Will VOD Come In Under The Radar As The Next Gen Technology?

Implications: While the format wars in the next generation DVD systems continue to confuse customers clearly indicating that there is not going to be an obvious winner for some time, if at all, VOD may be sneaking under the radar. This is still a very nascent business. The studios in making their content available to Time Warner Cable and their counterparts for VOD, also must face the most important implication of all, angering some of their biggest customers, namely Wal Mart that accounts for ~ 40% of total home video sales. When Target, Best Buy, Amazon and a few others are added in, the total is well in excess of 50%.   And in allowing the cable companies to experiment with a day and date release on DVD and VOD, they must be careful not to shorten that time frame from theatrical release too much or they risk angering their other very large customers, the major exhibitors. In this arena, Regal, AMC and Cinemark comprise some 16 – 17,000 of the 39,000 screens in North America.

Analysis: The rumor that packaged media is going to be dead due to the popularity digital downloads is a bit exaggerated. Will digital downloads and VOD gain traction? The answer is yes as evidenced in part by the statistics from #2 cable company Time Warner Cable that are discussed in this article.

I suspect that Comcast, the nation’s largest cable company, has similar, if not better statistics from their VOD offerings as they are considered the current king of video on demand.

Home entertainment represents by most accounts approximately 50% of the total revenue from the studios’ motion picture production programs. It is clearly the cash cow.

Approximately 62% of the total to date this year at retail is from sale of product while the balance of 38% is due to rentals.

In this article, Time Warner Cable indicates that they have had continuing success at driving their digital video customers to using the VOD offerings of new movies at $3.95 each and older movies at $1.95. The article presents many other statistics related to the number of customers using the enabling DVR and digital video technology as well as the number of their customers who own HD TVs.

The essence, though, is about VOD.

As a consulting professional who has worked in and around the movie/entertainment business for more than 25 years, I prefer to go to the theater, not just for the experience of seeing a movie in that setting, but due to the fact it is important in our business to be able to see as many movies as possible earlier than later in their release cycle. If our clients in production, post production and visual effects are involved in a particular movie, I want to be able to tell them that I have seen their hard work.

There are times, though, when the VOD is just too easy and it is much more convenient than driving to the local rental store. And it is comparable in convenience to having the DVD arrive in the mailbox from one of the online rental companies.

This year, TWC expects to generate $400 million in VOD revenue via some 1 billion streams. Some of my hard earned dollars are in that total. It is very easy and convenient to click the remote a few times and voila be able to start watching a movie on my HDTV.

The $400 million is significant in terms of its rate of growth, though that amount is but a fraction of the total of >$26 billion generated annually by the home entertainment industry. It will continue to grow in absolute terms as well as on a percentage basis.

Although I noted that the studios are careful not to anger their best customers – Wal Mart, Target, Best Buy and the like, the TWC experience so far seems to indicate that the VOD revenue does not seem to have cannibalized the sell through market which is dominated by the aforementioned companies.

Therefore, the correct assumption is that people are using VOD as a rental item – but due to the market dynamics, it is difficult to say how much of the revenue is indeed incremental and how much is coming at the expense of Blockbuster, Movie Gallery and their brick and mortar counterparts and how much it will impact NetFlix and Blockbuster’s Total Access.

The day and date release of movies and TV shows on DVD and VOD will be a continuing event as long as the evidence continues to show that there is little impact on the sell through market. Once that happens, Wal Mart and their retail counterparts will make their opinions known. One only needs to walk into a Wal Mart or Target on a Tuesday to know how much space is dedicated to new releases. And one only needs to walk into the DVD departments and near the check out lines to know the impact of library product on their sales.

Customers are shopping in those stores for other items anyway. It is very convenient for them to pick up a competitively priced DVD, new or old, as an impulse or planned purchase while they are there. Even when VOD and downloads are more prevalent, those shoppers will still be going to Wal Mart and the like and will continue to buy DVDs.

Although TWC is attempting to make the menus easy to navigate and thus make it easy for the couch potatoes to buy easily, it will take some time before VOD truly becomes mainstream. The flashing 12:00 on VCRs is a reminder of the level of technology prowess that is in the marketplace.

To become mainstream will require the studios through cable companies (and the telcos under the IPTV scenario) to continue to make product available and to continue to educate their customers on the virtue of using their digital video DVR/set top box. Growth will also come as the penetration of HD TVs increases and hopefully simultaneously, the customers rent the set top boxes and pay for HD service.

While catering to the impulse buyer, the cable companies need to work hard to keep their pricing competitive with the all you can eat plans offered by NetFlix and Blockbuster’s Total Access where the convenience factor weighs in as well.