PREMIUM SERVICES SET TO COUNTER VOD
July 26, 1999
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Electronic Media via NewsEdge Corporation : The battle for at-home movie fans is under way even though true video on demand isn't expected to be a widespread competitive force for several years.
But the notion of empowering consumers to order up any movie they want when they want with a click of a remote control is proving a potent force among premium movie services.
''Video on demand will change everything,'' said John Sie, chairman and CEO of Encore Media Group. ''But it isn't going to make our business obsolete. We will change to compete. We already are. We're not sure just how many consumers will initially buy into it. But VOD will be an intoxicating option.''
Encore, Showtime, HBO, The Movie Channel and other premium movie services are cautious about detailing their plans to counter a video-on-demand rush that could begin next year as digital cable takes hold.
''VOD could hurt our business if consumers flock to VOD before they sign on to our new services,'' Mr. Sie said. ''If it quickly becomes widespread, our value could decrease and there will be price pressures for new releases.''
More intense brand marketing and the launch of theme multiplex channels -- from Encore's mystery and romance; to Showtime's selections for Generation Y; to Starz! family premieres; and HBO comedy -- are the start of a defensive attack.
The next step -- subscription on demand -- will surface by late this year or early in 2000.
Subscription on demand will go a step further by allowing premium movie service subscribers to select from a crop of several hundred movie titles for a single fee. Subscribers can access the titles any time and manipulate them with VCR-like options.
''We can use the same server technology as VOD,'' Mr. Sie said.
Premium movie providers also are working closely with consumer electronics manufacturers to produce devices, such as the Philips Electronics' Personal TV receiver and the TiVo Personal TV service, that enhance TV experiences by providing easier ways to choose and record films.
By solidifying ties with direct broadcast satellite operators, premium movie services are betting that consumers will stick with their branded products even with an aggressive video on demand rollout.
''Multiplexing should allow the premium services to offset the potential erosion from enhanced pay-per-view,'' Morgan Stanley Dean Witter analysts conclude in a report titled ''The Digital Decade.''
In that sense, multiplexing could prove a financial boon to companies rich with movies and other attractive content by ''enabling cable operators to create a separate digital tier of premium channel packages, which should boost subscriber growth,'' the report states.
Digital cable PPV revenues are expected to grow from $39 million in 1998 to $1.5 billion in 2003 and to $3.6 billion by 2008, the report says.
Subscribers will pay more for premium services: from an average $3.20 a month in 1998 to $8.14 a month in 2003.
Inverted cost pyramid
Premium service executives say that economics could work in their favor.
Video on demand has a potentially onerous inverted cost pyramid that requires heavy investment of tens of thousands of dollars in upfront movie storage to meet customer requests, they say.
There are only about 5,000 titles, or about 5 percent of all films, most often demanded by consumers, most of which are recent releases, Mr. Sie said.
But early signs are encouraging. Trials have demonstrated video-on-demand movie buy rates have exceeded existing PPV buy rates by 350 percent to 500 percent.
At the same time, multiplexing is boosting subscriber counts and revenues. For instance, 35 percent of Encore's estimated $55 million in profits this year will be generated by multiplex services.
HBO, which is furthest along in the movie multiplexing game, demonstrated the value of such tiering. Between 1992 and 1996, cable systems with multiple HBO screens generated 40 percent higher audience ratings and 10 percent higher subscriptions.
The 'killer application'
A sure winner in the video-on-demand game will be cable operators, whose costly system upgrades will allow them to reap the benefits of a new revenue stream from video on demand as well as an improved competitive response to DBS.
Many cable operators expect video on demand to be an initial ''killer application'' driving the growth of overall digital cable.
Merrill Lynch analyst Jessica Reif Cohen predicts video-on-demand penetration could ramp up to 28 million, or 60 percent of digital cable subscribers, over 10 years. Video on demand could generate between $3 billion and $6 billion in incremental cable revenues by 2009, Ms. Cohen said.
The nearest thing to a sure loser is the home video rental business, which already is scurrying to hedge its bets.
''Initially, VOD will not have a significant negative impact on pay-per-view services, although they could be replaced within 10 years by VOD,'' said Laura Martin, analyst for Credit Suisse First Boston.
Overall, video-on-demand's impact may be less onerous. Ms. Martin points out that leading PPV movie services are owned by larger media companies that will hedge their bets with new interactive movie services. As one business phases out, they will be ready to step into another.
Executives at pay cable movie and satellite services insist they have plenty of time -- at least two years -- to ''figure it out.'' It could take video on demand until 2008 to grow to a $2 billion a year business, according to Paul Kagan Associates.
Still, premium movie services say they do not expect video on demand to do too much damage to their bottom lines. The cost of competing, however, could tighten or stunt existing premium movie service profit margins of an estimated 25 percent for HBO, about 20 percent for Encore and less than 15 percent for Showtime, according to industry sources.
<<Electronic Media -- 07-19-99, p. 16>>
[Copyright 1999, Crain Communications]
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