It’s Spring, and thoughts turn to March Madness and The Cable Show (this week in DC – if you’re going I’ll see you there). And since Cinderella Stories are part of March Madness and VOD seems like it has the status of Cinderella among the various "children" of the MSOs (their business initiatives)…
Rather than extending that metaphor, here’s the point.
VOD usage could and should be a lot bigger than it is. It should be providing much more value to networks, advertisers and consumers. And operators too, especially via higher subscriber satisfaction driving better retention, which will have a beneficial impact on their financials.
Currently, VOD usage is not large. There are billions of annual VOD views, but that’s not a big number when total US TV/video viewing in 2008 was 480 billion person hours (according to my calculations).
Comcast recently reported averaging 325 million VOD views per month. With Comcast’s 17M digital cable subscribers (end of 2008) and their previously reported 30 minutes per view, that’s about 19 minutes of VOD per day per enabled household. The average US TV household watches 8.25 hours a day. 4% average share is great news if you’re a TV network, but this is for the entire Comcast VOD portfolio of 10,000+ movie and TV show titles. Not to single out Comcast, other MSOs have reported similar levels of VOD usage.
My estimates indicate all VOD viewing was 1.2% of total US TV/video consumption in 2008 (for more details see here). Online video was 1.4%.
Despite digital cable/telco VOD being available in 36% of US homes (EOY 2008) and having its first market launches nine years ago, VOD is in second place to online video for ad spend and tied for usage. The consensus among insiders is online video ad spend is approaching $1 billion a year. Ask for a VOD ad spend guess and you get shrugs, but it’s likely in the $100-$150 million a year range.
What’s constraining VOD usage? MSDOS-like program guides aren’t helping, but in the main it’s that most of the current top rated ad-supported TV network shows are missing (for a quantized look – see here).
Why those shows are missing is closely related to why the ad spend is so low for VOD.
Nine years since first coming to market, VOD is still dominated by systems intended for pay per view with little or no ad support. Ad insertion, standard in online video, has yet to be deployed in VOD by any major MSO, even on a single market trial basis. Ads must be "baked in" the programming by networks before it is delivered to the cable operators. Lead times from ad submission to first run can be six weeks or more, and ads cannot be changed in the field. Reporting systems typically cannot say how many times a specific ad was seen.
Presented with this VOD ad environment, advertisers and media buyers are spending the bulk of their new video money and mindshare elsewhere. Networks cannot effectively monetize VOD via advertising, so they don’t post most of their current top rated programming.
The technology to enable ad insertion and better reporting is available now. Ironically, most local cable ads in linear viewing are already digitally ad inserted by MSOs using systems very similar to VOD (often from the same vendors).
Ad insertion is a moderate cost add-on to most existing VOD systems. Certainly there are technical and operational details to be worked out. But to work those out eventually one needs to "take the car out of the garage" (do market scale field testing). Plus, VOD carriage agreements and advertiser / media buyer / network / operator business practices need field testing too.
What’s the payoff for operators in getting a robust portfolio of current top rated ad supported content into VOD?
It starts with more VOD viewing, with rapid increases of 2X, 3X or more being likely. (I’ll go into more detail in a later newsletter but here’s the Cliffs Notes – ad supported content viewing in VOD is dramatically underrepresented compared to linear TV. According to Nielsen data on TV viewing in all US households – ad supported content is about 90% of total viewing, premium pay content is about 5%. In VOD premium pay is around 40%, and ad supported (less kids and music) is around 25%.
With increased viewing comes increased MSO revenues for enabling networks’ VOD ads and/or sales of operators’ own ad inventory. But that’s not the biggest payoff.
The big payoff is better subscriber retention and adoption metrics, something that can have a notable beneficial impact on cable operator bottom lines (or telcos’, they can do better on VOD advertising too). Video services still provide well over half of revenues for the major cable operators.
Parks Associates reported in October 2008 – the more digital cable subscribers use VOD, the more satisfied they are. In the press release for the survey report, Kurt Scherf, VP and principal analyst at Parks, says… “Subscribers who actively use primetime VoD services show significantly higher satisfaction levels. Primetime VoD offerings are potential ARPU generators and trigger churn toward the provider, a reversal of current market trends.”
And yet, enabling network and advertiser friendly ad supported VOD appears to be getting short shrift from MSOs.
There’s a very full plate at cable operators? Stipulated.
The economy is less than optimal? Check.
Nonetheless, cable operators are devoting significant resources to Canoe Ventures to go to market with addressable linear advertising and interactivity (as well they should). But so far there’s been almost no mention of VOD by Canoe (understandable, they have a really full plate there).
VOD offers a go-to-market path for addressable and interactive advertising. Every VOD view is an individual session driven by robust computers (the in-plant VOD equipment). Set-top box level addressability is intrinsic to VOD.
Comcast, Time Warner and Cox are now working on initiatives to bring more TV content to broadband (Comcast says it will launch "On-Demand Online" this year). Another arena worthy of pursuit. But what of the on-demand platform in place now on digital cable for which "authentication" and "entitlement" is built in?
Returning to the metaphor… VOD could turn out to be a prosperous advertising and subscriber retention Cinderella Story for the MSOs. But first they need to invest the moderate effort and money to get ready VOD ready for the Ball. Unless there is a Fairy Godmother for cable operators who’s willing to wave a magic wand and make it happen.