Dec 1st, 2002

When you're talking about video on demand (VOD), you really have to start with porn.

That's big boobs, foot fetishes, graphic sex, erotic fantasies, gay programming and Pamela Anderson, to name just a few. Yes, folks, when it comes to VOD, there are three things that are really work - porn, porn and porn.

OK, that might be a little bit unfair to all the other VOD programming available, especially Hollywood blockbuster films. But, when all is said and done, VOD is a one-to-one technology and that's good for the viewer because he (note the emphasis on the male pronoun because porn buyers are mostly men) can get what he wants when he wants it.

Porn is also great news for the VOD operators. In America (where the VOD market is bigger than anywhere else in the world at 3 million users), figures from cable companies Charter and Comcast reveal that churn rates fall by as much as one third when VOD is added to the customer options.

Plus, buy rates for VOD porn are typically much higher than for first-run Hollywood movies. According to Susan Elkington who runs Arrivo On Demand (part of Chello Media), a non-porn customer will make a VOD purchase only once every 10 weeks on average. But, she says, the porn guys (and some girls) buy erotic programming up to 2.4 times every single month.

Better still is that porn gives the VOD operator a higher revenue split than is possible from the movie studios. The latter drive much harder bargains to keep more of the money.

So if VOD is so good, why aren't all the operators rolling out the service as fast as they can say "sex sells"? Well, firstly, the technology is (still) expensive because the cost of providing discreet video signals on demand 24/7 is more complicated than simple broadcasting. Five years ago, on Time Warner's full-service cable network in Florida, it cost (including network access and per video stream costs) about $2,000 to deliver VOD to a single home. Today it costs about $200 per stream and this is likely to fall even further, according to Concurrent Computer Corporation, a firm that makes VOD technology.

VOD on a typical DSL delivery system today costs about $600 per stream, but these costs are also coming down as the price of video servers, set-top boxes and network costs fall.

As already mentioned, Hollywood studios hold operators hostage on revenue splits, usually demanding 50% or more of the VOD price. And in Europe, for historical reasons, the VOD windows are further away from theatrical release than in the US, making VOD product less attractive.

In the UK, the Kingston system in Hull invested in VOD technology a few years ago, buying a system that was capable of serving up to 30,000 subscribers. However, 12 months ago Kingston stopped rolling out VOD at the 8,000 subscriber mark because the buy rates were too small. Only one third of the subscribers had even used it by summer 2002.

Kingston had some 800 hours of VOD programming but no porn. Graham Warren, network development director at Kingston Communications, said: "The platform doesn't make money. We're getting £20 a month average revenue per user (ARPU) and the money we're getting back from VOD is not enough."

But porn may come to Kingston's rescue. Kingston launched its first porn VOD service (in association with Playboy) at the end of November 2002.

"Every single VOD operator is talking to us," says Jeremy Yates, deputy managing director of Playboy TV UK. "They all recognise that there is money to be made out of adult programming and the best way to start is with the brand that everyone is comfortable with and that is Playboy TV."

Yates says that he has had extensive conversations with both UK cable operators ntl and Telewest about VOD and with London VOD operator HomeChoice. One fillip that the UK VOD industry is hoping for is much lighter touch regulation of VOD from UK regulators. The UK government's recently-released Communications Bill (which must be passed by Parliament) outlines a self-regulatory regime for VOD, which, importantly, would allow operators to ignore broadcasting watersheds as long as programming trailers and programming is PIN (personal identification number) protected.

The other big problem for VOD is money. Not only does launching VOD have a cost, but at the moment, it's discretionary money that right now operators in the UK and Europe are having a hard time putting their hands on. HomeChoice, which peaked at 14,000 subscribers a year ago, is now down to about 10,000, and is in the middle of trying to raise more venture capital. The extra cash is needed to see the DSL service through until it can get a better carriage deal with BT for the use of their telephone lines.

The cable operators are not much better off. Telewest, ntl and UPC all have broader financial re-structuring issues to tackle. As one VOD consultant quipped: "The cable companies don't have the price of a bus ticket, much less the money to roll out VOD."

That said, the big US VOD technology providers are eyeing Europe as the next big thing. In November, technology company SeaChange pledged £10 million to the U.K. ON Demand Group (operator of the Front Row pay per view service on Telewest and ntl) to help roll out VOD service in Europe.