Must-See Whenever You Feel Like It TV
(FORTUNE Magazine) – After a decade of hype and dozens of trial runs in the hinterlands, video-on-demand over cable TV is finally ready for prime time. That may be welcome news for viewers--but it threatens the economic underpinnings of ad-supported television.
Cable TV giant Comcast will roll out video-on-demand in its hometown, Philadelphia, in September; soon after, Time Warner Cable, which like FORTUNE is a subsidiary of AOL Time Warner, will deploy it in New York. By the end of the year, more than 25 million cable homes will have access to on-demand television.
It's about time. Video-on-demand is ready now that cable companies have made $60 billion worth of infrastructure upgrades, and the costs of storing and streaming programs have fallen dramatically, as have the prices of the digital set-top boxes that deliver the shows. Most important, cable operators that have lost subscribers to satellite services DirecTV and Echostar see video-on-demand as a potent competitive weapon. Satellite TV can't match the service.
"The satellite guys have taken a 23% market share in five short years, and we're fighting back," says Michael Willner, CEO of Insight Communications, which will make video-on-demand available to its 1.3 million subscribers this year. Says Steve Burke, president of Comcast Cable: "The goal is to have a product that's better than satellite."
To that end, Comcast's Philadelphia subscribers, who pay an extra $14.95 for a digital box that gives them about 250 TV and music channels, will get access to about 1,500 hours of on-demand programming. That is expected to include Hollywood movies, sold individually, a month or so after they hit video stores; films and shows from pay-cable services HBO, Showtime, and Starz, at a price to be determined; and news, entertainment, and sports such as replays of Phillies, Flyers, and 76ers games, which are free.
Because viewers can start, stop, and rewind at will (read: skip commercials), that's a big problem for networks that depend on ads. They must decide whether to adopt video-on-demand, fight it, or pray that it doesn't catch on. For its part, ABC is unwilling to play ball so far. "We have to be careful to deploy strategies that are not cannibalistic," says Disney President Bob Iger. "Giving product away free is very dangerous."
By contrast, NBC plans to provide Comcast with Nightly News and Today, along with news programming from its Philadelphia station, WCAU. And Discovery Communications is marketing an on-demand package of the best shows from its dozen or so cable channels. "We've learned that you can't stop technology, and that consumers want choice," says Judith McHale, Discovery's president.
This may sound self-destructive, but the hope is that the added window will build brands as well as new hits. That's why Fox has offered the prime-time show 24 and FX's The Shield to Cablevision's video-on-demand subscribers on Long Island instead of its biggest hits. Still, News Corp. President Peter Chernin says, "we're not sure this is the model."
Some clever innovations may eventually resolve the dilemma. The companies that make video-on-demand software say they can disable the fast-forward function when commercials come on. But they'd prefer to adapt advertising to the new platform, by targeting ads to particular viewers, embedding them in programs, or sponsoring messages on demand. A potential car buyer, for example, could fetch videos about any make or model.
"I can give a different ad to each user at the same time," says Jim Kelso, a VP of SeaChange International, the leading supplier of video-on-demand technology. "The advertising dollars get bigger, not smaller." Who says we've heard the last of the hype?