SPs Say VOD Is Primed To Weather New Threats

Steve Necessary, VP, video product development, Cox Communications

Steve Necessary, VP, video product development, Cox Communications

March 23, 2009 – Surging performance by Netflix and mounting threats from other over-the-top providers may be raising questions about the viability of video-on-demand in some circles, but cable and telco providers believe they have aces up their sleeves that will reward aggressive expansion of VOD for a long time to come.

Netflix has morphed its DVD-by-mail service into a multi-pronged movie business that hooks into television sets, gaming consoles, alternative set-top boxes and the laptop itself through the company’s Watch Instantly feature that lets subscribers stream more than 12,000 movies and TV shows immediately. The company has made tremendous inroads with its new electronic offerings, gaining 600,000 new customers in the first six weeks of this year alone and raising the possibility that it could start siphoning away precious movie dollars from cable operators’ VOD tiers.

MSOs are taking notice. “Netflix has a strong consumer franchise, and by virtue of their growth they are offering a value to consumers and they must be doing something well,” says Steve Necessary, vice president of video product development at Cox Communications. “We must pay attention to it, because only the paranoid survive, and we want to be a little paranoid.”

The threat is bigger than Netflix though. Competition is sprouting from all sides, prompting service providers to expand VOD content libraries as fast as they can with hi-def movies and a veritable flood of free programming. Consumers have more choices than ever with fresh telco competition and the new line-up of over-the-top conduits to the TV like Netflix hardware partner Roku, Vudu, Xbox, AppleTV and the newest entrant, ZillionTV, which is backed by Sony, NBC Universal, Disney, Twentieth Century Fox Television and Warner Bros.

Subscriber counts for these new services are still tiny in comparison to the customer roster of the incumbents. AppleTV has the most name recognition, but Apple still regards AppleTV as a work in progress, even though unit sales tripled earlier this year. Then there’s Roku, which scored a big win in March by inking a deal to deliver Amazon video-on-demand content, a deal that Roku says is the first of many new partnerships it will form with content providers in the next few months. Roku launched a year ago with Netflix as its charter partner and has amassed more than 100,000 customers for its $99 box. Customer count is growing each month.

Roku doesn’t hide its intentions. “We want people to be able to cut their cable and get what they want to watch directly on our box,” says Tim Twerdahl, vice president of consumer products for the company.

But cord-cutting is a long way from becoming main stream. In fact, the number of multichannel video customers across cable, satellite and telco providers grew collectively in the fourth quarter, suggesting consumers aren’t ditching their cable service in favor of online video viewing.

Most experts agree that neither Netflix nor other over-top-providers are having a discernible impact on service providers’ bottom lines, but they say they could in a few years.

Cable operators are responding with alternatives. Both Comcast and Time Warner say they’ll launch new services later this year to let their consumers access some of their programming lineup online. The goal is to give existing customers the option to watch where and when they want, because most cable programs aren’t currently available for Internet streaming.

The Netflix effect will become evident within the next two years, predicts Michael Greeson, founding partner with The Diffusion Group. “[Netflix] is becoming a virtual network operator…an existing media brand that has an established base of media users/buyers/subscribers that can be leveraged to test and, when testing is positive, to introduce new virtual, non-physical media services,” he says.

Netflix insists it’s not angling for the cable or telco VOD business with its new streaming service. In fact, most of the streaming movies and TV shows on Netflix aren’t new releases.

“We don’t provide live sports or news or weather, and a lot of folks want that in addition to movies, so I think we’re a complement to home entertainment,” says Steve Swasey, a Netflix spokesperson. Most Netflix movies are not available for streaming until a few months after the DVD release. While consumers can order any new release or library title in the Netflix vault for the mail delivery service, they can’t find many new releases via the streaming option. As an example, consumers could see “The Dark Knight” on Comcast’s VOD service now or on DVD from Netflix, but it’s not available for instant watching via Netflix.

The difference in the release windows is a key differentiator between a streaming movie service and a VOD one, Cox’s Necessary says. VOD has a leg up because service providers land most new releases ahead of broadband delivery methods. For many movies, VOD often snags the title about 30 days after the initial DVD release, and that’s down from 45 to 60 days just a few years ago, he says.

