The Different Ways To Slice VoD

By Dom Serafini

Some order it à la carte, others prefer to get it via subscription, and others want it only for free. No matter how one slices it, video-on-demand (VoD) seems to be television’s new way of squandering profits generated by the industry’s severe cost-cutting of the past two years.

The investments needed to enter the VoD business are high, as are the risks, but so are the rewards if one is able to produce a better mousetrap. According to research company Paul Kagan & Associates, 70 percent of digital homes in the U.S. will have VoD capability by the year 2008, and more than 31 million homes will have access to VoD movies. Those numbers, Kagan projected, will then represent $4.8 billion in movie revenues per year.

The history of VoD is somewhat short. Basically, it began in 1994 with Time Warner Cable trials in Orlando, Florida. During the 10 years that VoD and its derivatives have been around, the model has changed at least eight times. For all practical purposes, VoD has replaced pay-per-view, which evolved into a near-VoD for satellite services and quasi-VoD; then came SVoD (Subscription VoD), followed by the true VoD and time-shifting VoD, both tailgated by iVoD or interactive VoD and BoD (Broadcast-on-Demand, which is not time-shifting television) and now FoD (advertiser-supported VoD or free VoD).

Today, VoD in most two-way digital cable systems is of the iVoD type, which, in effect, means that consumers can fast-forward, fast-rewind and pause. For the record, if content is also on a linear (traditional) network and viewers watch it on VoD at a different time than scheduled, they are time-shifting that show.

One could divide the whole VoD sector into two main components: technology and content.

The heart of VoD technology lies in the video server, which stores, manages and delivers content or programming via the downstream network to a subscriber’s digital set-top box. The amount of storage depends on the number of titles offered by the cable operator or content provider associated with the cable system. Typically, each 100-minute movie digitally compressed using MPEG-2 requires about 1,700 megabytes of storage space. The cost of this computer memory, which in 1994 was $1 per megabyte, is now between four and seven cents.

Today, VoD’s per-stream (to the consumer) capital cost is about $300. Capital costs include five key areas: video servers, encryption, modulation and upconversion, network transport equipment and varied costs for VoD set-top applications. The initial capital investment also includes a one-time investment in management, hardware and software. Therefore, if a cable-TV system counts 150,000 digital consumers and an estimated peak utilization rate of 10 percent, the operator would have to build a 15,000-stream VoD system. At $300 per stream, capital costs would total $4.5 million. The content is called “stream” because it travels in an IP (Internet Protocol) standard.

Jonathon Barbato, vp of content and distribution at Ripe, a Los Angeles-based FoD service, pointed out that most cable systems are currently equipped to handle an average of five percent of their digital customer base using streams at any given time, since more would be an overload.

As per the QofS (quality of service), each cable-TV channel (six MHz) can carry 10 streams (programs) simultaneously, which translates to 3.75 Mbps per stream: basically the quality of a VHS cassette.

As for operating costs, these are now averaging about $1.20 a month per subscriber. The major operating expense for movies-on-demand is the actual cost of the content itself. The business model for this type of VoD programming follows the 50-50 split revenue PPV model, where the cable operator gets 50 percent and the content provider, such as On Demand, the rest. The content provider, in turn, will split its share with the content supplier (such as a studio) 50-50 at best, but most likely 40-60 for blockbusters. Ultimately, for its marketing, assembling and negotiation skills, the content provider could end up with as much as 25 percent of the VoD consumer fee.

Programming costs for SVoD are still comparatively low, since, according to Barbato, “no one has yet launched an SVoD service independent from a linear subscription service.” Basically, HBO on- demand and Starz on-demand have their sister linear services and when they buy programming for their core service, the services simply build-in VoD rights for free, as per the Starz model.

For SVoD, leveraging on the part of studios is minimal, but this is not expected to continue, especially when the program distributors catch on.

For FoD, Barbato’s Ripe is said to be the first free-on-demand network to license content. The rest of the content on FoD is old Discovery, Comedy Channel, etc., programs that they already own or programs they acquire from independents, which are putting up their libraries. Cable MSO Comcast has also introduced FoD in its Marketplace offering, supported by advertising revenue. So far, selections of shows on FoD have been week because cable networks don’t want to dilute their linear channel viewership.

The Ripe model is to pay fees based on regular basic cable

license fee standards and/or to do a revenue share. Ripe generates revenue off of advertising: it sells sponsorships into its shows. In addition to the traditional 30-second spot Ripe offers seven new forms of advertising that can’t be fast-forwarded through.

Research into the consumer pricing of on-demand is still in its early stage. Typically, VoD services with a 1,500 to 1,800 hour per server library, would price new releases at $3.99 each; classic and recent favorites at $1.99; and adult movies at $7.99. The pricing strategy for SVoD varies. Some operators offer SVoD for free (bundled) to all digital subs, others offer it as a standalone (à la carte) for $3.99 to $12.99 per month with an average price of $6.99.

It’s still in its early stages, but Michael Wolf, director and managing partner of McKinsey & Company’s Global Media and Entertainment Practice, told VideoAge in January that early buy rates have been strong on SVoD. “Consumers like to pay for the option value of media, where there’s one fee for everything. In other words, they’d rather pay a cover charge than pay by the drink,” he said.

As far as whether content providers will get parity with video stores for VoD (i.e., will get early VoD release), Wolf stated that “It comes down to a question of windows. Major studios have to figure out how they will stagger windows. There will be releases that will jump the video store and go right to VoD, some will be day/date release, and some will maintain the current system. But this is something that will be decided on a film-by-film basis. There’s no real rule, in the same way that there’s no rule about pay versus broadcast windows on TV. VoD supersedes other windows and can decrease the value of subsequent exploitations.”