When most of the cable industry launched digital program tiers in the late 1990s, Cablevision Systems Corp. stayed on the sidelines, adding programming services to its addressable analog service to satiate consumer demand for more networks. It wasn't until last summer that Cablevision launched digital, built around video-on-demand and expanded sports packages. But in the last 18 months, with the addition of new VOD content and HDTV, Cablevision has zoomed from near zero to 20% penetration (600,000 subscribers across a base of 3 million homes) for its Interactive Optimum service (iO for short). Digital is on pace to reach close to 30% penetration by year-end. In this interview with Multichannel News Broadband Week editor Matt Stump, Cablevision senior vice president of digital product management Kristin Dolan discussed the MSO's ability to drive digital penetration, generate meaningful VOD revenue and avoid high digital churn rates with a set of features appealing to consumers. An edited transcript follows.
MCN: Cablevision was a late bloomer to digital, and launched iO with an emphasis on new features and services like VOD, rather than just more program networks …
Kristin Dolan: What we've been proudest of is that even though we went last, we benefited by waiting. [That gave us time to plan] the equipment, the rollout, the product offering, the packaging and offer a more advanced suite of digital services versus more channels.
The end of 2003 and definitely 2004 are harvest years for us, in that we're really starting to recognize the subscriber growth, the revenue growth and the overall changes in behavior that are brought about by giving customers these new products or services.
MCN: Are there one or two pitfalls you avoided by going later?
Dolan: We got the benefit of everyone else's learnings. We've never had 6%, 8%, 10% digital churn on iO that other operators had to live through. We really benefited by giving people more and stickier products.
MCN: And you launched iO with VOD as the key centerpiece?
Dolan: We launched with VOD as a critical component, and it was really the featured product within iO. We said, of course, we have more channels and multiplexes and digital music, but what we really have, along with that, is this great new opportunity of on-demand product.
The plan from the beginning was to load up as much VOD content as we could. We market 700 titles in our inventory and that's the combination of SVOD offerings, à la carte and included content, like Mag Rack [a suite of specialized on-demand channels].
MCN: Compared to PPV, how are new releases doing on VOD?
Dolan: Fifty percent of our revenues come from new releases on VOD. The other half is a combination of adult and library titles. We've had titles like Austin Powers in Goldmember that have had 12 times the buy-rate on VOD as they have on PPV. Harry Potter [and the Sorcerer's Stone] had almost 14 times the buy-rate.
Some people say VOD is just a substitute business for PPV, and we absolutely believe it's way more than that.
If you look at total usage, fourth quarter last year we streamed over a million streams of VOD, and by the middle of this year, we were streaming over 2 million streams a month, so the average iO subscriber uses four streams per month.
MCN: Does the 50-50 split between new releases and adult/library titles surprise you at all, and does it mirror what happens in PPV? It almost seems like adult is more important in the VOD world.
Dolan: Adult does extremely well in VOD, and that 50-50 split is really on revenues only. We've been pleasantly surprised at the amount of adult content that gets used on VOD. We have two categories, hot [or X-rated] and hotter [XX], and we have Playboy on Demand, which is original content.
MCN: You've got seven SVOD packages. How do you market all of those to the various audiences?
Dolan: We do a little bit of targeting where we can. But in general, because the overall iO message includes on-demand, we talk about subscription on-demand as a category within iO. Then we throw in all these great things from different networks.
In August, we launched nine new educational and awareness spots for VOD, and SVOD versions as well. We've expanded that into outdoor advertising. Right now we own the whole Amtrak section of Penn Station [in Manhattan]. It's all iO. We have outdoor billboards. That comes off of the education campaign we started in August.
In doing these nine spots, we spent a lot of time looking at what needed to be done for customers to understand what VOD is. We had communication goals of awareness, education, convenience, control [and] choice, and then came up with concepts and messages for our agency.
With SVOD, a significant number of our customers have more than two packages. We have a lot of customers that have three, four and five SVOD packages. The usage on them is eight to 10 times per month.
MCN: What's churn like?
Dolan: We're just starting to look at that now. We added a one-month free opportunity for customers in July. We've had so much growth.
