Supply And [video On] Demand

As video-on-demand brings instant gratification to a growing number of home consumers, questions remain about the business model for a service in which most content is free.

VOD via digital cable or the Internet allows consumers to access everything from music videos to full-length movies with extras with just a click of a remote or mouse.

"Content and consumer awareness are finally starting to jell together" in the VOD arena, says Curt Marvis, CEO of Internet VOD service CinemaNow. "This is accelerating fairly quickly."

The extent to which VOD will replace DVD "is something we all need to be thinking about," says Peter Worsley, managing director of licensing, worldwide for Eagle Vision, a division of Eagle Rock Entertainment.

Because most VOD content is delivered free to Internet users or digital cable subscribers, monetizing the traffic is largely reliant on advertising revenue. However, for VOD providers, it is essential that the ads do not encroach on the viewing experience.

VOD distributors and content providers are grappling with a number of other issues, including release windows, which place VOD, like pay-per-view, after DVD street dates.

"VOD will be a very important landscape in the future," says Steve Beeks, president of Lions Gate Entertainment. "We want to make sure that it happens in the right sequence."

Other challenges on the distributor side include obtaining the rights to offer content and, with Internet VOD, convincing content providers that their material is protected from piracy.

"Even if you have the most motivated content partners, it takes time to clear rights with video," says Rob Bennett, senior director of MSN Entertainment. "There's still hesitance by the content industry due to piracy."

Additionally, consumer education has to become even more of a priority for VOD to become a truly strong competitor for consumers' home entertainment dollars.

Although growing rapidly, VOD is a reality in only a small slice of U.S. homes.

Jupiter Research forecasts that 24 million U.S. households will have the ability to watch VOD by year's end. That's 21% of the country's 115 million TV households. By 2009, it is expected that 41 million homes will have VOD access.

But VOD access does not equal VOD use. Jupiter reports that 50% of digital cable subscribers who have access to VOD have not watched or paid for VOD programs in the last year. Another 12% have not even heard of VOD. About 16% of digital cable subscribers have watched free VOD and about 22% have paid for individual VOD programs. Internet VOD figures are unavailable.

The digital cable industry is making inroads, particularly as such major players as Comcast and Time Warner offer a range of free and subscription VOD to its subscribers.

Page Thompson, Comcast's VP/GM of On Demand, says more than 95% of Comcast's VOD content is free. The remaining 5% is free to subscribers of such pay channels as HBO and Showtime. Actual PPV on-demand movie content ranges in price from $2.99 for a library title to $3.99 for a new release.

Thompson says that during March 2005, Comcast digital cable customers watched more than 100 million VOD programs. That is triple the number of programs viewed in the same month a year earlier. More than 276 million VOD programs were viewed in the first quarter of this year, and Comcast forecasts that by the end of the year that number will top 1 billion.

Cable operators say they are not making money from the free VOD services. However, since most of this content is produced in-house by the likes of HBO and Fuse On Demand, they are not paying extra for this content either.

Joe Glenon, VP of affiliated sales and senior VP of distribution for Fuse On Demand, says his company is making nothing from VOD. "For us, it's not helping our bottom line at all but helps our relationship with the cable operators," he says.

Eventually, the hope is that VOD technology will allow consumers to directly purchase products related to the content they are viewing and thus create a steady shared revenue stream. Glenon says, "It would be natural if they could click straight through and buy a CD" after watching a video.

Thus far, cable operators are "resistant" to paying for content, says Amanda Marks, executive VP of Universal Music Group's eLabs. "It does keep my group extremely busy because you have to figure out how content is going to be monetized," she says. On the Internet side, Universal and other labels have struck licensing deals, but that model has yet to make the transition to cable.

Some content providers are recognizing the value of VOD as "a promotional tool," Thompson says. "Music in particular works really well because it's very easy to find [a] particular artist or video."

David Asch, head of programming for In Demand, which provides VOD content to cable operators, says that movie lovers are "using VOD like a video store . . . We're distributing to 10 million-plus homes, and studios are acknowledging that that's a big audience to reach."

In the music area, digital cable subscribers can also go directly to such VOD channels as Music Choice (available in more than 8 million homes) and Fuse On Demand (available in about 6 million homes). Both offer music videos and live performance clips. Fuse On Demand also provides behind-the-scenes footage and other extras.

With so much free VOD content available on cable, advertising is needed to bring in cash.

David Del Beccaro, founder and president/CEO of Music Choice, says he is going after "A-level" accounts to advertise on the main Music Choice pages.

It is unclear whether major advertisers are tuned in to VOD, however. Cherie Wenstrom, VP/media director for Wenstrom Communications in Clearwater, Fla., says that advertisers seem to have a "wait-and-see attitude" about VOD. "We haven't had any of our clients on a local level request video-on-demand information," she says. "It makes more sense that the bigger brands like the Toyotas and Cokes would be looking to do this."

Gotuit Media president Mark Pascarella says most ads will look like banner ads on Web sites. Gotuit Media provides software and indexing services to cable operators that enable consumers to navigate through available VOD content.

"These ads will never disrupt the main viewing," Pascarella says. He expects his company to share ad revenue with content owners and cable operators.

Advertising is more entrenched on the Internet side of the business, which includes such major portals as MSN, Yahoo and AOL that offer free music videos, news and sports clips.

AOL reports more than 100 million VOD streams per month. MSN has grown from 6 million VOD streams in January 2004 to more than 60 million in May 2005.

When watching a music video on MSN, a 15-second ad typically plays beforehand, and banners can be clicked on after playback for more information. Links also lead consumers to MSN Music, where they can purchase singles or full-length CDs tied to that video.

MSN and AOL recently signed deals that require them to pay UMG for access to its music videos for VOD. AOL also has an agreement to pay for Warner Music Group videos.

Though MSN Video is free to consumers, such major advertisers as Procter & Gamble and McDonald's are "moving their TV budgets online," MSN's Bennett says. "There are other ways we can help monetize this, maybe a per-stream fee, maybe selling clips that are exclusives."

Cable operators and PPV-style Web sites such as Movielink and CinemaNow, which offer full-length movies at a cost similar to renting, say that shortening the VOD window may bring in more business for theatrical VOD product.

"It would be beneficial to change the windows," Comcast's Thompson says. "That's an ongoing discussion with the studios."

"The major studios are always very, very cautious historically when any new distribution medium is being introduced," CinemaNow's Marvis says. CinemaNow and Movielink have studio financial backing.

More clear-cut rights deals are also expected to emerge.

Companies like Eagle Vision are trying to build VOD rights into contracts now. "By controlling both the video rights and television rights, we are in a good position," Eagle Vision's Worsley says. "We bridge the gap."

Movielink CEO Jim Ramo says that clearing music is particularly hard when it comes to full-length content. Ramo adds that concern about potential piracy of VOD online is waning. He says improved digital rights management technology "is giving content providers more confidence."

Some rental chains are also starting to get into the business. Netflix, for example, will offer VOD trials later this year or in early 2006, though details about the plan are still being hammered out.

"We want to shake out the bugs and figure out what works," says Neil Hunt, chief product officer for Netflix. "We think it's the right time to start exploring, though it won't be a big piece of revenue in the near future."

"The main challenge in this industry is customer awareness," Comcast's Thompson says. "This is the type of service where the true benefit is difficult to understand unless you are using it." ••••