Kate Bulkley, Media Analyst.

Fast forward to new-style TV

By Kate Bulkley

The Guardian

Friday November 5, 2004

Video on demand is about to come into its own in the growing battle for viewers

Television has come a long way from the simple broadcasting of a handful of channels. Now the telly can offer hundreds of choices as well as interactive quizzes, games and voting. But TV continues to evolve and the next big thing set to hit European screens could be video on demand (VOD).

VOD allows viewers to call up TV shows, films and sport just by pushing a few buttons on their remote control. The difference from current on-demand offers, such as the pay-per-view movie service on Sky Digital, is that VOD programmes can be ordered and viewed immediately and they have full VCR functionality. It is like having a DVD but without having to go to the video shop.

Despite the benefits to viewers, VOD in Europe has been relatively slow to take off. The exceptions in the UK have been in select areas of London and Hull. Both Kingston Communications in Hull and Video Networks in London have struggled for years to make the economics of VOD work, but advances in technology and the search for compelling new services is now attracting others: UK cable operators NTL and Telewest say they will launch VOD in 2005 and BT is testing a VOD product connected to Freeview digital TV boxes that will also debut next year.

Meanwhile, internet service provider Wanadoo has plans for a VOD service attached to its broadband internet product. "In the old days VOD used to be seen as a panacea for pay-TV operators but that didn't really turn out to be the case. Now it's seen as something that needs to be on the menu to make a compelling service," said David Mercer, principal analyst at Strategy Analytics.

Since its relaunch in June, London's Video Networks (known as Home Choice) has revamped its VOD service with an emphasis on the entire package of broadcast TV, broadband, VOD and, from this week, telephone services.

"We don't play up the VOD capabilities of our service as much as we could because people don't understand it well enough yet," said Roger Lynch, chief executive officer of Video Networks. "But once they get the service they understand it and they use it extensively."

Video Networks puts a lot of VOD content into its subscription packages (these include broadband access, broadcast TV and other services) and subscribers spend about 20% of their total viewing time on VOD. Video Networks has about 30 VOD services, including VOD movies and entire channels that can be watched like a regular broadcast schedule but with the added capabilities of viewers being able to fast-forward and skip to the content people want. The children's VOD channel called Scamp has higher ratings than all of the rival broadcast channels, including Cbeebies, Cartoon Network and Nickelodeon, Mr Lynch says.

The success of Video Networks in attracting VOD usage is one thing, but making VOD pay its way is another. Even Mr Lynch admits that VOD on its own is very difficult to market and make money from. Its importance comes in making a subscription service more compelling.

This is certainly what cable TV operators in the US have discovered. Comcast, the largest US cable operator, told investors last week that it had more than 50 million VOD orders in September in its main Philadelphia cable system. "We think that [VOD] is a way of expanding that appeal to people who might otherwise not subscribe to a digital cable service," said John Alchin, co-chief financial officer for Comcast.

"And what we are finding is that when customers have the VOD functionality on top of the digital service it reduces churn [disconnection]. It just makes it a stickier, more appealing product. And churn is down something like 20% to 30% as a result of VOD functionality."

For NTL and Telewest, finding a new product that will make them stand out is crucial, especially against Sky and its increasingly popular Sky Plus personal video recorder that allows subscribers to record programming and store it on the hard disc in the Sky set-top box. Sky Plus has about 400,000 subscribers and last month introduced a new Sky Plus box with an even bigger hard disc.

For BT the appeal of a VOD service delivered using its phone lines has been underlined by the success of Sky Plus. "There is a shift in how people want to watch TV," said an industry insider familiar with BT's plans. "Subscribers to Sky Plus watch 40% of their TV when it suits them, as opposed to when it is broadcast, so the concept of VOD clearly works. So what if viewers could access all that content from a server, truly on demand, not limited by the size of the hard disc on the Sky Plus box? As long as the economics work, this is a compelling product." BT will probably offer VOD on a pay-per-programme basis, which has some analysts casting a sceptical eye.

According to Screen Digest, only when VOD services are part of a monthly access fee do they make economic sense, something that Comcast and Video Networks seem to have proved. "VOD is more of churn reducer than a revenue enhancer," said Guy Bisson, senior analyst at Screen Digest. Screen predicts that by 2008 VOD revenues in the UK will still be relatively tiny at 64.3m, compared with overall pay TV revenues at a forecast 4.5bn.

VOD seems to be on its way in the UK, but one crucial factor for its success is access to movie content. TV programmes, sports events and adult entertainment are all part of the VOD mix, but top Hollywood movies are still the most important component and Tinseltown will not go out of its way to help VOD take off.

"The studios don't want VOD to challenge the revenues from DVDs because that's the cash cow," said Mr Mercer. "So until the operators can demonstrate that there is a big audience potential and revenue potential they will tend to keep VOD at arm's length."


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