Kate Bulkley, Media Analyst.

Loyalty demands more choice

By Kate Bulkley

Royal Television Society

FFebruary, 2005

Video on demand has been ‘the future’ for many years, but Kate Bulkley discovers it is finally taking off – as an important way for service providers to differentiate themselves from their competitors.

In Samuel Beckett’s Waiting For Godot, the eponymous hero never actually arrives. Waiting for VoD (video on demand) in the UK has seemed like it might reach the same conclusion, but the breakthrough TV technology is finally set to begin proving the sceptics wrong.

Not only have the two UK cable companies launched video-on-demand services in selected areas and announced national roll-outs, but their new service is being furnished with movie content via a joint venture, FilmFlex, part owned by Hollywood studios Sony and Disney.

“2005 is the year when video on demand starts to come to the fore as a compelling reason for UK users to switch to digital TV and specifically to cable TV,” insists Philip Snalune, Telewest’s director of product management and marketing.

For cable operators the launch of VoD services is timely because even as both NTL and Telewest begin to offer their subscribers the ability to order movies and other programming at the touch of a button, plans for similar services are being finalised by BT.

Meanwhile, Video Networks, operator of the Home Choice VoD service in parts of London, will double the number of homes it reaches this year to 2.4 million. Not to be outdone, some of the largest internet service providers in the UK are also jumping on the VoD bandwagon.

Both Wanadoo (formerly known as Freeserve) and AOL UK will add increasing amounts of video content to their broadband services this year. And the pioneer of VoD in the UK, Kingston Communications, is also intent on rolling out a nationally available “content rich” broadband service this year.

“As a competitive weapon VoD is awesome,” claims Jim Kelso, head of marketing and broadband for Seachange, a California-based VoD technology supplier working with both NTL and Telewest.

“Everyone we have sold VoD to has made good money with it. As the cost of implementing it has fallen substantially over the last three years it pays for itself really fast – in less than six months.”

Of course, this assumes that you not only have attractive content, but that it’s also marketed in the right way and at the right price. Another question mark over the success of VoD in the UK is competition from DVD sales.

“The single thing that is different in the UK is that we have a more competitive digital market than the US and a more aggressive retailing of DVDs than the US,” opines Andy Birchall, chairman of the On Demand Group, which has been supplying so-called near on-demand movie services to cable through its Front Row pay-per-view service for the past seven years and is now a partner in FilmFlex.

FilmFlex is believed to be the first time Hollywood studios have been closely involved in making the retailing of VoD a success.

“Having a couple of studios involved at this point is very important to the cable operators when launching a product as adventurous as VoD,” says an executive familiar with the studios’ strategy.

Adds David Thatcher, managing director for sales and marketing at NTL: “FilmFlex really changes this model because the studios are owners, which gives then the incentive to think in a more partnership-oriented way.

“A lot of the old-style, traditional movie content deals were about minimum guarantees, where studios gave you product and the operator guaranteed a certain amount of revenue regardless of how many ‘buys’ we got from our subscribers.”

What you want, when you want

VoD allows viewers to watch content at any time of day, and programmes can be paused and rewound, offering a comparable experience to BSkyB’s Sky+ personal video recorder (PVR) service.

However, VoD proponents say that VoD provides a much fuller viewing experience than PVR because the PVR can only record what is available on the broadcast TV service schedule, while VoD can have thousands of titles available at any one time.

For example, in addition to hundreds of film titles, NTL’s new VoD service – launched last month to NTL’s 80,000 subscribers in Glasgow – also includes children’s programmes, music videos, adult entertainment and up to 40 hours of BBC programming a week available following the original broadcast.

After a recent focus on selling high-speed internet connections to its subscribers, both cable companies are now dedicating big money to VoD.

Telewest turned on 2,100 subscribers in its Bristol system to VoD last month; the company will spend about £20m to roll out VoD and PVRs to all 1.1 million of its digital cable subscribers by the end of this year.

Meanwhile, NTL says it is spending between £30m and £40m to provide VoD to its 1.3 million digital cable customers over the next two years.

Although there is a precedent in the US that says VoD can help lift overall revenues for cable operators, the service is primarily seen as a customer retention tool and as a differentiator against satellite-delivered pay-TV services.

That said, the biggest US cable operator, Comcast, counted 50 million VoD transactions in one month late last year on its Philadelphia cable system.

