Video On Demand: Cable's Challenge To Home Satellite

In what has become a long-promised delivery of new services to better battle digital satellite systems, cable's leaders are investing in a new form of pay-per-view (PPV) on steroids called video-on-demand (VOD).

This remote-control-activated service allows viewers, typically for $4-$5 more per month, to instantly access large stores of video programming, such as movies or specially produced niche programming.

Although it appears this promise is becoming a reality, many questions remain: Can VOD stand up to the competition from digital video recorders (DVRs)? Will VOD access more than just a handful of niche markets? What do the development of VOD and DVR mean to the CE retailer? Will VOD really become a $1.5 billion market by 2008? (See chart.)

Regarding VOD versus DVRs, some content will be stored on the cable head-end's server, some will be stored on the client side (typically on a DVR-line hard drive). Ultimately, the two devices will probably work together. In the short-term, because of its national availability via distributors like DirecTV and EchoStar, DVR will surpass VOD, because VOD remains a niche service. In the longer-term, if VOD becomes more widely deployed, it may become a true DVR competitor.

Because it will take a long time to ramp up these services, VOD will likely be a niche market service for the near term. Slowing down implementation are concerns over digital rights management (DM), including copyrights and ownership of rebroadcasts.

Consumer electronics retailers will be both helped and challenged by the deployment of VOD. Presently, CE dealers can enjoy sales of DVR equipment — such as DirecTV's TiVo and UltimateTV systems. When cable companies begin to aggressively market VOD services, sales of DVRs will likely be impacted. On the other hand, the fact that many in the cable industry are saying their VODs fight DVRs, helps to bring new product identification and consumer interest to DVRs.

The Carmel Group is conservatively projecting that VOD will generate a $1.5 billion market by 2008.

Yet, to cover their huge outlay, programming providers will need VOD systems to become revenue generators, rather than just tools to lessen digital cable churn.

Panelists who attended The Carmel Group's recent Dinner Convergence Series indicated their concern that the DVR market could eventually develop and outshine VOD services, unless VOD services can combine a mixture of VOD with DVRs, and can access valuable timely content from more distant regional or national cable head-ends.

Cable subscribers' dissatisfaction with their own cable company (both the product and the service) was also listed as a "challenge" for cable's Multiple System Operators (MSOs) trying to unveil this new VOD opportunity.

Meanwhile, Direct Broadcast Satellite (DBS) provider EchoStar has set a goal of delivering DVRs to half its subscribers within a few years. This mission could substantially aid the nation's CE retailers (and make life that much more challenging for the nation's cable MSOs).

Following the lead of PPV, certain upscale neighborhoods have always done well when new services like VOD are offered. That may well end up being the ultimate resting place for VOD. The real opportunity for cable MSOs, however, lies in getting a successful VOD experience to a much wider audience.

For as many as 10,000 cable operators across the nation, the prospect of VOD brings visions of dollar signs and the ability to gain back lost upscale subscribers from DBS.