Comcast, Rivals Leaning on Video on Demand - TheStreet

Comcast, Rivals Leaning on Video on Demand

Cable operators are high on the service's prospects as second-quarter earnings approach.
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What's the demand for video on demand? Cable investors are starting to get a better picture.

Over the past few years, cable TV system operators such as

Comcast

(CMCSA) - Get Report

and

Cox

(COX)

have spent billions upgrading their networks to be able to offer advanced video services, including high-speed Internet connections and dozens of additional video channels.

Now, after years of grindingly slow development, video on demand -- one of the harder-to-sell advanced services -- is beginning to show progress. Comcast, the nation's largest operator of cable systems, says it's getting promising results from its rollout of VOD, which permits cable customers to choose programming from a menu, start watching it whenever they choose and control it with VCR-like commands such as pause, fast forward and rewind. VOD, says Comcast, appears to be remarkably effective in attracting and retaining customers.

So with the cable earnings season starting up this week -- Time Warner Cable parent

AOL Time Warner

(AOL)

reports Wednesday, and Cox and Comcast come the following week -- investors will likely be hearing more news about VOD, which Comcast, for one, hopes to have in 80% of customers' households by the end of next year.

Showing the Money

Two major questions regarding VOD loom for the industry. One is, where is the money in VOD? Operators have a good sense of how much cash flow they can generate from offering high-speed, or broadband, Internet service. But it's much less certain how much business they'll generate in the long run from offering movies, television and other programs via VOD.

A second, related question is how effective VOD will be in defending cable operators' turf against incursions by direct broadcast satellite services. Cable companies point to VOD as a service that DBS operators such as

Hughes Electronics'

(GMH)

DirecTV simply can't offer. But DBS operators say that the digital-video-recorder technology they offer along with satellite service, though not directly comparable to VOD, enriches the satellite viewing experience to a similar degree, if not a greater one, than the extent to which VOD improves cable.

As for where the money is in VOD, some information has begun to trickle in.

Insight Communications

(ICCI)

, one of the smaller publicly traded cable operators, said in its first-quarter earnings call that it reaped $3 in per-subscriber revenues in the first quarter. Interestingly, about 26% of the buys for pay-per-view VOD at Insight are for adult movies, according to the company -- programming that has a higher margin than other VOD offerings.

Pay-per-view VOD -- a single program, usually a movie, bought for a one-time fee -- is only part of the VOD story. Operators are also experimenting with subscription VOD -- a rotating menu of programming available on an unlimited basis for a monthly fee. They're also offering hundreds or thousands of hours of free VOD, mostly to familiarize cable customers with the concept of VOD and get them comfortable with ordering it.

Dishing It Out

Comcast, however, says that boosting pay-per-view isn't where the real money is in VOD. "The economic value is derived from subscriber growth," Andy Addis, Comcast's vice president of video marketing and new products, told Wall Street analysts in a May presentation. "It's much less important to us that we drive incremental pay-per-view buys of $4 here, $4 there." What's more interesting to the company is driving subscribers who generate $15 a month in digital service revenue, or basic subscribers who generate an average of $60 a month. "When you look at it and account for economics that way, it's a very powerful play," said Addis.

VOD appears to be an effective customer-retention tool, Addis told analysts. In a study of more than 5,700 new digital services subscribers in Philadelphia -- Comcast's hometown, where it launched VOD on a grand scale last year -- the company found that after four months, 86% of customers who had never used VOD in any form remained as Comcast subscribers. But 96% of people who had used VOD at least once remained. "Clearly, with On Demand, it's about driving usage," said Addis, using Comcast's name for VOD and related services. "Usage equals value. Value equals loyal customers that are more likely to stick around."

Separately, Addis said VOD could be used to lure satellite customers into dumping their service for cable. A Comcast telephone survey of 800 satellite customers, not necessarily in Comcast's market, found that the percentage of people willing to drop DBS service through a traditional "dish buyback" program increased "very significantly" when the salesperson explained that VOD would be part of the cable package.

But satellite operators aren't willing to cede this advanced services territory to cable. Both DirecTV and

EchoStar Communications'

(DISH) - Get Report

Dish Network are pushing digital video recorders, or DVRs, which allow users to collect mini TV libraries, often automatically, on a hard drive in their satellite receiver.

DirecTV, for example, is rolling out DVRs with 70 hours or more of storage capacity later this year, as opposed to the standard 35-hour DVRs it already has in its user base. And though cable operators say that people are often using VOD to watch television programming on demand, Tim Traynor, DirecTV vice president of advanced services, labels cable VOD as mostly a movie play. "At the end of the day," says Traynor, a DVR "helps the customer with all of their video watching, not just the movie part."