VOD – The MSOs’ Less Favorite Child? (When It Could Be the Cinderella Story)


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.

DVRs Are An Involuntary Carriage Agreement


As consumers move video consumption to new digital platforms, carriage agreements between content providers and platform operators are of key importance.  Cable networks’ agreements with multi-channel operators (cable, satellite and telcos) limit their ability to offer their full portfolio of shows online.  Many of the proposed "Over The Top" initiatives for bringing video content via the Net to TVs will likely need their own carriage agreements or collide with existing ones. Issues of carriage agreements loom large for VOD and mobile too. 

However, there is a digital video on-demand platform where the carriage rights landscape is friction-free.  In fact, for broadcast networks, TV stations and cable networks it’s unavoidable.  It’s a TV-connected platform in 30% of households – my modelling says it will be in 50% by the end of 2011 (see the previous newsletter Back To The Future (Estimates) – A Brief Review of Broadband Video, DVR and VOD Metrics for more).  It’s…

DVRs – The Involuntary Carriage Agreement

TV stations (and therefore broadcast networks) are on all DVRs regardless if they’re seen over the air or in operator-connected households under must-carry or retransmission agreements.  Cable networks are on all operator supplied DVRs and many of the standalone TiVo DVRs (despite defining the category, standalone TiVos now are only about 4% of US DVRs, and that continues to decline slowly).

Not only is DVR carriage involuntary, it’s revenue negative for ad supported TV programmers. Unless you make the case DVR timeshifting increases viewing and therefore ad impressions (even accounting for ad skipping). My look at publicly released ratings data says you can probably make this case for some individual shows, but not for overall network viewing.

What are networks and stations to do?

While disabling ad skipping has become the norm online and will probably be the same in VOD, over ten years since the first DVR hit American homes (Replay TV in January 1999) that horse seems to be very far out of the barn.

Legal remedies?  The Betamax VCR case (Supreme Court ruling in 1984) is regarded as putting consumer controlled ad skipping on consumer owned DVRs out of reach via "fair use."  I’m unaware of any legal attempts to assert "fair use" does not apply to consumer control of operator owned DVRs.  For that matter, the ruling by the US Court of Appeals on the Cablevision RS-DVR case ("network DVR" using VOD technology) says that’s "fair use" too.  We’re still waiting on the Supreme Court to weigh in.

Regulatory remedies?  It’s not realistic to anticipate the FCC or Congress would enact regulations to allow networks for force operators to block DVR ad skipping.  Imagine the reaction… take the AIG bonus outrage and multiply by five (ten?).

Operators acting individually under pressure from networks?  If one multi-channel TV operator steps out of line and blocks ad skipping on their DVRs, in every US market there are two other operators (and in some cases three) who will proclaim from every marketing rooftop that they don’t.

Move content to other platforms (including online or VOD) where ad skipping can be controlled? DVRs challenge even that.  Via robust choice and control, plus the ability to avoid irrelevant advertising, DVRs bind viewers closer to linear TV delivery making it more difficult to move them away.  It’s as if the newspapers’ digital challenge was magnified by a magic machine they could not control – you feed it a paper newspaper, out comes a customized paper edition with the content sorted the way you want and the ads cut out.

Could we see high quality original TV content completely depart “free” broadcast TV and move to pay TV models?  That shift is already underway and has been going on for decades (although slowly). DVRs could well accelerate that.

There was a time when TV was three broadcast network affiliate stations and a few independents. TV was free and over-the-air. Then came cable (later small dish satellite and then telco IPTV).

HBO and Showtime launched in the mid-70′s, and although the bulk of their initial content was movies and sports, they offered a few original TV series even then.  Over time they’ve increased their original content offerings significantly (it’s been 10 years since The Sopranos launched).  Today, premium channels are regarded by many subscribers primarily as sources of original series.

