Despite repeated false dawns it can now be confidently said that Video on Demand (VOD) is arriving and that over the next few years it will become a significant component of the service bundle that cable operators will offer.

The number of North American cable homes that are "VOD-capable" is projected to rise to 4.8 million by year-end, up from approximately a million in 2001 (See Chart). Allied Business Intelligence (ABI) defines VOD-capable households as those homes that are passed by and subscribe to cable systems that offer VOD. They also have the capability to receive VOD with respect to an installed digital set-top box. Note that actually purchasing a selection through VOD is not a requirement to be counted in this category.

Flavors of VOD 

Traditionally, the term VOD has been equated with movies on demand (MOD). However, with the surging interest in subscription video on demand (SVOD), the term VOD has to be broadened. With SVOD consumers have the capability to call up, for example, their favorite episode of the Sopranos. Hence consumers have the flexibility to adjust their viewing patterns and access the archive of cable programming.

While MOD will remain at the core of a VOD offering, it is important to recognize that SVOD potentially offers operators an equally valuable tool for increasing revenue per subscriber and reducing customer churn. On a conceptual level, SVOD is particularly appealing because cable operators can now better predict monthly incremental revenue.

Cox is even testing what it dubs "free on demand," where it provides some level of local programming and sports content free to subscribers. This helps subscribers sample the convenience that on-demand services can offer and provides further differentiation from DBS offerings.

In the larger picture, the trend is toward everything on demand (EOD), where a range of content (movies, television shows, sports, local programming, instructional content, etc.) is available at the convenience of the subscriber.

US MSOs' Approach To VOD 

In general, most cable operators see VOD as a critical piece of a bundle of services that they are trying to provide in the longer term. While the current emphasis is on migrating subscribers to the digital service tier and increasing data penetration (cable modem service), operators have identified VOD to be of medium-term importance in increasing revenue per subscriber. VOD offerings represent an incremental revenue stream, and commercial rollouts have shown that it has been effective in reducing customer churn.

One of the most attractive aspects of VOD is that once the infrastructure has been upgraded, the cost of deploying VOD equipment is very small relative to overall capital expenditure budgets. This is why most industry observers believe that even though cable operators are tightening capex budgets, VOD's share will continue to grow for the next three to four years.

The major cable operators are not approaching VOD uniformly. Some have accumulated extensive knowledge of VOD and are gradually proceeding with deployments on a system-by-system basis. Other cable operators have lagged in VOD trials and will take some time before progressing to real commercial deployments.

The three most aggressive cable operators in terms of VOD deployment are Charter, Comcast and Time Warner Cable, with an average of 12 to 14 markets deployed as of Q1 2002. Time Warner Cable in particular has access to content from within the larger AOL / Time Warner family and is well poised. Charter has always been a leader in the VOD realm, reflecting shareholder Paul Allen's view of the "wired world."

What Are The Issues/Obstacles? 

In general, it is clear that the rollout of VOD will be on a system-by-system basis. In an environment in which cable operators are having their balance sheets and debt leverage scrutinized, they are seeking to be prudent with capital expenditures.

Obstacles and Issues that will negatively impact the deployment of VOD include:

• Confusion over VOD and SVOD - At one time, the term VOD essentially implied movies on demand. That is clearly not the case with the prospect of traditional television content on demand. The surging interest in SVOD has to some extent clouded the business issues, since business models will need to be reevaluated as well as technical requirements (equipment capacity and peak bandwidth).
• Sufficient content - Although VOD movie libraries are now far larger, they are still a far cry from what is available at movie rental stores. More work needs to be done to assemble a broader content catalog. In particular, Hollywood studios are loath to make available new rental releases for VOD at the same time as Blockbuster and Hollywood Entertainment.
• Digital penetration - VOD requires subscribers have digital set-top boxes, and the penetration levels need to increase much further.
• Thin vs. thick clients - Even though a VOD deployment using thin client digital set-top boxes is possible, it requires that additional work be done at the media server end. Cable operators need to tweak equipment further to ensure that thin client digital set-top boxes will not pose a problem in large-scale deployments.
• Cost of VOD Equipment - Even though the cost of VOD equipment has fallen, cable operators know that further cost declines are inevitable. Declining costs mean that payback periods are reduced.

Does Pay-Per-View Have A Future? 

There will always be a pay-per-view (PPV) market for one-time events or events where there is a clear benefit to seeing it in its first release window. This would include events such as boxing matches, wrestling events, music concerts, etc. While it is true that VOD will be the primary vehicle for movies and other non-time-sensitive content, time-shifting boxing or wrestling events will have limited appeal.

In fact, recently ESPN announced a foray into offering sporting events "on demand," but it is unclear what type of demand there will be for such a service.

Cable Vs. Satellite 

Cable has a built-in advantage versus satellite when it comes to VOD, because it can accommodate return-path or upstream signals, which are crucial to real-time interactivity. Cable operators are keen to use VOD to reduce churn of customers due to DBS competition by offering a service that the satellite infrastructure cannot truly replicate.

DBS providers are rolling out pseudo version of VOD dubbed near VOD (NVOD), which typically requires a satellite receiver with a hard disk so that it can store more content locally.

VOD's Future Looks Bright 

Unlike past VOD rollouts, present VOD is riding the wave of a winning service - digital cable. At the end of 2001, there were more than 15 million digital cable subscribers in the United States. This represents more than 20% of all cable customers, and this figure has been reached in less than three years. The numbers speak for themselves and offer an immediate base of potential VOD customers.

Allied Business Intelligence Inc is an Oyster Bay, NY-based technology research think tank that offers expert advice and research on wireless, broadband, and emerging technologies. Details can be found at www.alliedworld.com or by calling 516-624-3113.