It's one of those things where you can't look at churn when you're hockey-sticking, when the growth spurt is so big and so fast it's really hard to look at churn. Our retention in general on these products is really high.
MCN: Can you tell me the total amount of SVOD packages you have?
MCN: What's SVOD sell-in like, even if it's anecdotal?
Dolan: Anecdotally, I can tell you that our sales group has gotten really good at selling these products in and the one month free definitely helps. The retention on people that have one month free is equal to what we used to get on one-month-free premium offers. We know that that's working.
MCN: A lot of people in the industry will say you can't nickel-and-dime people with SVOD packages. Why does it work for you?
Dolan: The underlying piece of it is we're giving people the choice to choose what they want. We're not going to bundle Playboy On Demand with Disney On Demand.
The other piece that I love to point out is that our core premiums, like [Home Box Office], vary in price between $8.95 and $10.95 a month. So you add $4.95 SVOD on top of that and you're at the $15.95 price point that most of our MSO friends are charging.
We could bundle them in, but we choose not to. I'd rather have people come in at a lower package and add on the things they want to use rather than to say, 'Here's everything and pay more.'
The other thing we've been sensitive to from the very beginning is the cost of streams. If 50% of people want to buy an SVOD package and pay us for it, why would I give the other 50% of the base the opportunity to do 10 streams per month that we're paying for.
We're doing 2 million streams a month right now. Obviously, SVOD drives a lot of stream usage and that's with almost 20% of the base using SVOD. If you go to 100% of the base and you're pushing out 10 million streams a month, you can't say there's not a capital cost of doing that.
MCN: How much free content do you have and what does it do for you?
Dolan: We have more than 100 hours a month and we use it to draw people into the category. It's a safe way for people to wade in and get a sense of what on demand is all about. We love the PBS product that we have too. That's just a natural thing to give people.
MCN: Is the Fox TV material The Shield and 24, kicking up again for another year?
Dolan: We had it for two years. The first year was free. The second year, Fox wanted to test the viability of it.
We charged $19.95 last year for the full season or you could buy à la carte episodes for $1.95. So this year, we're discussing with them if and how we would want to do it.
MCN: What kind of usage did you get?
Dolan: I really don't have usage on it. People appreciated having the opportunity to use it, and it did get used, but I don't have any numbers.
MCN: NBC has done some stuff with Comcast Corp. in Philadelphia, which is different. Can you give us a sense of other programming you might want for VOD?
Dolan: We're always looking. Our programming department brings us tons of ideas. We're trying to look at areas that may be underserved right now. Our research shows that people are interested in home improvement-type content.
International content is a big thing for us and we've launched some World Pics product.
MCN: You've launched HD with some of the premiums and local broadcasters. Is there a reason there is no ESPN or Discovery?
Dolan: We keep evolving and we're looking at that content. We really prioritized to get the broadcasters on first, and that's what we're continuing to work on. There's no charge for the box or the programming.
MCN: Some MSOs, like Insight, say that anyone that wants to charge for HD content will be put on a HD programming tier, with a separate charge. Would you like to have any content you have come under the lease fee, or would you look at launching an HD tier that might be $4.95 or $6.95 a month?
Dolan: We're still thinking it through, but I would agree with Insight's positioning, if somebody is charging us for content that they feel has merit — particularly things that may just be exactly what's on the channel only in a different format, and they feel they want to charge for it.
We're really focused on the broadcasts and the multiplexes right now because that's something that's a real value-add for our customers.
MCN: Let's talk about HD on VOD servers. Why was important for you guys to launch this as soon as you did?
Dolan: I think it was sort of classic Cablevision. We're always pushing the envelope. We knew we could do it and we wanted to. I don't know that it was put out there as a big revenue play. It was more that we needed to respond to the needs of the customers and give them the opportunity to look at great content on their HD sets.
MCN: How much content do you have up there now?
Dolan: We try to keep 10 titles up there at all times. It's Imax content and new movies.
MCN: What kind of usage are you getting?
Dolan: I think people are interested that it's there and people are playing around with it. The HD customers are always happy to have options.
MCN: What about digital video recorders? You are painted as a non-DVR MSO right now. What's the philosophy, and can DVRs coexist with VOD?