Comcast has found that the VoD service not only expands the appeal of cable pay-TV against satellite pay-TV, but that it also helps to reduce cable customer disconnections, or churn, by between 20% and 30%.

Guy Bisson, senior analyst at Screen Digest in the UK agrees: he 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 is more of a churn reducer than a revenue enhancer,” says Bisson.

Competitive weapon

In the UK, the cable companies plan to use VoD as a competitive weapon, particularly against BSkyB. But Sky already has plans to counteract the threat from VoD by ramping up its Sky+ service.

Says David Mercer, an analyst at Strategy Analytics in Cambridge: “Sky will extend its PVR offer by downloading select content to the Sky+ boxes so that, for example, a range of movies could be available at the click of a button, giving their subscribers virtual VoD. Of course, it will be more limited than cable VoD but it will give Sky some sort of counter product.”

Although it is assumed that NTL and Telewest will merge, they continue to have slightly different ideas about new services. For example, while Telewest sees VoD as just one part of a dual strategy that also includes plans to roll out cable PVRs, NTL is less keen. “While we admire Sky+ it is really just a step forward from a VCR,” opines Thatcher. “VoD is what really differentiates us from our competitors. If you are in a cable area you are more likely to choose cable over satellite already, but we know from our research that VoD gives viewers a real, new reason to choose cable ahead of satellite or Freeview. VoD also gives our current customers a reason for sticking around.”

VoD on cable in the UK is brand new, but VoD delivered down telephone lines using DSL (digital subscriber line) technology is not.

In fact, Kingston Communications in Hull pioneered VoD on its phone lines back in 1999. The service, known as Kingston Interactive Television or KIT, has survived a series of financial problems but its current 5,000 users have been a valuable test bed for VoD.

Late last year Kingston decided to buy a national ISP called Eclipse Networking. Emboldened by the falling cost to use BT’s phone lines required by Ofcom last year, Kingston plans to roll out a “content-rich broadband service” across the UK over the next few months.

“We understand the economics of delivering VoD and it’s not an easy market to be in,” says Andrew Fawcett, head of products and services at Kingston Communications. “It’s going to be an interesting year in this area. We are leveraging our experience in Hull, but it’s safe to say that a DSL-only delivery of TV is unlikely to make commercial sense.”

According to Fawcett, delivering VoD over phone lines only works as an economic model if it is bundled with a fuller TV service like Freeview or Sky. “VoD is not a killer application by itself,” he reckons.

BT seems to feel the same way and is heavily rumoured to be close to announcing a tie up with Freeview set-top box manufacturers to add a broadband telephone connection to their next generation of set-top boxes.

Although BT has been short on details regarding its VoD plans, late last year the phone giant announced the creation of a new division called “BT Entertainment” to develop, license and deliver on-demand music, gaming, TV programmes and movies.

Pierre Danon, who resigned as chief executive of BT Retail last November, said then that the launch of a dedicated entertainment services division was a “natural next step” for BT. And just before he left, Danon hired Dan Marks, the president of Universal Studios Networks UK (part of NBC Uni-versal) to oversee the national roll-out of its mooted VoD service.

Marks arrived at BT in early February. He is keeping his head below the parapet until he is established in his new job.

However, in the intervening months since Mark’s appointment it has become clear that IT services like those delivered by EDS and IBM, rather than retail services such as broadband delivered to home consumers, are likely to be the main thrust of BT’s strategy.

“You can only judge the threat from BT based on what they do rather than what they say, and I wait and I wait and I wait some more,” says Birchall.

“When I think about what some other telcos are doing in continental Europe with VoD I am not complacent about the competition. We are behaving as if competition is imminent in the UK, but whether it is or not is another matter.”

BT’s engaged signal could last five years

Unlike cable, BT and other newer VoD entrants are building up subscribers from a standing start, while cable already has a pay-TV customer base. There are also some technical barriers to delivering more than select VoD services on phone lines because of capacity issues.

These “bandwidth constraint” problems can be solved if the phone lines are upgraded but this costs money.

“BT’s network is not capable of doing a full TV service now,” claims Roger Lynch, CEO of Video Networks. “BT is building a network that could do it, which it calls its 21st century network, but it’s five years away.”

Video Networks also uses BT phone lines to deliver its Home Choice service but in recent years VNL has spent millions of pounds adding VoD equipment and dedicated fibre to BT’s basic infrastructure.

