No Surprise: Ops Feed Off Adult VOD Revenue

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Sexually explicit programming has been a financial success for nearly every pay TV platform on which it appears, and video-on-demand is no exception.

Cable's two principal adult programming providers, Playboy TV and The Erotic Network, have deployed their service on cable VOD platforms, and report buy-rate successes that haven't cannibalized their existing pay-per-view businesses.

TEN counts more than 5 million digital VOD homes, while Playboy counts 1.5 million, which means that most of cable's 7 million to 8 million household VOD base has access to adult product.

Because adult content generates a bankable, predictable revenue stream, many of the expenses related to cable's early VOD rollout are funded by adult buys — something the providers of this type of programming are happy to point out.

"VOD tends to more than double digital cable buy-rates," said Playboy Entertainment Inc. vice president Bill Furrelle.

Incremental income

"In some cases, VOD is posting higher buy-rates than five PPV channels combined," said TEN president Ken Boenish, who added that he isn't aware of a falloff in adult PPV buys in systems that proffer adult VOD.

"VOD is 100 percent incremental to the cable system," he said. "We were surprised about that."

One system tallied 14,527 hit-movie buys last August, compared to 10,430 buys for TEN's on-demand product. Given that the operator keeps more than $8 of an adult buy, compared with $2 for each hit movie purchase, the adult category produced three times as much revenue for that system, he said.

At a recent Cable & Telecommunications Association for Marketing videoconference, an Insight Communications programming executive said adult buys were on par with hit-movie buys. Since adult movies range in price from $7.99 to $10.99 per purchase — and MSOs keep a large portion of the split — it's no wonder adult fare is such a lucrative revenue stream in VOD's early days.

Boenish said TEN will approach 6 million homes by the end of April, having secured agreements with nearly every major MSO except Cablevision Systems Corp.

"Generally we put 60 hours on the system at a given time," he said. "We do a weekly refresh of content," he said, or about 20 new titles or 30 hours per month.

X to XXX

TEN offers three editing standards: the traditional soft porn/cable edit, which equates to X-rated content; a less inhibited product (XX); and the least-edited, most-explicit content, which equates to XXX. Pricing gradually increases as the content becomes more explicit, he said.

"The pricing becomes the identifier" of how heavily a movie is edited, he said.

A cable system typically runs the same content on its PPV and VOD platforms, Boenish said. "But some systems and MSOs are showing some signs of being much more comfortable with less-inhibited editing standards. We've got a few taking triple-X."

On the content side, Boenish said TEN is cycling in its traditional movie titles. No DVD-type content is being offering as of now, but TEN has launched three video-clip services.

"We've got thematically organized blocks," he said. "It's where MTV meets adult entertainment."

Examples of these 90-minute blocks might be Blonde Bombshells
or The Best of Jessica Drake, he said. TEN compiles eight to nine 10-minute scenes to make up the block.

Operators are removing some PPV channels to make room for VOD bandwidth, but Boenish said he hasn't seen any drop in TEN's linear channel capacity.

"We didn't see any loss in '02, and actually, we saw some net gains," he said.

Some MSOs have opened up an adult movie for a 12-hour window, which might be too long, Boenish said. MSOs could be leaving money on the table, and might generate more revenue by reducing the window viewing time to four hours or so.

Cable operators also face tricky issues in terms of showcasing adult product on on-screen guides.

"Some of the systems limit the entry point for adult [content]," Boenish said. "With some entry points, you can't see the adult category. We'd like to see a universal menu, no matter [the] entry point."

It's fine line for MSOs, which don't want to flaunt adult product too much.

Of course, the digital platform is more secure than analog, which makes it easier for MSOs to offer parental-lockout devices. Movie descriptions in guide listings are carefully sanitized.

Playboy's pitch

Playboy offers its VOD affiliates 40 hours per month of adult content, a mixture of acquired films and Playboy original productions.

"We've seen great buy-rate success with both categories," Furrelle said. Playboy offers both VOD and subscription VOD.

"We're carried in all sorts of configurations," Furrelle said. "We have one MSO that is doing SVOD with us, at a $4.95 buy-through" — similar to HBO On Demand's arrangement with operators.

"We've had some systems where 25 percent of monthly subscribers take the SVOD package," Furrelle added. One MSO has increased its monthly Playboy customer count through the SVOD package.

"They are seeing the SVOD offering, and say: 'I should be a Playboy monthly subscriber,' " Furrelle said.

Playboy typically charges $8.95 for a VOD movie that typically equates to XX content, Furrelle said. About 10 of the each month's 40 hours of programming are originals, such as Playboy's Naughty Amateur Home Video.

At any one time, Playboy will have six to 10 episodes of Video
on its VOD servers.

Furrelle said Playboy has deals with three major MSOs and is working on three more, which would put Playboy closer to VOD parity with TEN.

"It's good to have competition," Furrelle said. "It's healthy. We do have the benefit of a 40-plus year brand name.

"That's a lot of what we want to bring to the on-demand space, the power of that brand name. Playboy is a great entry point into the adult space. It's important to get the Playboy brand name out there."

Revenue meter

Playboy is working to create a virtual channel for the adult space that would encompass both the Playboy and Spice brand names. "There is lot of brand value in the Spice name," he said.

On the business side, Furrelle would like to see the industry get away from focusing too heavily on buy-rates and shift to revenue per household.

"It's a much better metric," he said.

Furrelle also doesn't plan to lose any linear PPV space with the advent of VOD.

"We always see ourselves existing in the linear world," he said. "We're concentrating on having a linear channel offering that compliments VOD."

Playboy has launched Spice Clips, a live, hosted show featuring adult video clips, on linear PPV.

Both Playboy and TEN see upside in the future — as well as cable operators that are more willing to promote adult product.

"Marketing folks at cable systems have gotten behind the category recently," Boenish said. "More and more cable MSOs are recognizing adult entertainment as a legitimate entertainment category.

"They are starting to do the same marketing, with the same forethought and care as any other entertainment category and consumers are really open to it."

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