Still Bullish

Despite hurdles, Programmers and Operators predict Big Things for on-demand Platform

By George Winslow
Multichannel News

While video on demand has given cable a key competitive advantage against satellite providers and has proven popular with consumers, the predicted explosion of VOD revenue and content has yet to materialize.

The format still faces some challenges. The range of available content is limited by programmers withholding most of their most popular fare, while the user interface remains clunky. And VOD revenue is still just a tiny part of the multichannel business.

Magna Global estimates that VOD advertising will total only $140 million in 2007 and PricewaterhouseCoopers forecasts that VOD revenue will reach just $2.1 billion this year. In contrast, PwC predicts that consumer spending on multichannel TV will top $66 billion in 2007.

Still, operators, programmers and vendors remain bullish that what might be termed next-generation VOD will cure many of those problems.

Most cable executives predict that in the years ahead the amount of VOD content will expand to tens of thousands — or even hundreds of thousands — of hours, with new navigation and search engines making it easier to choose from a vast array of offerings. Most important, they anticipate significant new revenue streams from advertising and commerce, as next-generation VOD advertising systems deliver ads targeted to the demographics of a particular household.

“It is a great opportunity for cable to get a larger piece of the ad pie,” said Barry Hardek, vice president of business development and marketing for Everstream, which provides data on video-on-demand usage. “Advertisers have been carpet bombing for years. Targeted VOD advertising will accurately measure who they are reaching and how the ads are performing.”

“Even with the great success we’ve had, we are still only in the second or third inning of the VOD game,” said Comcast senior vice president of new media, Matt Strauss. “We are only beginning to tap the potential of this platform.”

Realizing that vision, however, poses technical and business challenges.

On the technical side, an exponential increase in the amount of VOD streams and high-definition content will force operators to find new bandwidth and use their networks, servers and storage devices much more efficiently.

Huge amounts of content will have to be incorporated almost instantaneously, and operators will need to deploy systems to insert targeted ads in the blink of an eye into all this new on-demand content. Set-top boxes will have to be improved in order to deploy better navigational systems.

“The lack of a good user interface has slowed the usage of VOD,” said Andy Addis, executive vice president of Hillcrest, which has developed a next-generation user interface. “If you have trouble navigating through 10,000 titles, imagine what it will be like when you start aggregating millions of videos” from the Internet and other sources.

Encryption, coding, digital rights management and ad trafficking systems will also need to improve.

“Bandwidth is a big issue” for next-generation VOD, said Jim Turner, Synacor vice president of product management. “You’re going to need more bandwidth from either switched digital or [Internet protocol-TV solutions]. But just solving the bandwidth issue isn’t going to solve the programming issue. You need to get a robust advertising model if programmers are going to make their content available.”

Premium networks, such as HBO, Showtime and Starz have embraced on-demand platforms for years because of the popularity of VOD with viewers. David Charmatz, Starz senior vice president of product development, said VOD adds about 8% to 25% to the total viewing of a particular movie.

“We don’t care where, they see it,” said Jonathan Shair, the premium service’s vice president of network operations. “If they see it on linear, great. If it’s on VOD that’s great too. What we care about is that they enjoy the service and subscribe,” either to the TV premium channels or to Starz’s PC download service, Vongo.

But programmers that survive on advertising rather than subscription revenue are hesitant.

“It is kind of a chicken and egg thing,” OgilvyInteractive senior partner and executive director of digital innovation Maria Mendel said. “The programmers want to see a way of monetizing it and we [the advertisers] need content to attract consumers and create a large number of impressions.”

Still some steps are being made. C-COR senior vice president of advanced global technology Joe Matarese said the amount of content available is increasing.

“The greed factor — the money they now see that they will be able to make from advertising — and the fear factor — their worries that they will lose viewers to the Internet and user-generated content — are both pushing them to make the rights available on demand,” Matarese said.

In a recent interview, Comcast’s Strauss spent 15 minutes ticking off all the content the company has added. The number of on-demand titles has increased to about 10,000 as Comcast has added more high-definition content, local fare and high-profile basic cable series and broadcast programs. They’ve also developed and launched 20 VOD-only channels, such as Exercise TV, that now generate about 11% of all on-demand usage.