Ad-supported cable networks are another pay model.  While they do carry advertising, for the top rated cable nets their carriage fee revenues typically are as large as their advertising revenues (or more especially for the outlier ESPN).  Those carriage fee revenues are coming from cable subscriber monthly fees.  In recent years we’ve seen an increasing number of top rated original series on cable networks such as USA, F/X and TNT, subsidized by this hybrid ad/pay model.

(At least for NBC Universal, the shift in revenues to cable has been pronounced. At last week’s McGraw-Hill Media Summit, NBCU CEO Jeff Zucker said (reported at paidcontent.org) "About 60 percent of our operating profit comes from cable. We’re mostly a cable company now, you wouldn’t know it by the name, but it’s true."  Good news too for digital video models, regarding his comment of last year on trading analog dollars for digital pennies – "We’re at digital dimes now. We’ve made progress." Next stop – digital two bits?)

Even broadcast television is moving towards the hybrid ad/pay model as stations are increasingly asking operators for and getting carriage fees, moving from must-carry to retransmission agreements.  This new revenue source will roll up to broadcast networks too via their own O&O stations and evolution in affiliate agreements.

There is another option.  Reinforce and strengthen the TV ad model via DVRs enabled as enhanced engagement ad delivery platforms (DVRs are computers – dismantle your operator owned DVR and you’ll see).  As I discussed in my previous newsletter (Embrace The Click – Taking Advanced Video/TV Ads Beyond CPM), major TV brands are paying significant cost per click rates for the targeted trackable advertising that is keyword search.

There are two important constituencies that want the TV ad model to continue.  Advertisers vote with their dollars that TV is an advertising platform that is critical to them – around $70 billion in annual ad spend (subject to economic excursions).  Consumers understand that advertising helps pay for the TV shows they enjoy.  And while many of them are more than willing to use DVRs to skip a lot of the TV ads sent their way, they also show willingness, via their behavior in many forms of media, to view and engage with advertising that is relevant to them

If networks, operators, advertisers and their agencies work cooperatively to enable capable enhanced DVR advertising (as well as working on other digital video platforms), they all should benefit.  As well as forming a better relationship with and providing a better experience for their shared "ultimate customer" – consumers.

Embrace The Click – Taking Advanced Video/TV Ads Beyond CPM


This past week I moderated a panel at ITVT’s TV of Tomorrow Show. The panel was on broadband video advertising and featured an excellent set of panelists (thanks to them for participating):

(In my opinion, the TV of Tomorrow Show is the premier conference focused on advanced and interactive TV/video. The panels are excellent, as is the quality of the attendees.)

On our panel, one of the top of mind topics was ad metrics and currencies.  The panel discussed moving away from CPMs towards engagement currencies (for example time spent), those better reflecting the ad capabilities digital tech affords.

Viewers using new video platforms are not tolerant of the 32 units per hour or more in linear TV (DVR owners certainly are not).  Combine fewer units with CPMs linked to TV (even with a premium) and it will be difficult for programming on new platforms to match, let alone surpass, today’s revenue production of TV on a per episode viewed or per hour basis.

On other panels, the desire to move towards engagement pricing was reinforced.  But, several content providers voiced a strong aversion to using clicks as currency – clicks seen as not being a true indicator of engagement and not reflective of the branding power of new video platforms. As I heard this, informed both by my time in advanced video/TV and the past seven (coincident) years as Chief Keyword Marketing Officer of Cat Faeries – my significant other Gail’s cat product retail site (note cross-enterprise synergistic brand integration here) – I kept thinking…

"Embrace The Click…"

I do believe engagement currencies for advanced video ads should be brought forward.  But so far, we have no definitions or standards for engagement online.  In fact, there’s been no agreement on defining engagement for other media including linear TV (the Advertising Research Foundation tried in 2005/2006 to come up with a pan-media definition and effectively didn’t, they restarted the initiative in 2008). Trials, tests, and pair-wise deals should and will be done, but it seems likely there’s not going be any broadly accepted engagement currencies online or on TV coming soon.

