VOD’s the Ticket for Some TV Startups

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The goal of most startup networks is to put their programming and advertising messages in front of the widest possible audience. Historically, that’s meant driving deals with cable operators and satellite providers for analog or digital basic distribution.

But with operators already bemoaning digital-basic bandwidth constraints, the odds are heavily against most network newcomers gaining the critical mass of subscribers needed to meet revenue projections.

As a result, some new networks have turned to the video-on-demand platform as an initial stepping stone to greater carriage down the road. Indeed, services like Anime Network already have parlayed a VOD run into a distribution as a linear channel.

Most network executives remain leery of placing proprietary product on VOD, though, for fear that they’ll be forever imprisoned on the platform and unable to realize the greater potential revenue returns afforded by linear-cable distribution.

FEW ON THE PATH

Of the nearly 30 networks that have announced cable launch plans over the past year, only a handful have opted for VOD carriage over linear distribution.

The list encompasses narrowly targeted niche services, such as the hip-hop culture driven Hype TV, adult-oriented services Playgirl TV and Hustler TV and gay/lesbian channel Here TV!. VOD is a means way to introduce their product to operators and consumers alike.

“The prospect of launching a linear channel is next to impossible,” said Matt Cohen, vice president of business development and new networks at content aggregation company TVN Entertainment Inc. “There’s a general hesitancy of launching such services because of bandwidth limitations.

“And even if you can get a launch, the cost estimate is $150 million to $200 million before you break even, so it’s pretty daunting.”

Many networks have found out the hard way — through negotiations — that new linear channels are not a priority for operators. Systems are trying to launch revenue-generating advanced services, like high-speed data and telephony.

VOD distribution of teen-targeted Varsity TV’s programming came about only after operators asked the network to develop a daily afternoon block of programming, in an effort to reach young, VOD-savvy subscribers.

“We have a linear 24-hour channel, but VOD is a priority for the industry,” said Varsity president Joe Shults.

While the network continues to aggressively push for 24-hour basic carriage — it has linear cable deals with several small MSOs encompassing fewer than 2 million homes — Shults said he’s willing to also offer a VOD product that effectively functions as a door-opener for the short term, if the wait is rewarded by long-term and broader distribution later.

“[The deals] are like a marriage: Once you get on the cable operator’s lineup, it’s like family and both sides will take care of one another,” he said.

Anime — which now reaches more than 10 million homes, through VOD deals with Adelphia Communications Corp, Comcast Corp., RCN, Time Warner Cable and Cablevision Systems Corp. — is one network that has vaulted from the VOD springboard. Anime’s programming is offered to subs for free in some systems, while other distributors charge a subscription for content, according to network president Kevin Corcoran.

That combination has made Anime an attractive option for many customers. It’s one of the most-ordered content providers on Comcast’s free VOD offering, although Corcoran and MSO executives declined to disclose specific results.

As a result, the network has apparently notched its first linear cable deal. Corcoran would not disclose the MSO’s name or the deal terms, saying only that Anime would receive a licensing fee —a rarity in a cable environment where most operators refuse to pay startups for several years.

“We wanted to demonstrate that there is a demand for a linear [Anime] network and we’ve done that through VOD,” said Corcoran, who added that the network will remain aggressive on the on-demand front. “Our plan is to push VOD. We’re looking to deliver Anime Network to the operators through various platforms.”

OPS NEED VOD NETS

TVN’s Cohen said that in today’s crowded network environment, independents that can’t lean on the leverage of a multimedia parent have to wait years before getting any significant distribution.

“If you want to launch something, launching linearly is probably not the way to do it,” he said. “Cable operators are not only willing, but are looking for [niche] categories to launch on-demand, because they want to justify their VOD and digital boxes, and all of that goes to digital churn.”

Operators are welcoming the potential of VOD channels, given demands on spectrum.

“In general, we think the on-demand space offers a tremendous opportunity to provide additional content to people without necessarily launching a new linear channel,” said Comcast vice president of marketing, new video services Page Thompson. “We have a number of providers that have come to us with content like that and in the next few months, I think you’ll see content that’s coming exclusively to the on-demand platform.”

