VOD Shares PPV Burdens But Bears More Promise

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While born in different cable eras, the pay-per-view and video-on-demand industries over the past 25 years have been burdened with very high expectations as operators looked to the technologies as “killer apps” that would not only generate significant ancillary revenue but also serve as a driver for cable boxes into the home.

While the PPV industry in the 1980s and 1990s arguably failed to deliver on its promise for a variety of reasons, the book is not yet closed on the still-emerging VOD platform.

<p>Revenue On Demand</p><p>Cable’s total revenue take from video-on-demand purchases, in billions of dollars, including future estimates.</p>

2003

$0.25

2004

$0.49

2005

$0.81

2006

$1.12

2007

$1.54

2008

$2.08

2009

$2.70

2010

$3.36

2011

$4.06

2012

$4.78

2013

$5.51

2014

$6.15

The on-demand business has shown signs of life in its relatively infinite stages, but the technology is fraught with its own set of hurdles as it attempts to mature within a crowded and competitive home-entertainment arena.

VOD, able to provide consumers with the power to order content when they want it — as opposed to PPV’s unfriendly and often inconvenient scheduling format — began rolling out about five years ago as cable companies were fighting a losing battle with direct-broadcast satellite for the lion’s share of PPV revenue.

PROTECTION AGAINST DBS

At the time, cable was losing thousands of subscribers to EchoStar Communications Corp.’s Dish Network and DirecTV Inc., which were offering near video-on-demand services via 100 or more PPV and sports event channels. These digitally enhanced services allowed viewers to watch top Hollywood PPV titles every 15 to 30 minutes by devoting five to six channels to one film, compared to cable PPV, which could only show titles every two hours on one or two linear movie channels.

The direct-broadcast satellite services were also attracting scores of former cable subscribers with live, out-of-market PPV games from the major pro sports leagues. Cable, with its limited analog channel space, could not clear as many as 10 channels a night to telecast nearly every National Hockey League, National Basketball Association, Major League Baseball or National Football League game.

But with the advent of digital technology, which allowed cable operators to expand from approximately 60 analog channels in the mid 1990s to 150 channels in early 2000 to more than 500 channels today, cable over the next five years would combat DBS and secure the rights to popular out-of-market services like “NHL Center Ice,” “MLB Extra Innings” and “NBA League Pass.” Only “NFL Sunday Ticket” remains the exclusive purview of DirecTV.

More important, digital allowed operators to launch VOD — something DBS technology could not achieve. Operators believed then and still trust that offering marquee Hollywood movies, popular cable programming and other new and innovative content to subscribers on demand with VCR functionality will help drive digital boxes into the home and dishes off of customer rooftops.

“The on-demand business is so much more important to the industry than PPV ever was, because it is much more than just about the revenue that’s produced out of it,” said Bruce Leichtman, president and principal analyst for Leichtman Research Group, Inc., which reports on the VOD category. “It is much more about added value and [retention] for the cable operators.”

Thus far, VOD’s rollout has been slow. By the end of 2004, only 10 million subscribers were VOD-enabled, as operators struggled to get consumers to ante up an additional $20 to $30 for access to hundreds of new digital services and VOD fare.

Even today, VOD is only available to 15 million households, according to MSO-controlled distributor In Demand LLC, with that number expected to reach 20 million by year’s end.

Industry observers point to the lack of new and appealing programming offered on digital tiers — many of the digital services are offshoots of established linear channels — as well as poor marketing efforts by cable extolling VOD technology for VOD’s sluggish performance.

“The challenge ahead is getting the consumer familiar with [VOD],” In Demand director of event programming Marshall Zalaznik said. “Once you use it, most people are impressed with its power and breadth.”

Also, other cable offerings such as broadband and digital telephone services have sapped marketing and promotional dollars from digital and VOD while further increasing the consumer’s overall cable bill.

At first, the lack of quality content was a major drawback for consumers. Initially, Hollywood movie titles constituted to lion’s share of VOD product, but just as it crippled the analog PPV business, the long 45-day to 60-day windows between a movie’s DVD debut in stores and its VOD launch hurt the category’s revenue potential.

Recently, the industry has made strides to shorten the window on many titles to 30 days, and some industry observers believe it’s only a matter of time before cable secures day-and-date parity with home video.

LINEAR NETS HAVE ISSUES

In 2001, Home Box Office became one of the first linear networks to enter the VOD space. The HBO On Demand subscription service — followed by similar offerings from Showtime and Starz Entertainment Group LLC — moved the VOD business from a movie-based transaction technology to a monthly, fee-based service, giving consumers the ability to watch original series, specials and acquired movies as often as they want for $5 to $7 a month.

Eventually, basic cable networks such as Turner Network Television, Court TV, ESPN and Hallmark Channel began to provide library titles to VOD content purveyors like In Demand and TVN Entertainment Corp. that would package programming to operators as part of their respective VOD platforms.

That changed in early 2003, when Comcast Corp. began to aggressively acquire library and proprietary content to offer as part of its free on-demand service. But rather than just relying on programming already seen on linear networks, the MSO has insisted on securing exclusive and proprietary fare for free distribution to its subscriber base. In fact, Comcast hopes to offer 10,000 hours worth of VOD programming by the end of 2005, ranging from exclusive NFL weekly game highlights to exclusive shows from networks like Nickelodeon and Noggin.

Comcast says such content helps boost the value of VOD while providing an incentive for consumers to upgrade to digital.

“We believe the whole success of on demand is a result of a free platform,” Comcast On Demand vice president and general manager Page Thompson said.

Comcast can point to some success. Thompson reported more than 75% of VOD-enabled Comcast subscribers have used VOD in the past three months. Comcast customers ordered some 106.9 million video streams this past May.

Still, several programmers, including NBC Universal’s Sci Fi Channel and USA Network and Scripps Networks’ Food Network and Home & Garden Television, will continue to withhold their best fare from the VOD platform until a viable business model is developed for free VOD.

“For the networks that aren’t SVOD, we’re having a harder time understanding the business model,” said Scripps Networks senior vice president of emerging media Channing Dawson says. “It’s still early and we have to give it more time, but there are other alternative [technologies] that could give it a pretty interesting run for its money.”

While the PPV-event industry will most likely never eclipse its 1999 record $486 million take, industry observers say the business will always pack an incremental revenue punch through high-profile boxing and wrestling events.

Indeed, events are enjoying a renaissance of sorts in 2005 with a string of unexpectedly strong boxing matches that should continue though the rest of the year.

In addition, the traditional adult PPV business continues to provide operators with consistently strong revenue. More recently, erotic, soft porn titles and uncensored content from established brands like Girls Gone Wild and NBC Universal’s The Jerry Springer Show have provided operators with low cost, titillating fare that consumers are responding to.

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