Despite the proliferation of addressable cable households, the pay-per-view movie business seems to be spinning its wheels.
While up from 2001, PPV revenue growth has paced well behind increases over the prior two years, and industry observers aren't predicting a performance revival anytime soon.
Executives said stiff competition from the fast-growing digital video disc (DVD) rental and sell-through businesses has combined with a surging number of multiplexed premium services offered through digital cable to derail what had been a steamrolling PPV-movie business.
Long considered pay-per-view's staple, theatrical movies had surged tremendously over the last two years, as digital technology reached a majority of cable homes. In 2000, the genre generated $879 million, an increase of 50 percent over 1999's revenue take, according to Showtime Event Television calculations.
PPV-movie revenue surged by nearly 60 percent in 2001, when the category set an all-time revenue record by garnering $1.3 billion.
The increased convenience and availability of PPV movie product via multichannel offerings — digital cable systems carried an average of nearly 30 PPV channels, while direct-broadcast satellite providers offered 42 channels, on average — led to the industry's significant rise in revenues.
The additional PPV channels have provided consumers with greater value and convenience through additional product availability and more frequent start times for titles, industry executives said.
Nearly 40 percent of all households have multichannel digital PPV channels, either through digital cable systems or DBS services, said industry executives.
But despite those advantages, the sales story will have a much different ending in 2002. While movie revenues continue to climb, the figures have increased at a much slower pace than in previous years. Industry sources estimated this year's revenue take will improve less than 20 percent over last year's record pace.
Even PPV stalwart DirecTV Inc. — which has consistently outearned cable in overall PPV-movie revenue — has experienced a slump.
"It's clear that PPV buys and revenue have not kept up with [subscriber] growth," said Michael Thorton, senior vice president of programming acquisitions at the DBS provider, although he wouldn't quantify DirecTV's PPV performance.
Steve Brenner, president of cable PPV programmer In Demand, also confirmed that PPV movie revenues have softened, despite the proliferation of digital households.
The most recent digital-cable converts are more likely to be former analog subscribers that weren't PPV users, said Brenner. As a result, that group isn't as quick to embrace near video-on-demand as previous digital-cable subscribers were.
Tougher sells now
For the most part, early adopters already have the service. Thus, Cox manager of PPV and VOD Denise Myers believes the industry now faces the task of building the business against a base of light and non-PPV users.
"Once you get past that low-hanging fruit, you then get another group of consumers that upgrade to digital and like the product, but have more choice [beyond PPV]," she said. "Those people in a digital environment may not have considered PPV something that they need to take advantage of, but with more options in a digital environment may not gravitate to it as much."
Indeed, along with a multitude of basic digital channels, PPV has to compete with nearly 50 multiplex premium services from Home Box Office, Showtime Networks Inc. and Starz Encore Group LLC combined.
Many industry executives believe that those premium services have undercut the value of digital PPV services by providing nearly as much choice and convenience as PPV without the $3.99-per-movie price tag.
NVOD digital PPV technology doesn't offer a product that's all that differentiated from the pay services, Brenner said. Given the similarities, consumers are checking out the pay services before they explore their PPV options.
"[Digital] PPV and multichannel premium services work on the same concept: I have to sit and watch my movie uninterrupted for two hours," Brenner said. "It's not that $4 is a lot of money, but why pay for something à la carte when you've already paid [a premium subscription] for virtually the same service?"
Myers countered that argument, noting that premium subscribers are often the most prolific PPV-movie purchasers.
Many industry executives also cite an explosion in DVD purchases and rentals.
Through Nov. 10, DVD rentals had already generated $2.3 billion in revenue, well above last year's total of $1.4 billion, according to the Video Software Dealers Association. In addition, DVD sales have reached $5.3 billion.
"DVDs have reenergized and revitalized the home-video business," said VSDA vice president of public affairs Sean Bersell. "It has great video quality, it has superior audio quality and programming extras that consumers tell us that they like, and it's offered at an attractive price point for consumer purchase."
DirecTV's Thornton believes the boon from DVD revenues has led studios to pour more marketing and promotional dollars toward boosting that business, to pay-per-view's detriment.
"The studios made a decision that [DVDs] are the bulk of the market, and that is what they've chosen to focus on," he said.
Brenner added that the extra features — as well as the 30- to 60-day jump home video and DVD gets on PPV, in terms of the premiere window — have boosted the medium's consumer appeal.
"First, you have the ability to purchase movies before it ever gets to PPV, so buy the time it gets to PPV it's old," Brenner said. "And most of the people who would be interested in watching that particular movie on PPV already have that movie in their DVD library, making PPV a very tough sell."
Digital future dim
Considering these obstacles, some PPV executives are not very confident about the genre's future.
"We might be able to do things with certain movies or do promotions with certain movies, but in general it will be a difficult category to grow," Thornton said.
Added In Demand's Brenner: "I don't think real heavy promotion of PPV at this point is going to change things enough. I don't think it's the most attractive consumer product now."
Nevertheless, operators continue to aggressively promote digital PPV. Cox's Myers said the MSO hopes its efforts to market pay-per-view will get subscribers to at least try the technology, with the hope they'll be more accepting of VOD when its available.
"You have to get people comfortable and used to the technology and understand the power that it has," Myers said. "One thing that helps is content previews and trailers that are available to consumers to try and become empowered by it."
Despite his concern, DirecTV's Thornton also continues to put substantial resources behind the DBS service's 50-channel PPV offering. He said DirecTV utilizes a number of marketing tactics, including offering discount PPV coupons, two movies for one price specials, and additional footage for select films.
"We also offer a tremendous amount of cross-channel marketing," Thornton added.
VOD rollout slow
The industry's best hope to reverse the revenue malaise might be VOD. Brenner is very bullish about the technology, and believes that VOD will inevitably usurp all other home movie platforms.
"With VOD you're not offering the same thing as HBO is offering," he said. "It's just like a tape that you rented, except that you didn't have to rewind it and pay late fees when you go back to the store to return it."
But VOD's rollout has been slow at best. Currently, only 6 million households can access VOD programming, a reach that has disappointed studio executives.
"I wish the operators had rolled out VOD more aggressively than they have up to this point," said one studio executive. "We've gone out and made long-term deals for VOD, so we would have liked to see more homes have VOD access, and more promotion of the service in the homes that have the technology."
Brenner also expressed concern about the slow growth in VOD homes, but said recent launches by Time Warner Cable and Comcast Corp. have strengthened his resolve.
"Time Warner has done it in [New York City], Comcast is launching in the Philadelphia DMA, so there's a lot of stuff going on," he said. "It's there, it's real and it works — it's a good consumer proposition."
Cox recently introduced VOD in San Diego and Hampton Roads, Va., but Myers would not disclose how many subscribers are currently receiving the service. It's too early to provide revenue or buy-rate numbers, she added.
But not everyone is convinced that VOD will become the ultimate home entertainment choice for a majority of consumers. "I'm not optimistic that the industry can stem that decline with VOD," said Thornton.
While DirecTV's national footprint makes it logistically impossible to offer true VOD, the service is working with premium programmers like Starz Encore and digital video recorder company TiVo Inc. to offer a subscription VOD service. Consumers can request movies, then have the content sent to their TiVo service, which offers full VCR functionality.
Brenner believes the naysayers will eventually come around and realize that VOD is not PPV redux.
"It is a better mousetrap," Brenner said. "With PPV, it's 'Do you want to watch a movie on a pay or PPV service?' With VOD, it's 'Do you want to go out to the store and rent it or do it through your cable box?' I think it puts us in a good competitive position."