The investment seems to be paying off, albeit slowly, with Home Choice counting 15,000 subscribers in January, up from 3,500 in May of last year.

“I have never thought of VoD as a killer, standalone application,” says Lynch. “That was one of the problems with VNL’s original business model. VoD is a great differentiator but it needs to be part of an integrated package of TV and other services.

“With Home Choice we try to integrate VoD with regular broadcast TV and we blur the lines on purpose. Is it broadcast or are you watching a recorded EastEnders? It doesn’t matter to the viewer. It’s about what do you want to watch, not how it is being delivered to you.”

“The huge distinction about the UK is that we have the opportunity to be the largest deployment of VoD in the world on a per capita basis because of the large percentage of digital TV homes here,” adds Birchall.

“There are good reasons why this should happen and they have to do with the success of digital in this country with Sky and cable and Freeview. The UK is a highly competitive and vibrant market.”

Round-up of operators

Video Networks HomeChoice

Number of subscribers: Available to 1.4 million homes across London and Stevenage; plans call for the footprint to double to 2.4 million by June 2005; and eventually to 8-10 million across the UK by 2010. Has 15,000 subscribers.

Offer: 10,000 hours of on-demand TV programming and 100 on-demand movies a month plus terrestrial broadcast and niche channels, including Nickelodeon, Disney Treasures and Cartoon Network and numerous news and music channels. Sky Movies and Sky Sports also available.

Home Choice’s own on-demand channel, C-1, is an entertainment service whose programmes range from Friends, Futurama and King of the Hill to The West Wing, What Not to Wear and Wife Swap. It regularly achieves a higher viewing share among VNL customers than all terrestrials except BBC1.

Bafta-winning interactive music service V:MX allows viewers to create their own music channel, choosing from 3,000 music videos. They can also purchase and download music. VNL offers its customers triple-play service: on-demand and broadcast TV, telephone calls and broadband internet at 1Mbps, 2Mpbs or 4Mpbs with 100Mb of web space and up to 12 email addresses.

Cost: From £27.50 to £40.00 a month depending on broadband speed. On-demand movies cost £2 for classic titles, rising to £3.50 for current releases.

Telewest On Demand

Number of subscribers: Launched to 2,100 Bristol subscribers in January; Roll-out across 1.1 million digital cable customers by the end of 2005.

Offer: FilmFlex provides hundreds of films, as with the NTL service (see below). Telewest plans to add more content as the VoD service is rolled out.

Cost: £2.00 to £3.50 per movie.

NTL On Demand

Number of subscribers: launched to 80,000 NTL digital TV customers in Glasgow in January followed by roll-out to 1.4 million NTL DTV customers across UK over two years.

Offer: Hundreds of hours of additional programming with DVD-style features. Mixture of free and paid-for content. ‘Pick of the Week’ includes programmes from previous seven days, including EastEnders, Holby City, Casualty, Top Gear, Natural World, Blue Peter and Antiques Roadshow. FilmFlex provides hundreds of movies from Sony and Disney stables plus others. February’s TV premieres include Spiderman 2 and King Arthur.

Kids shows feature over 30 hours of advertiser-free programming. Suppliers include Nickelodeon, BBC Worldwide, Jetix and Entertainment Rights.

Music boasts over 35 hours of music videos, concerts and documentaries. Suppliers include Warner Music, Planet Rock and VPL (all independent labels).

Adult fare available between 10pm and 5.30am.

Cost: Prices range from 20p to 50p for kids’ shows, £2.00-£3.50 for movies, 20p-£1.50 for music and £7 a month for adult programmes.

Kingston Communications: Kingston Interactive Television

Number of subscribers: Has 5,000 in Kingston-upon-Hull area (to telephone and TV package, including VoD)

Offer: Fourteen-month VoD trial run in conjunction with Blockbuster Video ended in December. The VoD service currently offers local BBC news and entertainment programming.

Launched in 1999, Kingston Interactive Television reached operating breakeven in October 2003 following a radical restructuring. Kingston Communications purchased national ISP Eclipse Networking in September 2004. Eclipse counts 40,000 customers and Kingston plans to use it to extend its broadband offer nationally.

Together with Kingston’s own broadband customers in Hull the company now has 55,000 broadband connections.

Currently evaluating options for delivering added-value services to wider customer base.


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