“It used to be that we were the hunter in terms of getting new VOD programming,” he said. “Now we’re the hunted, with programmers pushing to be available on demand.”

Most of the big hit shows though are still not available on demand.

The importance of creating an advertising model for on-demand content can be seen in Cox’s decision to disable the fast-forward button in its VOD trials with ABC and NBC that started in late September, Cox vice president of video product development and support Steve Necessary said.

Time Warner Cable has made a similar move to disable ad skipping with its “Start Over” service, which lets viewers restart live programming from over 130 channels.

“For next generation VOD you have to build an ecosystem where you have timely content [that is being rapidly added to the system so that viewers can see it as it airs on linear TV], timely data [that programmers and advertisers can use to track their results] and the ability in a timely way to insert new advertising,” said Time Warner Cable senior vice president of on demand Bob Benya. “We are all focused on creating a new advertising model that can support this.”

While competitive pressures are playing a key role in the push to personalize content and make more of it on demand, telcos, cable and satellite providers all face some unique challenges in expanding their on-demand offerings.

“IPTV has an inherent advantage” in a world where most or all content is personalized and delivered on demand, said Microsoft TV director of product management Hemang Mehta. “IPTV architecture is closely coupled with personalized content and [IP delivery] makes it much easier to move content between the Internet, mobile devices or the TV.”

Still, each of the telcos face challenges. Verizon Communications has a potentially very fat pipe to deliver on-demand content because it is building fiber to the home. But it is using a cable architecture that “is very much like a cable 860 [Megaherz] system,” said Marc Tayer, senior vice president of marketing and business development at Imagine Communications. “They don’t have quite the unlimited bandwidth that people think they have.”

AT&T does have a true IPTV network, but also has bandwidth constraints because it is delivering content into the home over copper.

“I think their technology is actually limited compared to ours in terms of bandwidth,” Time Warner’s Benya said.

Today, cable operators and telcos have a huge advantage over satellite, which lacks a return path and the ability to deliver true video on demand.

But DirecTV and EchoStar aren’t admitting defeat. They have deployed push VOD systems with a limited amount of movies and TV programs available on demand via a digital video recorder. Eventually, both are expected to use broadband connected set-top boxes to deliver true VOD content into the home.

Whatever the platform, operators will have to address the demands of much larger on-demand libraries, which will include large amounts of HDTV programming, and increased VOD streams.

“Today 5,000 hours is a big VOD library,” said Kip Compton, senior director and general manager of Cisco System’s video and content networking business unit. “But next generation VOD will go far beyond that [as you begin to get content from other media, such as the Internet, made available on the TV.] On the Internet, no one talks about how many hundreds of thousands or millions of hours of content are available.”

More HDTV content is also moving to on demand. “Increasing amounts of high-definition content will be a key part of next generation VOD,” said Imagine’s Taylor.

That will be “a big differentiator for cable” but HD content also puts more pressure on bandwidth, he said.

Overall, on-demand usage is already growing very rapidly. Comcast, for example, is on target to hit some 3 billion views this year and VOD measurement specialist Rentrak reports that there were about 1.44 billion orders in the first six months of 2007, up 44% from the same period in 2006, in the 18 cable operators covering about 60% of all VOD homes that supply Rentrak with data.

Some programmers are reporting even bigger numbers. Between August 2006 and August 2007, overall VOD usage on all of Discovery’s networks grew by 87%.

As more on-demand content is made available, VOD streams will grow exponentially, said Ramin Farassat, vice president of product marketing for RGB Networks. “That is going to be really difficult for operators that have bandwidth constraints.”

Network DVRs are also likely to be a feature of next-generation VOD even though Cablevision’s efforts to deploy a network DVR has run into legal roadblocks.

Tom Rosenstein, vice president of the Infrastructure Software Group and Alliances, at SeaChange International, noted that network DVRs have advantages for operators and programmers. Network DVRs could reduce the truck rolls operators need to make to deploy advanced set-top boxes and it would allow the operators to disable the option of fast forwarding through ads, which would make programmers much more likely to make their content available.

“It is a much more efficient platform with benefits for everyone,” he said.

