very encouraging," Burke said.
The Philadelphia-based MSO counts 2.3 million digital subscribers in its 8.4 million-subscriber universe, for a penetration rate of 28 percent. VOD could help drive that rate to 40 percent or greater, Burke said.
"Our strategy with digital is to continuously enhance the product," he said. "VOD is a product that can move digital to the next level. You can drive penetration deeper."
Charter has set its sights even higher. It believes it can move digital penetration, now at 31 percent, to 50 percent over the next two years, thanks to VOD and a slew of new interactive services it just launched.
Comcast plans to become more aggressive in marketing VOD in its big clusters during the second half of the year. And several additional Hollywood studios will soon make VOD deals, which should help the category even more.
Burke and other MSO executives have been reluctant to put a revenue-per-home figure on VOD, though.
Cox Communications Inc. plans to launch VOD in seven markets, covering 43 percent of the MSO's homes passed, by the end of the third quarter. Cox is emphasizing growth of the digital-subscriber base.
"VOD will drive digital penetration," said Cox executive vice president Pat Esser. "VOD will be a retention tool and an enticement to our light viewer base."
Cox executives say they've cut digital churn since they've bundled together video, voice and data services.
Digital penetration rose from 13 percent to 17 percent among video-only subscribers between the first and third quarters of 2001. But over that same period, the digital-penetration rate for homes that took video, data and phone service rose from 54 percent to 60 percent.
And while average monthly churn for cable subscribers was 1.7 percent in 2001, cable, data and phone subscriber churn was only 0.8 percent, Cox said.
BEYOND VOD: ITV
Charter views VOD as one step toward a broader array of interactive services that will retain digital subscribers and draw in new customers.
"As we layer on more services and more value, you begin to weave a mosaic of features and benefits to the consumer," Charter's Lang said.
Charter will launch its "I-channels" — which are basic interactive services — across the MSO.
"Suddenly they find a feature that becomes a service to them," said Lang. "It's not just about more channels or movies, it's the benefits to the consumer that benefits their life."
But that mosaic also makes it more difficult to figure out which service makes the difference in keeping a digital subscriber.
"It becomes more and more subjective," Lang acknowledged. "You've got multiple users in the home. As you create a web of trying to hold a customer, how much each strand is worth?
"As you layer on more products, it's difficult to quantify each product enhancement," he said.
For instance, Lang said it's difficult to determine if VOD is a useful basic-acquisition tool. "Certainly we've been pleased with the word-of-mouth on VOD," he said.
Charter hopes to reach a digital-penetration rate of 50 percent by 2004.
"We think there is tremendous amount of upside," Lang said. "This whole platform brings a wide array of services to the customer."
Some Charter markets have sailed past the 50 percent mark with respect to digital penetration, he said.
"The biggest factor is time of deployment," Lang said. Layering in new services like VOD also helps, he said.
That gives operators more time to improve sell-in rates for new customers, which gradually boosts overall digital penetration, according to Lang.