Found this on the CCUR thread...REALLY GOOD!! From MultiChannel News.
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SeaChange: VOD Pays In Under Two Years
By LESLIE ELLIS
Network operators pursuing in-house video-on-demand can recoup their investments in under two years, based on order levels of 3.5 rentals per household, per month.
That's according to a comprehensive model developed by SeaChange International Inc. to validate the business case for VOD, released so far only to a handful of large cable operators.
"For the last six months, everybody's been looking for the business model," said Yvette Gordon, director of interactive technologies for SeaChange and a former executive with Time Warner Cable's
Full Service Network in Orlando, Fla. "The No. 1 question is: What's the cost payback?"
That's the question that SeaChange set out to answer in its model, built on a 200,000-home cable-system scenario with 80 percent penetration (160,000 customers) and 20 percent digital
penetration (32,000 potential VOD customers).
The report also assumed that the cable network was configured to handle a peak streaming rate of 10 percent -- meaning that servers were set up to spit out 3,200 simultaneous video streams.
On the revenue side, SeaChange posed an adult-title charge of $5.95 and nonadult content at $3.95 per title, for an average per-title charge of $4.25.
Then came the tough part: estimating how many titles consumers will buy from the couch.
Demand "is undoubtedly the most contested part" about VOD models, Gordon said.
Taking "the conservative route," based on historical VCR rental-tape figures, SeaChange put the monthly take rate at 3.5 rentals, Gordon added.
For one year -- using the model of 32,000 customers buying 3.5 programs per month at $4.25 -- that's a total revenue stream of $5.7 million.
And then there are the subtractions, which go well beyond simple cost-per-bit-stream math, Gordon noted, describing the yardstick that many video-server firms generally use when asked about
equipment costs.
"It's not just cost per stream -- that's just a surface issue," Gordon added.
Also in the mix are revenue splits with studios, costs to receive digitally encoded material, bad debt, equipment and staffing.
It is the latter point that touches a nerve with Gordon, who saw firsthand at the FSN what it takes to staff a VOD-enabled system -- albeit a fledgling one at the time.
"What you don't want is to have to hire computer-lab personnel to run your headend," Gordon said. "As computers merge with cable ... I tell operators to be very careful and to make sure that their
VOD systems run like headends."
Also built into the cost side of the equation: a 55 percent revenue split with studios for adult content and a 35 percent split for nonadult content, as well as a cost of $3,000 per title to receive
digitally encoded material. Bad debt was estimated at 2 percent.
For capital costs, taking into consideration the swiftly dropping prices for hard-disk storage and memory, SeaChange used a $350-per-stream figure. Management systems for hardware and software
rolled in at $350,000; encryption, modulation and upconversion at $300 per stream; and network-transport equipment at $200 per stream.
Totaled, the initial VOD investment for that 200,000-customer system weighed in at almost $3.1 million, not including another $300,000 for initial encoding of 100 titles.
Operationally, for one year, SeaChange estimated additional staffing at $140,000, equipment maintenance at $307,000, bad debt at $114,240, content-acquisition fees (10 titles per month) at
$360,000 and studio payback at almost $3 million. The grand total for annual operational costs: $3,891,480.
That points to an investment payback of 22 months, based on estimated annual cash flow of $1.8 million.
SeaChange said that so far, the model hasn't lured any business arrangements -- or at least any that can be discussed now. But Gordon said the 1999 outlook for VOD will be one of "wide-scale
testing and small-scale deployments."
In 2000, she predicted, VOD will really take off.
"Now, it's no longer a question of looking at the numbers: It's a matter of looking at the technology, and that's good," she added.
Time Warner -- perhaps the most vocal MSO in its pursuit of steep VOD revenues -- agreed with SeaChange's VOD outlook.
"We've not kept it a secret that the killer app coming out of the Full Service Network was video-on-demand," said Jim Chiddix, chief technical officer for the MSO, adding "it's a favorite topic around
here."
Chiddix said that while Time Warner is not yet ready to discuss specific VOD-launch plans, he "couldn't agree more" with Gordon's timing assertions.
Cox Communications Inc. will take a longer look before leaping, said Alex Best, its senior vice president of engineering.
"While we're transitioning to digital as quickly as we can, we've also decided that we're not going to be pioneers when it comes to VOD," Best added.
That's because Cox wants to "wait until all of the wrinkles are ironed out," Best said, noting take rates of 150 percent to 200 percent for the MSO's existing 50-channel near-VOD service. "We like that
business model -- it works well, for now," he added.
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