Dolan: We definitely think that DVRs are a viable product. It's something we're absolutely looking at. We've spent a lot of time and effort and invested a lot in VOD at this point and we've put a lot of stuff in front of our customers over the last 18 months. We think there are value propositions for both products and that they'll definitely successfully co-exist. We're looking at it and will definitely move in that direction.
MCN: Is a test next year a likely possibility?
Dolan: I think it's fair to say that, sure.
MCN: Different MSOs position VOD in different ways. Is VOD a churn-buster, a way to drive digital penetration or a standalone revenue stream? Can it do all three of those in your mind?
Dolan: Absolutely. It is the centerpiece of iO and we've never had 5% churn. Our churn is significantly lower and I believe it's because we've launched such a comprehensive suite of services.
To remove VOD from that equation is just unthinkable. It is the core of iO.
MCN: What does HDTV do for you, since it doesn't seem to add immediate revenue on a straight-up basis?
Dolan: HD is a competitive counter for us. We have a competitive advantage there with local HD channels. It's really the whole suite of iO that we think marginalizes the satellite offering. If you have on-demand, you have local HD, you have all the channels that they have and more, DVRs in the future, we have a pretty nice international package right now available in our city market.
The ITV applications that we have on Sony that we will be carrying on [the Scientific-Atlanta platform], they look better than what satellite has up now. Our expandability and our opportunity to compete are built upon VOD and HDTV and then we spring from there and add more and more.
MCN: Cablevision is reporting some strong year-over-year RPU growth. I'd assume some of that would be VOD numbers.
Dolan: In Q2, we showed a $13-per-subscriber digital lift, and that's a combination of package revenue, VOD, SVOD and digital sports. So there's definitely a couple dollars there in VOD and SVOD combined, and we're growing every month.
For Q3, we're showing 60% VOD buy-rates, and we actually had our high water mark in August when we had a 72% buy rate on VOD. We're very vested and very big believers in this technology.
MCN: What are some of the top interactive applications that you have that people like?
Dolan: People definitely like Metro Traffic and Weather. These are on Sony [set-tops] right now and we're pushing [Scientific-Atlanta] to get their box to do things it's never done before and they're responding well. Our goal is to have the offering be the same on both platforms and we're moving towards that.
Game Director, which is the multichannel camera application for MSG [Madison Square Garden Network], does very well. [Viewers can choose from among six different camera angles during MSGN telecasts of home New York Knicks or Liberty basketball games or New York Rangers hockey games.]
We added recently, on the Web and the Sony box, the capability to instantly upgrade to our SVOD product. That's huge. You can tune to the channel that has HBO On Demand and if you're not a subscriber you can push one button and put in your PIN number, and within two minutes upgrade to the product. We launched that one month ago.
We had over 1,500 upgrades in the first weeks and we've now have had just around 6,000 people upgrade instantly through the box. For S-A customers, they go to the Web to do that. We're giving customers the opportunity to manage their own viewing.
Showcase is our HTML barker that we have on our Sony box. That is really cool. There are six different areas where a customer can dig in to find out more about different things that are going on iO. We use it to promote anything from more linear channels to on demand titles to SVOD subscriptions to Music Choice.
MCN: What's on tap for 2004?
Dolan: We're going to continue to grow the subscriber base, continue to maximize the revenue per subscriber with existing products and new products next year, other tiers, other demand offerings, more interactive content, that sort of thing. And also focus on customer satisfaction and the customer experience.
MCN: Do you ever get worried about too much video content on the modem platform that could hurt the video business? Are you terrified at all?
Dolan: Not at all. I'm no more nervous than the Optimum Online [high-speed data service] people are about my interactive television site. In conjunction with bundling, we're looking at the convergence of the three products, between voice, data and video.
With a Wi Fi scenario and some of the new phones that are coming out, it's very easy to move things between products. At Cablevision we're lucky because we have this one big system with a great platform that enables us to do a lot of different things for our customers.
Our next phase of navigation for iO that we have patents pending on, we also are looking to transport that navigation to the computer interface and to the cordless phone. We're looking that far ahead to say the way you navigate on iO could be a comfortable environment that we can replicate on the Web and on the phone.