Slowly but surely— through economic gales and terrorist attacks — cable's video-on-demand business is moving towards critical mass. By year-end, more than three dozen video-on-demand systems will have been launched, reaching a potential audience of more than 6 million basic-cable subscribers. Charter Communications Inc. and Insight Communications Co. have led the charge, with nearly two dozen deployments. The two MSOs are slated to reach a combined 3 million homes by year's end.
Comcast Corp. has resolved most of the integration issues that involve its various combinations of set-top manufacturers, billing, guide and server vendors. It's now marching toward its goal of launching service to 2 million VOD-enabled homes in 10 markets by year-end.
Those systems include Willow Grove, Pa.; Monmouth County, N.J.; Mobile, Ala.; Savannah, Ga.; Union, N.J.; Baltimore; Albuquerque, N.M.; Alexandria and Arlington, Va.; Harford and Howard counties, Md.; and the southern New Jersey systems acquired from the former Garden State Cable.
Though Comcast, Charter and Insight have led the pack, Adelphia Communications Corp., Cablevision Systems Corp., Time Warner Cable and Cox Communications Inc. aren't far behind.
Cablevision's late September launch of its Sony Corp. digital set-top included VOD. Adelphia has placed servers in Cleveland and Los Angeles to test subscription VOD, and will team with Intertainer Inc. and TVN Corp. for VOD deployments in 2002.
And Time Warner Cable — which has already deployed VOD in Honolulu, Austin, Texas, and Tampa, Fla., as well as SVOD in Columbia, S.C., and Cincinnati — could roll the technology out in a dozen markets over the next six months.
AT&T Broadband has launched VOD in Atlanta and Los Angeles, but has lain low on further launches. That's due to earlier uncertainty over its fiscal position and moves by Comcast to acquire the cable unit. But AT&T said that subscribers in its VOD markets have bought three to four movies a month, generating between $16 and $22 in revenue per subscriber.
GOOD NEWS, BAD NEWS
Cable operators who've deployed VOD have found that buy-rates are double or triple those for pay-per-view. Unfortunately, that's not enough to make VOD movies work on a stand-alone basis.
But there's some good news here: Those buy-rates were achieved with only a partial list of hit titles from the Hollywood studios or the potentially lucrative SVOD services. And MSOs have stopped looking at VOD as a stand-alone business. Instead, they see it as a vehicle to drive digital penetration to levels of 40 percent or higher.
Cable operators also believe VOD deployments can stem the flow of subscribers to their direct-broadcast satellite competitors — especially in a recessionary climate in which MSOs' yearly basic-cable gains hover in the 1 percent range.
Charter has launched VOD service with Diva Systems Corp. to 1.3 million homes in eight markets; plans would expand that to 2 million homes in 10 markets by year-end.
The MSO's VOD buy-rates stand at 3.1 titles per month, compared with 0.9 for conventional PPV, said Charter executive vice president and chief technical officer Steve Silva.
"We do see this as a comprehensive service or customers because they find a lot of content and a lot of reasons to use it," Silva said.
A $9-per-month package of children's programs — drawn from several cable networks and PBS — has afforded Charter some experience in the SVOD arena. It also sells the titles à la carte for 25 cents to 99 cents apiece.
"That has won a lot of admiration from our customer base," Silva said.
About 12 percent of Charter's VOD buys come from the children's and basic-cable category, while 21 percent are adult titles and 67 percent are hit theatrical movies.
Charter has pitched the concept to premium networks "and new providers who see SVOD as a way to increase their basic service," Silva said. And he sees a bright future over the next six months.
"You'll sell all studios aboard with VOD," Silva predicted. Sony Pictures Entertainment, The Walt Disney Co. and Universal Studios have yet to provide content to Charter, but Silva said negotiations are underway with two of the three studios.
"We're optimistic we'll close those in the next several months," he said.
CHURN BUSTING
Operators see VOD as a means to gain and retain digital subscribers.
"The research points to retention numbers that are extremely promising," said Charter corporate vice president of product marketing Rick Lang.
There's some indication that VOD can cut digital churn rates by as much as 50 percent, Lang said. Like other operators, Charter is looking to VOD to drive additional digital penetration.
"To get that next incremental 10 points, it's got to come from somewhere," Lang said.
The addition of VOD — including such local content as high-school sports events, as well as virtual channels and Digeo Corp.'s interactive-TV service — should help further drive digital penetration, Lang said.
"We believe a large portion of analog PPV users will find … VOD to be [functionally] very valuable," he said. The pause, rewind and fast forward features resonate with consumers, he added.
Lang also sees upside potential in Charter's 3.1 buy-rate as more hit movie content makes its way to VOD.
"At least early on, the big blockbuster titles are going to help us drive this business," he said. "We would certainly look that there can be significant enhancements in the number of buys once those big titles start to appear on VOD."
In the future, "we're going to increase our marketing effort in those markets where we've already deployed," Lang added. "Cross-channel [spots are] certainly a big part of the arsenal."
Promotions for VOD service offer less early emphasis on individual titles. Rather, they sell subscribers on using the service.
So what has Charter learned from its VOD rollouts to date?
"People like new features and benefits as long as you communicate them in a non-threatening way," Lang said. "We have so many new products we're deploying.
"To communicate to consumers becomes more and more challenging as our portfolio expands," he added. "We're learning to make our communication as simple as possible, focusing on the consumer benefits."
For two years, Insight has also offered Diva-enabled VOD service in three markets. It plans to expand its commitment to 1 million homes by year-end 2001.
Digital subscribers are making good use of the VOD service, according to Insight president Michael Willner: 160,000 subscribers use the technology in areas where it's been available for six months. About 26 percent of current digital subscribers use the VOD service.
Cox Communications Inc. is testing VOD in San Diego, Phoenix and Hampton Roads, Va., where the MSO may use Motorola Inc.'s 1000-level boxes. Cox has several hundred thousand units of the older 1000s in the field, deployed during its 1998 digital-cable launches.
"We're going to open up more markets next year," Cox CEO Jim Robbins told investors last month. "The product is coming better than I thought it was going to come."
Cox executives said the MSO would expand its San Diego, Phoenix and Hampton Roads tests over the next few months, and add SVOD in 2002. Cox also intends to launch VOD in several new markets next year.
AT&T Broadband's VOD launches have been put on hold as the parent company determines the fate of its cable subsidiary. Executives have said that in the markets where VOD has launched, it's averaged three to four buys a month and has generated $16 to $22 in monthly revenue.