Don’t underestimate the money-making power of new releases, says Mark DeBevoise, senior VP digital media and business development and strategy at Starz, which offers its movies for broadband viewing on Netflix, Verizon and other venues at the same time as the VOD release. “You get so much of the bulk of revenues on new release titles,” he says. “When titles are seven to eight years out, it’s not really impacting the VOD business of cable and satellite movies, because the majority is coming from new release.”

Another VOD advantages lies in access to broadcast shows. Cox, for one, offers a number of network prime-time shows about 12 hours after they air on TV. “We are going to have the best content available at least in the same window as Netflix if not sooner,” Necessary says. “It should be easier for the consumers to get it on VOD than a streaming mechanism, and most folks don’t have their PCs connected to their TV.”

But the PC-to-TV bridge matters less these days. Xbox users can watch the Netflix streaming titles from the gaming console and Roku users from their TV set-top. Later this year TV set makers LG and Vizio will roll out new models with Netflix streaming so consumers can watch the service directly on their TVs.

New entrant AT%26T U-Verse has seen an increase in VOD rentals in its VOD service, says spokeswoman Jenny Bridges. “We expect that to continue as customers turn even more to their home TV services to stay entertained during the down economy,” she says. “We view online content as complementary to U-verse TV and AT%26T’s three-screen strategy. With IP technology and our broadband and wireless services, we’re in a unique position among providers to deliver even more of the content that customers want, across their PC, TV or wireless device.”

A Comcast spokesperson pointed out that VOD’s popularity has grown based on a wide array of content. Sure, movies are the most popular category, but they’re followed closely by music and kids content. Comcast generates more than 300 million views each month over on-demand.

In an interesting twist, the spread of Netflix and its multi-venue availability could give operators leverage with programmers, suggests Tom Guida, a new media attorney with Loeb %26 Loeb.

“Netflix lets [consumers] watch what they want, when they want, for as long as they want,” he explains. “The cable companies are also being asked to pay higher carriage fees by the networks to make up for their lost revenues, so it’s fair to say that the cable companies will leverage this into more access to content, across more windows, and protect their own franchise.”

That means if an NBC Universal, as an example, wanted higher carriage fees, service providers could demand better rates on the syndicated shows from NBC and the ability to show films from Universal on VOD day and date with the theaters, he says. “The owners of each of the distribution windows – theatrical, VOD, home video, premium cable – have traditionally guarded their turf aggressively in order to increase the value of their respective windows by virtue of each being a unique place to see particular content. It’s a scarcity-based model, but consumers have no tolerance for scarcity any more.”

Don’t forget that Netflix and Blockbuster, too, are facing competition from dollar-a-pop rental kiosks offered by Redbox and others in supermarkets and fast food outlets, points out Paul Rule, president of Marquest Media Research. Netflix isn’t just growing; it’s having to fend off cheaper alternatives.

When it’s all said and done, over-the-top services are simply responding to the consumers’ wishes. Movie and TV viewers don’t want barriers anymore to content. They want their programming when they want it. That’s why Netflix is beating Wall Street’s expectations and defying the recession by giving consumers their entertainment now.

Consumers gravitate to content that is readily available and easy to access, says Ross Levinsohn, the former president of Fox Interactive Media who is now a partner with new-media investor Velocity Interactive. “The challenge with some streaming or download services today is simplicity,” he says. “Having to plug a new box in, or download a big application are both gating factors to the masses. If a Comcast or a Sony embeds the software into its existing boxes which sit in consumers homes or into a plasma TV that can pick up a wireless signal or have an Ethernet cable plugged in, then there will be rapid expansion.”

Levinsohn adds: “Windows will need to be negotiated quickly by the studios, which is not a pleasant prospect in the short term. The warning for the studios is simple – don’t become the record labels. Embrace the future and help propel it. Consumers are getting more tech savvy, and the longer the studios and distributors attempt to gate the distribution pathways, the quicker P2P (peer-to-peer) torrents will distribute the programming, through which the rightful owners won’t share a dime of upside. I’d hope we’ve all learned our lessons here and work hard to be part of the solution.”

Over-the-top services might eat into cable and satellite revenue, but there’s another option too. The pie might grow for everyone. “I see Netflix and other movie downloads to computer screens as more likely to expand the market for movies in terms of the time spent and places where people can view them,” says Will Richmond, analyst with VideoNuze.com.