Charter’s VOD Lessons

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Charter Communications Inc. has hit its share of bumps on the VOD road. The MSO was one of the first to roll out video-on-demand four years ago, using Diva Corp. technology and software. But when Diva went belly up, the MSO had to scramble to bring VOD in house, and transition subscribers with as little disruption as possible.

Soon after, the MSO was hit with acute financial problems and upper-level corporate turmoil. While the company soldiered on, launching VOD service in new markets, the business never quite hit its stride.

Now, CEO Carl Vogel’s management team is in place, including Kip Simonson, senior vice president of sales and marketing, who oversees VOD. And Charter has redesigned its strategy to move its on-demand service to the next level.

The Diva launch and ensuing internal relaunch predated Simonson’s arrival. “The product wasn’t quite as stable, and we didn’t market much of it,” he said. “We had a four-month ugly transition time. Our VOD buy rates and usage rates lagged the industry, and we weren’t marketing it much.

“We had made the same mistake as most of the industry,” he continued. “Everybody was searching for the pot of gold — and the pot of gold is movies-on-demand.”

To Simonson, the formula is easy: follow the money. “The money is going to Blockbuster and Hollywood Video,” he said. In fact, Simonson once worked in the home-video business, before joining the cable industry.

Slowly, that is changing. Charter has VOD deals with all the major studios, he said, save for Walt Disney Co. TVN Entertainment Corp. handles much of the product procurement and transmission for Charter’s VOD business.

Simonson said that Charter doesn’t have the early distribution windows to really make hit movies a big business. “New releases are what drive the business.” Still, Charter is seeing the benefit of efforts to reduce windows to 37 or even 30 days. “We are seeing the same shrinkage in windows. But that’s not something we can market. When we have day and date, then we can message it.”

And while others have looked to free-on-demand to boost VOD, Simonson believes, there is a better focus, while waiting for hit movie windows to change.

'A BIG MISS’

“When I looked at the technology, I think we focused on the wrong portion,” he said. “[Subscription-VOD] lagged movies-on-demand, and that to me seemed like a big miss. In the digital world, 70% to 80% of customers have at least one premium service, but only 30% to 40% of digital customers buy [pay-per-view].”

The answer, he said, was to push premium VOD, in the form of SVOD, to retain and even gain digital customers. Simons set out last year to renegotiate his premium deals to offer SVOD as part of current premium packaging. Although Charter tested $3.95 and $4.95 packages in St. Louis and Greenville, S.C., the goal was to have SVOD priced into the overall premium package.

Charter was having close to the same success rates as others who had launched a la carte. “But most of us have never a la cart-ed anything beyond 30%. SVOD and VOD are the two biggest competitive advantages that we have over satellite. They can’t do them, and we’re making them available to only a small subset of our subscriber base.”

After reworking the premium deals, Charter rolled out on-demand offerings from Home Box Office, Cinemax and Showtime in December and January and Starz On Demand in April and May. And although it’s a bit early to discern telltale results, Simonson pointed to Charter’s first-quarter statistics, which show that digital subscriptions rose and basic-subscriber losses were sharply reduced. “SVOD has dramatically increased users and usage,” he said. And SVOD could help Charter elevate premium package pricing over time, as long as penetration figures aren’t getting hurt.

Over a decade ago, cable introduced multiplexing, which helped stem erosion in the premium business. “We believe the phenomenon will happen again with SVOD,” he said. “The value of the product has increased dramatically.” Compared to DBS, he said, “HBO is a lot better on cable now” with HBO On Demand.

The emphasis on SVOD and hit movies does not mean Charter has abandoned free-on-demand. It does carry free product in about half its markets, focused on Rainbow Media Holdings Inc.’s unique Mag Rack content, “but we’re not filling our servers with FOD.”

The FOD averages about 55 to 60 hours, Charter said. In addition to Mag Rack, Charter also carries some TV Guide content, trailers and studio extra material.

But Simonson also is looking to bolster FOD with unique programming. One is local sports. “If we produce a high school football game on our local origination channel, at some point we could encode that game and carry it on VOD,” he said. Charter is considering the addition of such features.

It is also exploring deals with TV stations that have top-rated local newscasts to encode the newscast and carry it on VOD after it airs live.

ENHANCING KIDS FARE

What’s more, Charter is looking to beef up its educational and kids $4.95 a month VOD package. It carries a batch of kids’ content, including PBS fare, from TVN. “That balances the value of on-demand for the whole house,” Simonson said. “It’s nice to have, and there is a target market.”

Charter is rolling out HDTV, but it’s taking a wait-and-see attitude on HD VOD. The thinking is there is only a fraction of the people with HDTV sets and a fraction of those interested in VOD. Since it’s a relatively small fraction today, HD DVR could do the trick.

A vibrant VOD platform can help cable win back customers from direct-broadcast satellite. So far, Simonson said, “local HDTV is the No. 1 reason for satellite customers to be switching back.” But VOD also is in that mix, he said. “The proof in the pudding will be in digital churn and basic net gains. Our digital churn is significantly lower than rest of industry.”

“In the early days, people left cable for DBS because they perceived it was a better product,” Simonson said. “But in the second-generation products, we are beating, or we are the only product.” And that includes not only local HD and VOD, but interactive TV, which is available to 1 million Charter subscribers. Charter will add some new VOD markets this year, Simonson said. “As we get scale and the costs come down, we’ll deploy it deeper. We’re focusing on figuring out ways to shorten the windows with the goal to get to day and date.”

“From my prospective, coming out of the video-rental business, movies-on-demand is the pot of gold at the end of the rainbow,” he said. The $9 billion spent on movie rentals could flow to VOD. “Today’s PPV buyers still rent three to four movies at the video store. Availability and windows, it’s a chicken-and-egg kind of thing.”

“But with the things we have in the arsenal versus the competition we’re in great position,” he concluded. “We just have to execute and take advantage of it.”

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