Video on Demand: Who's holding the ace?
Coming home tired from work: fancy a trip to the video store? Thought not. Ending up having to pay late fees because you did not return the film on time? Thought so. Too tired to stay up and watch the film on pay per view? I know how you feel. Forgot to video the movie or recorded the wrong channel? Sounds familiar.
If you find yourself nodding in recognition, you are not alone. Such experiences go some way to explaining why Frost and Sullivan forecast that as many as 8.6 million homes will be subscribing to Video on Demand (VoD) services by 2006.
Cable providers have been heralding the advent of VoD for nearly a decade now, and market research shows that customers would welcome the increased choice that VoD would offer. So, if VoD is the Holy Grail for pay-TV providers, why is it not here yet?
A long time coming...
For a long time service providers have flirted on the edge of being 'nearly-there' as far as VoD is concerned. Every time a piece of the puzzle has fallen into place the market has caught a scintillating glimpse of what has been until now the VoD mirage.
And yet this time it is different, this time it seems like VoD will not disappear but turn out to be the real-life oasis pay-TV providers have been looking for. For the first time all the pieces of the puzzle are in place -- not only is it technologically possible to offer customers VoD on a large scale, but more importantly, it is economically viable to do so. The trusted Moore's law has once again proven effective in significantly reducing the cost of storage and processing power of the set top boxes that customers require. At the same time, service providers enjoy ever increasing streaming, compression, patching, batching and caching capabilities at every head-end, all contributing to efficiencies which help minimise upfront investment and operational costs.
One final barrier remains. As the CEO of Blockbuster put it: 'The real bottleneck in VoD has nothing to do with the pipe and everything to do with what's flowing through it'. Yes, VoD is now a potentially viable economic value proposition, but who is going to get the biggest piece of the pie? As content providers and access providers eye each other contentiously, the pie remains unbaked and as a result looks unappetising.
Without quality content, VoD services will fail. Over the last few years the studios have seen their revenues from video rentals grow to the point where they almost equal cinema box office takings. Yet for every 40 cents the Studio Moguls rake in through video rentals they are acutely aware of the 60 cents making their way into the coffers of Blockbusters et al, together with the late fees of which the studios don't see a single penny. For Hollywood, digital distribution through VoD is an opportunity to dispense with intermediaries, as their physical network of stores become less important.
The quibble over revenue shares may end
The continuing unbundling of local access loops around the world, coupled with a proliferation of broadband access technologies, has led to bandwidth becoming an increasingly accessible and affordable commodity. As gross margins fall, broadband-based services battle for each other's customers to maximize their volumes. The pressure is on holding on to your subscribers and keeping churn - the rate at which subscribers cancel their services - down. Forrester Research found that cable operators without VoD were facing a churn rate of 5% per month, whilst operators with VoD have a churn rate of less than 1% per month. The service may help attract new subscribers, too!
The need to cut churn has provided enough incentive for some telco providers to break the stalemate. Verizon in the USA, e.g., is suffering increasing churn rates, as cable operators eat into their telephony market share with bundled offers comprising video, voice and broadband access services. Verizon has responded to this assault by planning a VoD offering to help speed-up the take-up of its DSL service. As market pressures increase, Telcos and cable operators are set to clash. The pressure to provide compelling content to fill the pipes is already so intense that companies like Verizon are absorbing the cost of introducing VoD whilst passing on the revenues generated from this service to the content providers.
Others are following suit: in the UK, for instance, British Telecom is rumoured to have initiated a tender process with leading telecom technology companies worldwide (Alcatel, Marconi, Cisco, etc.) to upgrade its entire UK fixed-line network to enable VoD and broadcast capabilities. Hollywood is anticipating favourable deals as telco and cable companies battle for access to the best content.
Players are facing tough strategic issues
Having smelled blood, Hollywood feels strong enough to go it alone. Sony Pictures Digital Entertainment Inc has been toying for a few months with a service called Moviefly.com, enabling movie downloads to the PC. In August Sony decided to join four other major film studios in order to set up a consortium aiming at bringing old and new movie releases to broadband internet users. Hot on the heels of this initiative, Disney and News Corp have announced that they are partnering to establish their own VoD play called Movies.com. This service plans to distribute movies over broadband internet as well as cable. Nevertheless, all these initiatives have to overcome the fact that direct access to the TV-set is still beyond content providers' reach and that the PC just is not -- and most likely never will be -- the device of choice when it comes to viewing movies. In addition, these partnerships need to think hard about crucial support infrastructure such as billing and customer service, areas that content providers like film studios do not have much experience in.
Almost all broadcast network providers have invested large sums into the digital upgrade of their networks and related set-top-box subsidies. Now they find themselves facing three challenges: first, increased competition from alternative service providers that are keen to offer their large libraries of premium content. Second, fickle customers that will not think twice about discontinuing a newly signed subscription for a better deal elsewhere. And third, content providers that demand larger revenue shares from network operators. For operators the question that they need to answer is which strategy will generate most revenue and minimise churn? Either offering high cost exclusive access, leading to a larger revenue share of a smaller pie, or low cost mass-market access to content, leading to a lower content revenue shares of a larger pie?
Whilst network providers decide on their strategies, independent VoD service providers such as Video Networks (HomeChoice) in the UK are patiently waiting for unbundled access to the customer. Moving forward, scale will be crucial, and arguably, these specialist firms should consider repositioning themselves to offer their expertise to service providers looking for a "VoD in a box" solution. This is a model that some firms, such as Yes Television, are fully embracing already.
Telcos and cable companies need to decide which VoD model will prevail. Currently they should focus on:
Defining their strategic objectives: providing VoD as a customer retention mechanism may be a legitimate tactic in regions where the local loop has been unbundled. Elsewhere, exclusivity may help maximise revenues. For this reason, content deals with the studios should reflect local market conditions, language and content preferences and may have to be negotiated on a regional/country by country basis.
Understanding customer behaviour: a model based on 3.5 rentals per month leading to a 24-month break-even (Forrester Research / Sea Change International) may be credible in the States where the pizza and movie culture is prevalent, but this may not be mirrored across Europe. The way in which VoD services can be used to complement and enhance planned or existing offerings will most likely differ by region.
Making the right technology choices: business models will dictate technology choices, architecture design and migration paths. The more customers use these services the more sophisticated they will become, so flexible solutions are key.
Content providers and network operators are playing their cards close to their chests for now. Those that successfully address the key issues will take the pot but the stakes will be high and no one holds all the cards.
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