VOD? Broadband is Cable’s Bundle of Joy

For many cable executives, new video-on-demand services have a “so far, so good” feel to them. The service, with its VCR-like qualities such as pausing and rewinding, is new in many markets this year.

Cable companies say VOD is catching on nicely, bringing in incremental revenues for on-demand programs and movies that average about $3.95 per stream to a cable household.

John R. Alchin, executive vice president and treasurer of number one cable provider Comcast , recently said customers are responding positively to VOD offerings in Philadelphia, where it rolled out the service about a month ago.

“We have found that, anecdotally, about 5 percent of viewers on average used a (traditional) pay-per-view offering. With VOD, the number is five times larger,” he said during a media conference in New York.

VOD as a service is now potentially available to about seven million homes within Comcast’s original 8.5 million subscriber footprint, officials said at the media conference this week. And it plans to spend over $4 billion over the next two years upgrading the AT&T Broadband cable systems it inherited in its merger that made it a 21.4 million customer company.

In one market rollout after another, VOD is proving reasonably successful — and could become the big cash cow of the future. Research groups peg VOD’s availability in close to 20 million U.S. homes by year’s end.

Once derided as a too-pricey version of traditional pay-per-view movies, VOD and subscription VOD are catching on with viewers who enjoy controlling when they can view their favorite television programs, cable executives say.

They have plenty of reasons to be hopeful about what remains an immensely expensive build-out of digital systems, including servers and bandwidth costs, in order to deliver bits of digital video whenever consumers want them.

But some cable industry experts say the immediate money for cable companies — perhaps the cash financing VOD buildouts — is in bundling broadband services with basic video packages.

In addition, bundling data, video, and increasingly, voice-over-IP telephony, are seen by cable operators as the best way to thwart the erosion of subscribers to cheaper services offered by satellite broadcasters, whose technology is ill-equipped for high-speed interactivity.

“You can get a satellite broadcasting system installed for free these days if you take a year of programming,” said Richard Doherty, cable industry analyst with research and consultancy Envisioneering Group.

“Cable has to spend hundreds of dollars on a home for infrastructure” for VOD. “Satellite delivers generally cheaper movies. You may have to wait 20 minutes to watch them, but for many households, it’s close enough to VOD.” But that doesn’t mean that VOD doesn’t have huge potential, Doherty added.

Jessica Rief-Cohen, media analyst for Merrill Lynch, recently noted the results of video-on-demand that Cox Communications launched in San Diego. In a research report, Cohen said Cox’s VOD products should benefit six cable “metrics,” such as transaction revenue, subscription revenue, advertising revenue, digital churn, basic churn, and video market share.

“Preliminary results in San Diego reveal that transaction revenue is up 50 percent over (pay per view) and that usage is about 25 percent higher than PPV,” she wrote in a recent report.

Still, analysts and cable experts view VOD is a nice extra tossed into a bundling strategy that relies the most on high-speed Internet access and even voice-over-IP telephony services to keep customers from defecting.

“We think the bundle makes a huge difference,” said Jimmy Hayes,
executive vice president and chief financial officer of Cox, which has about 6.3 million subscribers. During remarks at the UBS Warburg conference in New York, Hayes said customers are less likely to defect to other providers when they are buying more than one cable product.

Another Cox executive, William Geppert, vice president and general manager, told
analysts at the Credit Suisse First Boston media conference that in its San Diego market alone, 40 percent of its customers are bundled subscribers. “We’re harvesting more cash flow from our entire footprint going forward,” Geppert said, with the biggest boosts coming from digital television and high-speed Internet services.

Jupiter Research (whose parent company also owns this publication)
estimates that by 2007, revenues from VOD movies (not counting subscription VOD) will generate just over $1 billion in revenue for the main providers, cable modem and DSL operators.

As Jupiter has noted in prior research reports, cable operators are armed with the most advanced infrastructure for delivering on-demand programming, although they will also have to rely on movie studios that control the distribution and pricing of the movies.

But many factors weigh on the growth of VOD, Jupiter noted, such as infrastructure, asset ownership, licensing, pricing, marketing, industry influencers and consumers’ demand.

VOD may represent potential revenue, Doherty added, but he said for now, the cable industry’s lead in broadband offerings is what is paying the bills for building out those digital systems.

With about 52 percent of the broadband access market, cable modem continues to dominate the broadband access market, according to tech research firm Gartner Dataquest, even with broadband via DSL growing at nearly twice the growth rate of cable modems.

Leichtman Research Group recently noted that that cable broadband added another 1.1 million subscriptions in the third quarter of 2002, compared to DSL’s 539,000, bringing the total to over 15.6 million high-speed subscribers in the U.S., among the highest growth rates of the year.

“While cable operators lost over 250,000 video subscribers in the third quarter, the industry-wide focus on high-value customers clearly paid off in cable’s growth of high-speed Internet subscribers,” said Bruce Leichtman, president and principal analyst. Among the key growth-drivers? Aggressive marketing and more bundling.

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