It has now been years since the concept of subscription video-on-demand was developed and more than 18 months since the first deployments of the product. Operators have rolled out, to various degrees using various price points, HBO On Demand, Showtime On Demand and Starz On Demand.
As the on-demand platform begins to hit stride in 2003, it's worth examining whether SVOD — one of cable's early pleasant surprises in 2001 — is panning out as a bonafide revenue stream.
HBO On Demand is sticking to an a la carte pricing strategy and now counts nearly 600,000 subscribers. Starz On Demand is sticking to its "brand-transformation" strategy, which calls for the on-demand functionality to be built into premium-package pricing that can be raised over time.
Showtime On Demand is pursuing both models, having secured a la carte rollouts on Time Warner Cable systems and also being the first premium programmer to launch in Comcast Corp.'s large Philadelphia VOD rollout, via category pricing. (Ironically, Starz and Comcast are the biggest bundled-pricing proponents, yet the Starz-Comcast lawsuits over former AT&T Broadband affiliate contracts have prevented any kind of SVOD rollout on Comcast.)
There are definitely some big holes in the SVOD map. Even huge parts of Comcast — the old AT&T Broadband systems — have not rolled out VOD,
let alone SVOD.
Cox Communications Inc. rolled out VOD in four markets last year, but hasn't added any new markets to that list, as it continues research on creating an economical return from VOD. While Cox executives have spoken highly of SVOD's potential, the MSO has not yet launched SVOD anywhere.
Except for Time Warner Cable and Cablevision Systems Corp., there are few MSO-wide SVOD rollouts. Insight Communications Co. and Charter Communications Inc. are working through transitions from their bankrupt former VOD vendor, Diva Corp.
Not fazing execs
The slower pace of SVOD rollouts doesn't seem to be bothering executives at the premium networks.
The delay, if it can be characterized as that, gives both parties the time to conduct further research on how to approach this emerging market, even if it's been emerging for two years strong.
"Our feeling is it is rolling along," said Mark Greenberg, executive vice president of corporate strategy and communications at Showtime Networks Inc.
Showtime On Demand has been launched in 4.5 million digital homes, including two million in the first quarter of 2003 alone, he said. Comcast launched Showtime On Demand in Philadelphia in January and in Northern New Jersey in March.
Probably 75 percent of Showtime's launches have been at Time Warner Cable systems. According to Greenberg, Charter and Insight both plan launches of Showtime On Demand in the second quarter.
"We expect for Cox to deploy in a few markets this year," Greenberg said. "The real question is how do you monetize it?"
"There are many ways for us to get remunerated," he said, including a la carte fees; rate adjustments within current pay pricing; and marketing and promotion tactics. "We'll get paid. We're not going to give it away for free," he said. "But we're still learning. We're all building towards a way to monetize the promise."
Educating consumers is another hurdle. "Consumers are still confused that there is no incremental charge when I press 'enter,' " he said. "There is a lot of upside if we can do a better job of marketing. That's a big challenge. There is money to be made here, coming out of households that are our best customers. We want to satisfy them and not leave money on the table."
Greenberg said the $6.95 per month category pricing at TWC "has worked well. We believe that's a good place to go." Charter is looking at a $3.99-per-month price point, which Greenberg said is worth experimenting with. "I'd rather start at a lower number and work up."
In general, HBO is happy with on-demand progress. "We were very pleased with the rollout last year," said Sara Cotsen, who as senior vice president, Interactive Ventures, HBO, is in charge of HBO On Demand. That service now claims 585,000 customers, a vast majority of whom are paying $3.95 to $6.95 per month on top of usual HBO fees for the new features.
By year's end, HBO On Demand expects to be launched in 75 to 100 systems, as companies like Charter, Insight and Cox launch the service, according to Cotsen.
Columbia, S.C., remains HBO On Demand's flagship. Penetration there is north of 54 percent. HBO On Demand costs subscribers in Columbia $3.95 a month. A two-pay on-demand package — such as HBO/Showtime or HBO/Cinemax — costs $6.95 a month.
Columbia is HBO's preferred pricing strategy, said Cotsen, because it gives single-pay HBO homes that already may be shelling out $10 to $12 for HBO the ability to add on-demand content/functionality for less than $4, rather than for nearly $7.
"We think this is a great product and we want to get it in as many homes as possible," she said, adding that she doesn't want to price HBO On Demand beyond the reach of single-pay subscribers. "We're open to the $3.95 price point for single pays, then $6.95 for the category."
That's the direction in which Charter and Insight seem to be headed. Charter has launched HBO On Demand in St. Louis and Greenville, S.C., for a $4.95 monthly fee. Insight is planning second-quarter launches, with pricing in that neighborhood. Cablevision Systems Corp. sells its premium on-demand services, including HBO and Showtime, for $4.95 a month.
Except for Columbia, S.C., TWC is using the $6.95 monthly price for either HBO On Demand only, or for any combination of premium on-demand services.
"There is a real halo effect in markets where consumers pay for it," versus markets where-on demand functionality is offered at no additional cost, Cotsen said. Columbia saw VOD buys increase after SVOD was introduced.
"There is no question that if you give consumers a choice and have it as an incremental fee, it's a product they are willing to pay for," she said.
"There are huge marketing issues with bundled pricing," she added. It requires a lot of time and money to raise people's awareness in order to build value in the product.
At the same time, Cotsen said free trial periods — buy-now-and-get-one-month-free — make sense for a la carte pricing models.
"A trial is very important," she said. "If they are paying for it, they figure out quickly how to access it and get value out of the product."
Starz is emboldened by its Altrio overbuilder rollout, which it says proves its brand-transformation theory. "It is the biggest endorsement of anyone out there," said Greg DePrez, vice president of SVOD, Starz.
Altrio priced its Starz SuperPak at $12.95 a month, and sold in the on-demand functionality for the same price. The Los Angeles overbuilder saw Starz penetration rise from 38 percent to 52 percent. Household usage grew from 40 percent to 57 percent.
Altrio wanted to provide a good offer to compete against the incumbent cable operator. "They were motivated," DePrez said. "They did an aggressive introductory offer and took away a lot of barriers to entry."
DePrez said the average user session with Starz On Demand was 51 minutes — after accounting for users who came in and out of content during the first six minutes, which is, in essence, trial usage.
DePrez said Altrio also discovered that SVOD didn't cannibalize PPV buy-rates. In fact, PPV buy-rates were 50-percent higher in Starz On Demand homes than in other homes.
Starz executives feel category pricing makes the most sense because it relieves overburdened CSRs from selling yet another product incrementally. "The VOD benefits accrue to 100 percent of the premium subscribers," DePrez points out, giving consumers a risk-free way to start using on-demand functionality.
Over time, he said, MSOs can gradually raise the price of Starz Super Pak to reflect the value of the on-demand component as well as to provide more revenue for the MSO and Starz. Starz On Demand remains on two Adelphia Communications Corp. cable systems, but two early trials on several Comcast systems and on Cablevision have ceased.
In a trial, Starz is downloading five new movies each month to more than 10,000 DirecTV customers with TiVo PVR boxes. "Usage has gone up" since the service first launched, DePrez said. "Subscribers are watching one movie a week. 86 percent say they are satisfied and 90 percent say they can watch movies they would have missed." There is no incremental cost to Starz DirecTV subscribers during the trial.
It's clear the premium networks, and operators, are exploring several economic models in the SVOD space, even using digital video recorders. In the end, there might be several SVOD approaches that become common in the marketplace, running the gamut of what cable is deploying today.