Beyond the legal issues, “one of the things that is holding back a true network DVR is bandwidth,” said Michael Pasquinilli, vice president of advanced engineering at Concurrent, which is working on Time Warner’s Start Over.

One obvious way to address those needs, as well as the huge requirements for new HDTV channels, is switched digital. “Every major operator has a robust switched-digital road map that is being worked through and is starting to hit the cap ex lines,” said Jim Riley, executive vice president of VOD service provider TVN Entertainment. “It will vary operator by operator, but 2008 will be the breakout year.”

Vendors are also offering a variety of solutions that would improve the efficiency and capacity of existing networks or upgraded switched digital plants.

Imagine and RGB Networks, for example, are selling products that increase the number of streams that share a single quadrature amplitude modulation channel.

“You can get 50% more streams in a QAM channel without sacrificing video quality,” by moving from a constant bit rate architecture to a variable bit rate system said Farassat.

While operators are also increasing their VOD capacity, it will also be increasingly necessary to find more efficient methods of storing and distributing on-demand content as tens of thousands of hours of niche content is added.

“You have to move away from the current model where all the content is stored on all the servers,” said Cisco’s Compton.

By storing some content on central servers and moving the more popular content closer to the edge of the network, “there is a lot of optimizing that can be done to reduce capital expenditures by just putting in an intelligent network and designing it in a hierarchical fashion,” said Greg Whelan, senior manager of Cisco’s service provider marketing group.

Declining costs for storage, better compression and more intelligently designed networks are also helping, said Microsoft TV’s Mehta.

But Mehta and others stress that the key issue is the consumer experience. “It’s not just about adding a lot more content,” Mehta said. “It’s about ease of use and making sure that they can easily personalize their experience and access the content they want.”

One key issue is latency, said Zodiak Interactive founder and CEO Alex Libkind. “Next-generation VOD will need to include not just feature movies that are 2 hours long but two-minute YouTube videos,” he said. Users need to be able to easily launch a series of short videos without waiting or plowing through several menus.

“You are not going to want to spend a lot of time waiting to launch a 60-second video,” he said.

Just how long subscribers will have to wait for all that next-generation VOD content to arrive remains an open question.

DBS Looks to Meet Its Own Demand

While cable has long touted video on demand as a key competitive advantage over satellite, DirecTV and EchoStar are working to develop their own versions of next-generation VOD.

Initially, those plans involve using a digital video recorder to store movies and offer a relatively modest slate of titles. But both companies are also exploring ways of expanding so-called “push VOD” service into full-blown VOD that would use a broadband connection to deliver movies and TV programs to the set-top box.

The importance that EchoStar is putting on those efforts might be seen in the Sept. 25 $380 million acquisition of Sling Media. That company’s SlingBox allows users to watch TV on any broadband connected mobile device or computer.

EchoStar vice president of programming Andy Karofsky last Tuesday said it was too early to discuss the acquisition but he stressed the importance of their VOD efforts.

Dish has offered a push VOD service for a couple of years now, but it has been adding TV content and recently premiered some NBC shows. “As the boxes get bigger, we will continue to offer more and more content,” he said.

EchoStar is also working to offer additional content via a broadband connection. “We will be able to combine that with push and pull VOD to offer a much larger variety,” Karofsky said. More movies and HD content are likely to be important additions.

Some cable operators are dismissive of those efforts, “When they get to their next-generation VOD, it will be just a pale imitation of our last generation VOD,” Cox Communications vice president of video product development and support Steve Necessary said.

“Satellite is at a severe disadvantage because they have to partner with people who have a network,” if they want to deliver content to the set-top via a broadband connection, added Kip Compton, senior director and general manager of Cisco Systems’ video & content networking business.

But Compton and others note that satellite providers in a number of international markets have already begun creating triple-play packages and are beginning to develop true VOD offerings.

In the U.K., the market’s largest pay-TV provider British Sky Broadcasting Group acquired broadband provider EasyNet in 2006 and this year has launched a high-speed data offering that has become the country’s fastest growing — with 716,000 high-speed subscribers by the end of June 2007. BSkyB is also offering an Internet download for PCs and has a push video-on-demand service tied to its DVR. Ultimately, boxes with a broadband connection would be used for a real VOD service.

