Cablecos: Your Video Wish Is Our Command

It's been a long time coming, but video on demand is finally here, and it looks like it's here to stay. "We continue to see high interest among cable operators in deploying video on demand," says Yankee Group analyst Adi Kishore, who wrote the report "Video-on-Demand: Sustained MSO Commitment Drives Rapid Growth." "They have moved very quickly on this front."

Kishore says that despite concerns the cablecos would drop VoD investments in light of the rough economy, the industry has remained steadfast in its efforts to bring on-demand programming to subscribers. Other potential showstoppers, such as whether studios would license content for VoD and how VoD would affect video rentals, he says, have also turned out to be footnotes.

Over the past 12 or so months cable companies have been turning up VoD on a limited basis, with the on-demand services available to just less than 7 million U.S. subscribers by the end of 2002, Kishore says. Driven by a need to differentiate their services from direct broadcast satellite operators, to improve the value proposition for digital cable and to generate incremental revenue from their upgraded networks, Kishore forecasts the cablecos will continue on this trajectory and VoD will generate $2.8 billion in revenue by the end of 2006.

"From a revenue perspective video on demand is not extremely important," adds Kishore. "But it does add value to digital services, and that's extremely important." Video on demand, he says, can add another $10 to $15 per month per subscriber to digital cable, which typically costs about $15 more than basic cable. Kishore says 18 million U.S. households subscribed to digital cable at the end of 2002; by the end of 2006 that's forecast to grow to 40 million digital cable subscribers, of which about 35-37 million are expected to use video on demand services.

Comcast Inc., Cox Communications Inc., Time Warner Cable, Cogico Cable Inc. and Videotron are among those companies using Concurrent Computer Corp.'s VoD systems today, says Del Kunert, vice president of marketing and business development at the vendor. "Time Warner's offering of on-demand is pretty widespread -- most of their large properties have it," he says. "Comcast also is pretty widespread."

Cox also is moving forward with video on demand, although Kishore notes the company now plans to launch VoD in four markets by the end of 2002 rather than the initially planned seven. As of late November 2002, Cox reached 200,000 homes with VoD between its marketwide trial of VoD to digital cable subscribers in San Diego; a limited availability trial in Hampton Roads, Va.; and two technical trials elsewhere, says Lynne Elander, Cox video president of video product development.

The trials provide digital subscribers with on-demand access and VCR-like control of new hit movies for $3.95 each; older "library" content for $1.95 to $2.95 per selection; and cable network shows like Comedy Central's South Park for $1.95. As of late November 2002, the company was preparing to launch subscription-based VoD, which would give subscribers on-demand access to premium-based content from programmers like HBO after the shows' initial airings.

In San Diego, Cox also offers an on-demand service called FreeZone, which delivers free, advertiser-sponsored content to subscribers. FreeZone includes straight long-format commercials, such as the five-minute video for the San Diego Zoo; sponsored content, such as a short from a cooking school sponsored by a packaged goods manufacturer; and entertainment content from advertisers, such as a mini-movie from BMW that prominently features its vehicles. Five to 10 percent of homes are using something from FreeZone, says Elander, who says this type of advertiser-sponsored, on-demand service has real potential. Concurrent's Kunert says Cox got 6,000 hits on FreeZone the day the service launched. "They had 50,000 digital subscribers that could have hit," he says. "That's an extremely high hit rate," Elander seems upbeat about the results of Cox's VoD trials. "In San Diego, where we've been actively marketing it for over five months now, we're very, very encouraged," she told xchange. The number of subscribers buying pay per view has increased by 25 percent since Cox turned up VoD in the system, she adds. But, like Kishore, Elander emphasizes VoD is about more than just consumer buy rates; it's also about generating incremental ad revenue, reducing churn and recapturing share from the DBS suppliers. "It is a new revenue source for us, and it is important to drive new revenue, but that is not it's only value," she says, declining to provide VoD revenue numbers or forecasts for Cox.

Beyond proving out that business model, however, is the issue of getting VoD to scale to ever-larger numbers of subscribers over networks that include equipment not necessarily designed to handle video on demand, Elander adds. "VoD in any scalable format has just not been done until the last 12 months," she says, noting a very big bandwidth service like user-controlled video puts processing challenges on a network.

VOD Will Generate $2.8 Billion in 2006
Source: The Yankee Group

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