From Multichannel News:
Comeback of the Year?
VOD May Be in Demand
By LESLIE ELLIS November 30, 1998
Video-on-demand's comeback could accelerate next year, as strategic and
technological issues come to the fore.
That's the refrain from VOD-equipment suppliers -- both turnkey and
full-system vendors -- as well as from cable-system operators that will
test VOD services next year.
Most of them described 1999 as an important year for VOD, because
equipment costs plummeted over the past few years, making the category
instantly more attractive to operators. Now that the cost hurdle is
lower, MSOs want to find out more about consumer demand and buying
patterns.
Turnkey providers and server companies are hoping to use this week's
Western Show in Anaheim, Calif., as a springboard to push VOD to the
front burner.
Turnkey providers like Diva Systems Corp., as well as newer entrants
like Intertainer Inc., will discuss product migration and likely sign on
more MSO takers at the show.
Meanwhile, the server community, including SeaChange International Inc.
and Concurrent Computer Corp., will be on hand with in-booth system
demos, as well as prototypes with set-top players like General
Instrument Corp. and Scientific-Atlanta Inc.
Diva is also expected to show that its technology works with GI's
DCT-series digital line -- a major coup for the provider, because up
until now, Diva had to furnish an additional set-top for the
already-crowded real estate on top of the TV.
"I think that 1999 is definitely a year of VOD, but 2000 is a bigger
year," said Alan Bushell, president and CEO of Diva.
Diva is already online with its "OnSet" service in four cable systems,
and many more are expected next year.
Lenfest Communications Corp., the first Diva taker, is expected to
extend its contract across all of its systems at the show this week. The
MSO is already using the service in the Philadelphia area. Adelphia
Communications Corp., Rifkin & Associates Inc. and Cablevision Systems
Corp. are also testing Diva.
The MSOs declined to talk specifics about their Diva trials.
"From our perspective, to some degree, 1998 has been a year of VOD,"
Bushell added, referring to the work that Diva has already completed.
Other suppliers were more conservative. SeaChange, which is set to debut
its full VOD system at the Western Show, predicted order momentum for
the latter part of the 1999, but not the early months.
"There are still a lot of people trying to push the VOD hype that there
will be huge rollouts in '99 ... whereas we think that a lot of
operators will be watching other operators' VOD work, or testing
themselves," said Yvette Gordon, director of interactive technologies
for SeaChange.
Instead, Gordon said, VOD vendors -- whether turnkey or not -- and the
operators testing them will take the time next year to see how VOD
scales up to large numbers of customers. Both Time Warner Cable and
Rogers Cablesystems gave SeaChange the nod for VOD tests in 1999.
Plus, 1999 will be a year of development, both technically and
perceptually. VOD vendors will hammer out workable technical links to
digital set-tops, while MSOs will seek a level of comfort around the VOD
category.
One variable remains in the mix: the plans of premium channel suppliers,
like Home Box Office and Showtime Networks Inc. Sources close to those
programmers said they, too, are interested in developing
on-demand-viewing models.
One scenario could include a premium programmer sending content to a
series of nationwide servers, owned by the MSOs, to keep the latest
titles fresh for a limited period of time, one source familiar with VOD
said.
Regardless, cable operators said, they're much more interested in VOD
these days than they were four years ago.
"We at Rogers are rather bullish on getting VOD to our customers as soon
as it is proven viable from a business and technology perspective," said
Nick Hamilton-Piercy, vice president of engineering for Rogers. That MSO
recently agreed to deploy SeaChange's VOD technology in Toronto and
Vancouver, British Columbia, next year.
Hamilton-Piercy said the Canadian market needs VOD "to make digital a
business success," going so far as to describe VOD as the "anchor
interactive service."
That's because nearly all of Rogers' systems carry between 70 and 80
analog-video services, "and there is not much else to offer ... if we
derive 100-plus digital channels," Hamilton-Piercy said.
Time Warner thinks that demand is there, too. Although the MSO never
released specifics about the VOD portion of its Full Service Network
project in Orlando, Fla., the results must have been dramatic.
Time Warner engineers consistently discuss VOD as one of the more
enticing applications coming soon to digital set-tops. And SeaChange is
already poised to supply Time Warner for a test next year, in an
as-yet-undisclosed location.
"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."
Time Warner is planning massive, simultaneous digital-video launches in
1999, Chiddix said. VOD figures into that, but Chiddix is also part of
the camp that views 1999 as a prove-in year.
"I don't think that anybody will have VOD in front of millions of homes
in '99," Chiddix said, adding that tests next year will include linking
video servers made by SeaChange and its competitor, Concurrent, with
S-A's digital set-tops.
"They need to show us that it's primetime," Chiddix said. "The pricing
sounds right, and the economics sound right."
VOD, a sort of digital pay-per-view, lets MSOs offer their customers a
way to watch films and other content when and how they wish. Unlike
"near-video-on-demand," content start times aren't assigned in half-hour
increments. Nor are viewing features -- like fast-forward, pause and
rewind -- repressed.
VOD is the real deal, vendors and operators said. And that's what makes
it a tricky strategic move, as operators wonder whether it will
cannibalize existing sales of premium channels and PPV programs.
"Let's face it: The pricing is fairly similar to what you buy on PPV,"
said Pete Smith, senior vice president of engineering for Rifkin.
"Obviously, VOD is compelling. You can buy when you want, and it's
substantially more convenient."
But will customers slip into the habit of buying content from the TV
screen, instead of at the video store? After all, PPV movies have been a
major bust, so far.
They already have, according to Diva. "Average buy-rates are running at
about four buys per month, per home," Bushell said. And it's not just
top-10 titles, he added, building the case for breadth of content beyond
just popular films.
SeaChange believes that at buy-rates of 3.5 titles per house, per month,
operators can recoup their investments in less than two years.
In a comprehensive model that was developed to shed realistic light on
VOD revenues and costs, SeaChange built a scenario based on a
200,000-home cable system with 80 percent penetration (160,000
customers) and 20 percent digital penetration (32,000 potential VOD
customers).
Also in the assumption mix was a cable network configured to handle a
peak streaming rate of 10 percent -- meaning that servers are 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.
For one year, using a model where 32,000 customers bought 3.5 programs
per month at $4.25, operators could haul in $5.7 million in revenues,
Gordon said.
Subtract server cost per stream, revenue splits with studios, expenses
to receive digitally encoded material, bad debt, equipment and staffing,
and cable operators wind up with an investment payback of 22 months,
based on an estimated annual cash flow of $1.8 million, she said.
The SeaChange scenario assumes that operators purchase their own
equipment.
Diva's model, as a turnkey provider, includes all capital expenditures.
Diva also asks for a split with operators of all on-demand revenues -- a
tactic not widely embraced by MSOs historically.
Chiddix said Time Warner will likely not pursue a turnkey-VOD model,
such as what Diva offers, because the MSO is simply "not a fan" of the
leased-channel model, where turnkey providers take a cut of a service,
whatever it may be. As a sister company to a major studio, Time Warner
knows its way around the business, the company feels.
"It's not the right business model for us," Chiddix said. "We don't need
anyone to make capital investments for us, or, in the case of VOD, to
book movies for us."
But Bushell said top-rated studio movies of the type that Time Warner is
comfortable with aren't the biggest VOD draws.
In its Lenfest deployment -- where nearly 500 titles are available for
customers to view at any time -- "the top 10 titles only generate about
25 percent of the traffic," Bushell added. |