There’s an expression in retail – "sell what you’ve got on the shelf." And what’s on the ad currency shelf right now is CPM (in both Internet and TV) and cost per click (on the Net).  (For the moment we’ll postpone discussion of other types of "CPX" such as per conversion or acquired customer.)

Towards evidence clicks can be a viable source of ad revenue, a company called Google has done pretty well with cost per click advertising on Web pages (seems their market cap is larger than CBS, Viacom, Disney, News Corporation and Time Warner combined).

Google is making the bulk of its large profits from clicks and some of the money is coming from major brands that do a lot of TV advertising.  One would think that video and TV content providers would like to have some of that "Google money."

Comparing TV CPMs to online click prices… let’s say major brand TV advertisers are paying about 3.5 cents per impression in top rated primetime broadcast shows for 18-49s (the most widely used currency), assuming a nominal CPM of $35.  Online today (using data from Google AdWords Traffic Estimator tool) major brand TV advertisers are paying 100X, 200X, even 400X that 3.5 cents for a click through to their web sites (regardless of age cohort as well).

Here are some examples:


Google AdWords Traffic Estimator Estimated Average Cost Per Click to Appear in Positions 1-3 (3/13/09)

Brands With Ads in Positions 1-3 on Google Search (3/13/09)


$3.63 – $4.61

GM, Jeep, Nissan


$8.66 – $11.68

Fidelity, T. Rowe Price, Scottrade

car insurance

$11.86 – $16.73

Progressive, AAA, Geico

(How accurate is the Traffic Estimator on cost per click for top positions? While feline marketing is not the same as automotive, financial or insurance marketing, I find the Estimator is on average getting it correct on CPC range for the keywords I’m buying.  Also, on Google, position is determined by not only bid price but ad Quality Score, and the Estimator cannot know in advance what that will be.)

Keep in mind, I’m not advocating video advertising moves exclusively to placement by keyword algorithms sold on a per click basis – the human-based sales process should not go away – branding will continue to be important and valuable.  And there are real world issues to be established for advanced video clicks such as typical viewer click rates and advertiser perceived value.

Plus, the people running today’s keyword efforts for major brands do start with an unfair advantage relative to TV – automatic hyper-targeting provided by the user’s search query.  But past that it’s a challenging landscape.  The ad canvas is all of 130 text characters and it’s presented on a web page with up to 10 similar units from direct competitors.

Compare that to an advanced video advertising unit available online – in this case units supported by the full episode video players of ABC.com or NBC.com.  The canvas is a 1000 x 550 pixel Flash ad.  It’s not only the only ad unit on screen it’s fundamentally the only thing on screen. It’s held on screen for a fixed time (in most cases 30 seconds), although viewers can still ad avoid the old-fashioned ways – doing something else (like checking email) and/or hitting mute.  Viewers can click within the ad to interact with it, or they can click through to the sponsor’s web site.  Sounds like a good environment to lift branding metrics while generating clicks (or engagement for that matter).

Of course, TV platforms are going to take a while to have the capabilities of today’s online video players. And engagement may have been defined and standardized by then.  But in the initial days of EBIF and tru2way based ads, clicks will probably still be the only broadly accepted option to CPMs.

What’s the value of a "TV click" or a click within an online video player Flash ad?  The market will determine those just as it does for every other form of advertising – but markets aren’t established in the lab, they’re established in the field, as are the rates at which users click.  Google saw the market take its revenue per click from their initial across the board 5 cents (if memory serves) up to today’s double digit dollars for some keywords.

Combine advanced video/TV ad units with capable targeting plus granular reporting and we might find a click-based revenue model that breaks out of the CPM box while providing better ROI for all (content providers, advertisers and even viewers).  Between 3.5 cents per impression and up to $17 per click, there’s a lot of room to experiment.