Mediacom Communications Corp. senior vice president of programming and human resources Italia Commisso Weinand views the ability to offer VOD content from niche content providers as a competitive advantage for her MSO in particular, and for the industry in general.

“VOD is truly a platform where we think we’ll differentiate ourselves,” she said.

LESS-COSTLY LAUNCH

TVN is working with several companies to launch such targeted services as a hip-hop music channel, a gay and lesbian service and foreign-language service. The platform also works well for networks that don’t have a vast programming library or lack the financial wherewithal to create a significant amount of original programming, said TVN’s Cohen.

“Unlike a linear network, which needs to populate 168 hours a week, the belief is in a VOD environment you need something less than that — around 20 [hours per month], refreshing [content] about 50% to 100% a month,” he said. “The programming requirements are substantially lower. You don’t have go out and produce a lot of content.”

For networks like Hollywood TV, which offers movie trailers and behind-the-scenes footage from newly released Hollywood movies, a 24-hour linear channel would be hard to program, according to Eric Illowsky, president of development at Hollywood Media Corp., which owns the VOD service.

Instead, the network only creates 10 to 20 hours of programming a month, which is refreshed frequently. As a result, the network is now in front of 1 million Cablevision Systems Corp. and Insight Communications Co. customers.

We have no aspirations of going to a 24-hour linear channel,” said Illowsky. “The content we do is suitable for VOD and interactivity.”

The VOD platform is also better suited for Studio 4 Networks, which offers three on-demand channels featuring fitness fare, preschool programming and young adult educational content. The subscription VOD channels currently reach about 5 million homes served by Adelphia, Insight, Mediacom and Charter Communications.

“Because most of our programming is watched on an on-demand basis, it works best in that fashion,” said executive vice president David McFarland. “Conversely, it hasn’t been nearly as popular on linear TV.”

BUILDS BRANDS

Cohen said VOD is also ideal for companies that are looking to extend an existing brand. Companies like Hustler TV, which will leverage the 30-year-old Hustler magazine title into a VOD service later this year, can do so without having to worry about recouping its investment through advertising or licensing fees.

“Their VOD network serves as a support to their existing assets,” Cohen said. “There’s a belief that a set of models will eventually exist that will allow a VOD network to exist and prosper economically.”

Added McFarland: “We know in early years, the revenue will be less on the VOD platform, but we’re in VOD for the long run and we believe that it will eventually be the dominant way to distribute fitness and education programming.”

Other networks, like ImaginAsian TV, will use VOD in conjunction with linear network distribution. The ad-supported network, set to launch later this year, will offer acquired movies, original series, music shows and animation programming targeted toward Asian-Americans.

ImaginAsian’s game plan is to use VOD as a vehicle to enter markets with a limited Asian population, while pushing for digital-basic distribution in locales with large Asian populations, according to network CEO Michael Hong.

“For secondary markets, VOD is a much more realistic play for us,” he said. “We eventually want to prove ourselves as a network that will be of interest to the non-Asian community as well.”

NOT FOR ALL

Despite some inherent advantages, a pure VOD launch is not a trump card many startup networks are willing to play. XY.TV, a free, digital-basic service aimed at generations “X” and “Y,” has no plans to offer VOD programming to operators unless they initially take the linear service.

“Without any license fees, we’re looking at our national advertising sales as our revenue stream, and, as an added value, we’ll offer a VOD stream,” said Dennis Patton, a consultant to the network, presently available on RCN’s Boston system. “We do have a VOD package that is available with XY.TV, but we will only offer it in conjunction with carriage of the linear service.”

The Atlanta-based Gospel Music Channel also plans to use VOD as a complement to its linear service when it launches this fall.

The network — which will feature Gospel music and related programming from a number of the category’s genres, including rock, adult contemporary, and Black Gospel — currently has a “hunting license” distribution agreement with Cox Communications Inc.

“We’re willing to work with the operators on a VOD service, but they have to take the linear channel first,” said network president and CEO Charles Humbard, who most recently served as senior vice president and general manager at Discovery Networks U.S.

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