Such offerings are proliferating in Europe because regulators have opened up the networks of incumbent telcos to competitive providers. That allows satellite providers to launch their own broadband service or to partner with other competitive telcos that are using the network of the incumbent telco to offer broadband and phone services.

Shahar Bar, director of on-demand solutions at Harmonic, sees a bright market for VOD services to satellite providers. He notes that at the IBC trade fare in Amsterdam in September they cut a deal with the Israeli pay-TV satellite platform yes to help it roll out VOD over PCs.

But in the U.S., the most obvious partners for broadband services are telcos like AT&T and Verizon Communications who are launching their own video service. EchoStar already has an alliance with AT&T for HomeZone, which provides on-demand movies and programming over the Internet.

One possibility, discussed by DirecTV executives in their last earnings call, would be to partner with Sprint and others who are bidding for WiMax spectrum and use that to provide a broadband return path for VOD services.

“Either way, we will see satellite going beyond the bird and trying to fill up the rest of their service,” with new VOD and triple-play offerings, Compton said.

— George Winslow

Time Warner Gives a Sneak Peek at VOD's Future

An early glimpse at how next-generation video-on-demand content might be personalized can be found in Time Warner Cable’s plans for its “Start Over,” “Look Back,” “Catch Up,” “Coming Soon” and “Quick Clips” services.

They allow viewers to restart live programming (Start Over), view programs they’ve missed anytime that day until midnight (Look Back), watch earlier shows (Catch Up), get previews of upcoming fare (Coming Soon) and view related clips (Quick Clips).

Not all of them are yet available and all five probably won’t be available in any single market until well into 2008. Start Over is currently deployed in about 6 systems, reaching about 1 million digital subscribers, with 10 more in the pipeline.

“We’re in significant ramp-up mode where we are out in about 10 other markets doing technical preparations to launch later this year and early next year,” Time Warner Cable senior vice president of on demand Bob Benya said. The service is expected to be pretty much everywhere in the Time Warner Cable footprint by the end of 2008.

Quick Clips is in three markets with more to come by the end of the year, and Look Back will be launched this month in South Carolina, with other markets to follow. “We’re out in the market right now talking to programmers about securing the rights to Catch Up and Coming Soon,” Benya said.

The initial deployments highlight a few important features of next-generation VOD. For starters, Time Warner Cable is ingesting huge amounts of content nearly instantaneously, a big change from the long lead-in time traditionally required for VOD fare.

Benya said more than 130 channels are participating in Start Over in Columbia, S.C., and that “every month we have over 22,000 shows processed for the Start Over experience.”

Quick Clips allows operators to refresh content several times a day, giving them the opportunity to insert new ads. Catch Up and Coming Soon will allow programmers to refresh content almost every day.

The system highlights how VOD and linear TV will merge in next-generation VOD. “You will see more and more applications like Start Over, where the subscriber gets to control when they watch content,” said Michael Pasquinilli, vice president of advanced engineering at Concurrent, which is working with Time Warner on Start Over in a number of markets.

To entice more programmers, Time Warner Cable has blocked the ability to skip ads, but Benya said that has had no impact on usage or consumer satisfaction, which is running at the very high rate of 93 out of 100, according to their research.

“The usage of Start Over in [digital video recorder] homes is greater than those without DVRs, so it [disabling the fast forward during ads] clearly isn’t hurting usage,” he said.

All of this will require more bandwidth and Time Warner Cable is moving forward with switched digital in a number of markets.

Benya stressed that “switched is really being deployed to solve a lot of different issues,” and that they are also resizing their VOD service groups, making them smaller so that they can handle more streams.

“We are expanding VOD capacity in conjunction with switched digital but it is not clear if we would have absolutely had to do switched digital [to simply handle increased on-demand traffic.]”

Time Warner Cable is also talking to a number of other operators about adapting these services. Bright House Networks, for example, will soon roll out Start Over in their Tampa Bay systems.

“We know that other MSOs [multiple-system operators] are interested in those types of services and we’ve had a lot of dialogue with them,” said Benya. “We’re very interested in helping develop these kinds of cable-only services, and I think you’ll hear more from the rest of the industry about doing those kinds of things.”

— George Winslow