Kate Bulkley, Media Analyst.

On-demand anxiety

By Kate Bulkley

Cable & Satellite Europe

www.informamedia.com

01 November 2004

Is VOD in Europe DOA? The answer is not as easy as ABC, but it's instructive to note that in October, when NTL announced the launch of its long-anticipated VOD service in the first quarter of 2005, there was a collective shrug of shoulders among analysts. NTL is a bit like the boy who cried wolf. We have heard it announce (and then abort) VOD before, and now other methods of delivering VOD are looking increasingly promising.

NTL's service will face big competition: BSkyB's PPV service is on track to generate the bulk of the UK's on-demand revenue until at least 2008 and Sky's promotion of its hard-disk Sky Plus boxes will offer more on-demand alternatives. Sky seems to have no near-term plan to create a hybrid-DSL satellite system to deliver a true VOD experience. Indeed, BSkyB CEO James Murdoch underlined the satellite company's commitment to PPV and its Sky Plus PVR roll-out earlier this year when he asserted that hard disk storage trumped bandwidth every time.

Even if you don't buy the 'storage trumps bandwidth' argument (and I don't), cable also faces competition from another quarter: BT has begun what looks to be very aggressive steps into on-demand TV services. According to research by Screen Digest, cable will only have enabled 43% of its homes for VOD by 2008. The conclusion is that by this time Sky will have corralled most of the on-demand revenues through its PPV services while BT and others who use phone lines to deliver TV will be using VOD as an added value service, likely at quite attractive price points.

In this environment how much of a killer app can cable VOD be? Elsewhere, the picture is even worse: this year broadband subscribers in Europe outstripped digital pay-TV subs for the first time. Without digital capabilities, cable can't launch VOD. There are about 30 telcos and alternative network operators across Europe running IPTV trials or commercialised rollouts (the lion's share with some kind of VOD offering). VOD suppliers such as Seachange (which is working with NTL) say that every MSO in Europe is looking at VOD, but even they admit that delays in rolling out digital systems is hampering cable's VOD aspirations.

On the plus side the price tag for rolling out traditional cable VOD has fallen considerably. According to Seachange, VOD now costs about $30 a subscriber, down from $80 a subscriber just three years ago, not including the cost of the set-top box and the content, of course. But the sobering fact for cable operators is that even if they get VOD up and running it may not actually help their bottom lines very much. In Italy alternative network operator eBiscom has seen its on-demand ARPU fall as its pay-TV subscriber base has grown. EBiscom enjoys TV ARPU of around €353 per year - comparable to Sky Italia - but most of that ARPU is generated by pay-TV, not on-demand services.

It is, however, the incumbent telcos that cable has to worry about most. These are under huge pressure to extend their customer offer in the face of commoditisation of voice services. France Télécom has abandoned its cable TV business in favour of IPTV service Ma Ligne TV. The growth in broadband connections routinely outstrips forecasts.

In the US, basic cable VOD has also had a rough ride with disappointing buy rates, a situation that the biggest US cable operator Comcast has countered with so-called subscription VOD, which has delivered better ARPU and crucially has acted as a churn suppressant. Monthly subscriptions are also behind most of the European IPTV services.

Through all of this an eye must be kept on what the studios want. Sports and adult play an important part in VOD, but movies are still the biggest feature. In the US, download service Movielink recently expanded its potential footprint by inking a deal with Warner Bros' sister company AOL to offer its content to AOL subs at a reduced rate. At the same time, US DVD rental mail-order service Netflix signed a deal with Tivo to deliver movies to subscribers' PVRs. The head of Netflix is trying to thread the needle between Movielink, which downloads to PCs, and on-line retailer Amazon, which wants to get into the DVD mail-order rental business.

As the players shuffle for position, the studios seem increasingly keen to create direct relationships with customers (à la Movielink) and to protect their DVD sales, their most lucrative revenue stream. In October Sony and Disney logged a request with the EU to launch a VOD service in the UK on NTL. Clearly they want to make sure that if cable is going to launch VOD, they are in the driver's seat on how it is delivered and priced.

VOD may avoid being DOA in the EU but cable operators will have their work cut out to keep pace with the on-demand strategies popping up all around them.

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