Cable Operators

VOD’s Mystery Numbers

2/13/2005 7:00 PM Eastern

As the cable industry steps further and further into video on demand, and with each new dazzling statistic released by Comcast Corp., it’s intriguing that the industry hasn’t been required to give Wall Street a hardcore, dollars-and-cents answer to the question: What’s the ROI?

Perhaps the passage of time and the onslaught of competition make it a question whose time has passed. Maybe no one cares anymore — except the Street always seems to care about rates of return on spent capital.

This section’s story on Cox Communications Inc.’s VOD strategy serves as a reminder. Cox has taken a methodical approach to VOD, always asking whether capital deployed for a given rollout would be better spent rolling out, say, another phone market. Cox executives can well remember being raked over the coals in the late 1990s for wanting to spend capex dollars on circuit-switched phone.

“How can you compete? You know nothing about the phone business. Why not wait for VoIP?” Cox proved those skeptics wrong in the end, but the memory of Wall Street questioning its strategy is still fresh.

VOD, by comparison, has gotten off scot-free. Perhaps it’s the bevy of numbers that Comcast throws at Wall Street. Brian Roberts spent 30% of his nine-minute introduction to Comcast’s fourth-quarter earnings call two weeks ago talking about VOD stats: 72 million orders in December, 567 million orders in 2004, with a projection of 1 billion orders in 2005.

Customers have some 3,000 VOD choices that could climb to 10,000 by year’s end. Nearly 75% of VOD-enabled subscribers in Boston and Philadelphia used the service in the past 90 days, ordering 23 titles per month for a total viewing time of 12 hours.

Comcast’s new MoviePass service started with a few dozen titles and will hit 75 movies in March and 200 titles by yearend, when MGM product is added to the Sony library. It’s now second in usage behind HBO On Demand. Roberts said 30% of VOD users watch at least one movie per month on MoviePass, with 2.7 titles ordered per set-top. Churn in VOD enabled homes is 20% to 30% less than in nonVOD homes.

That’s all great, but there is no dollar figure attached to any of it. Cable seemingly spent hundreds of millions of dollars in servers, Gigabit Ethernet transport, VOD software and program-acquisition costs with what to show for it? A feel-good story on churn?

But finally, there may be more to the story. Comcast reported pay-per-view/VOD revenue grew 21% in 2004 to $393 million. That equates to a $68 million increase in 2004, probably all on the VOD platform. It’s also fair to guess that perhaps half that $393 million, let’s say maybe $200 million, came from VOD ordering of movies and events, rather than through PPV.

Comcast Cable president Stephen Burke disclosed that long-form VOD advertising reached $40 million in 2004, a very respectable figure.

Now to put a dollar figure on churn. Comcast pegs churn in VOD homes at 20% to 30% less than other homes. Comcast counts 8.6 million digital subscribers, and half that base, on average, had access to VOD in 2004.

For the sake of argument, let’s assign a churn figure of 4% to non-VOD homes. If churn in VOD homes was 25% less, that would equate to 3% churn across the 4.3 million homes base, or 129,000 homes for the year. So VOD saved 129,000 homes from going somewhere else, either disconnecting entirely or dropping to basic. Let’s just say, for now, it saved all those homes from going to basic. Preventing 129,000 homes from dropping off the digital tier saved the company $15 a month ($1.09 million a month). Over 12 months, that equates to $23 million a year.

Add up $200 million, $40 million and $23 million and you get over $260 million in revenue. And that doesn’t include any reduction in premium network churn (HBO, Showtime and Starz!) or premium additions, because of VOD.

There may be a VOD revenue model after all. You have to make some assumptions and makes some cost allocations that may be difficult to do. For instance, GigE transport produces benefits beyond VOD.

Still, it’s a start. And in the end, the MSOs may be right. Maybe the dollars and cents don’t matter. VOD deployments may be just the cost of doing business in a competitive world, as well as the natural, next irreversible step in the evolution of video delivery.

September