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SeaChange: VOD Pays In Under Two Years

Network operators pursuing in-house video-on-demand can
recoup their investments in under two years, based on order levels of 3.5 rentals per
household, per month.

That's according to a comprehensive model developed by
SeaChange International Inc. to validate the business case for VOD, released so far only
to a handful of large cable operators.

"For the last six months, everybody's been
looking for the business model," said Yvette Gordon, director of interactive
technologies for SeaChange and a former executive with Time Warner Cable's Full
Service Network in Orlando, Fla. "The No. 1 question is: What's the cost

That's the question that SeaChange set out to answer
in its model, built on a 200,000-home cable-system scenario with 80 percent penetration
(160,000 customers) and 20 percent digital penetration (32,000 potential VOD customers).

The report also assumed that the cable network was
configured to handle a peak streaming rate of 10 percent -- meaning that servers were set
up to spit out 3,200 simultaneous video streams.

On the revenue side, SeaChange posed an adult-title charge
of $5.95 and nonadult content at $3.95 per title, for an average per-title charge of

Then came the tough part: estimating how many titles
consumers will buy from the couch.

Demand "is undoubtedly the most contested part"
about VOD models, Gordon said.

Taking "the conservative route," based on
historical VCR rental-tape figures, SeaChange put the monthly take rate at 3.5 rentals,
Gordon added.

For one year -- using the model of 32,000 customers buying
3.5 programs per month at $4.25 -- that's a total revenue stream of $5.7 million.

And then there are the subtractions, which go well beyond
simple cost-per-bit-stream math, Gordon noted, describing the yardstick that many
video-server firms generally use when asked about equipment costs.

"It's not just cost per stream -- that's
just a surface issue," Gordon added.

Also in the mix are revenue splits with studios, costs to
receive digitally encoded material, bad debt, equipment and staffing.

It is the latter point that touches a nerve with Gordon,
who saw firsthand at the FSN what it takes to staff a VOD-enabled system -- albeit a
fledgling one at the time.

"What you don't want is to have to hire
computer-lab personnel to run your headend," Gordon said. "As computers merge
with cable ... I tell operators to be very careful and to make sure that their VOD systems
run like headends."

Also built into the cost side of the equation: a 55 percent
revenue split with studios for adult content and a 35 percent split for nonadult content,
as well as a cost of $3,000 per title to receive digitally encoded material. Bad debt was
estimated at 2 percent.

For capital costs, taking into consideration the swiftly
dropping prices for hard-disk storage and memory, SeaChange used a $350-per-stream figure.
Management systems for hardware and software rolled in at $350,000; encryption, modulation
and upconversion at $300 per stream; and network-transport equipment at $200 per stream.

Totaled, the initial VOD investment for that
200,000-customer system weighed in at almost $3.1 million, not including another $300,000
for initial encoding of 100 titles.

Operationally, for one year, SeaChange estimated additional
staffing at $140,000, equipment maintenance at $307,000, bad debt at $114,240,
content-acquisition fees (10 titles per month) at $360,000 and studio payback at almost $3
million. The grand total for annual operational costs: $3,891,480.

That points to an investment payback of 22 months, based on
estimated annual cash flow of $1.8 million.

SeaChange said that so far, the model hasn't lured any
business arrangements -- or at least any that can be discussed now. But Gordon said the
1999 outlook for VOD will be one of "wide-scale testing and small-scale

In 2000, she predicted, VOD will really take off.

"Now, it's no longer a question of looking at the
numbers: It's a matter of looking at the technology, and that's good," she

Time Warner -- perhaps the most vocal MSO in its pursuit of
steep VOD revenues -- agreed with SeaChange's VOD outlook.

"We've not kept it a secret that the killer app
coming out of the Full Service Network was video-on-demand," said Jim Chiddix, chief
technical officer for the MSO, adding "it's a favorite topic around here."

Chiddix said that while Time Warner is not yet ready to
discuss specific VOD-launch plans, he "couldn't agree more" with
Gordon's timing assertions.

Cox Communications Inc. will take a longer look before
leaping, said Alex Best, its senior vice president of engineering.

"While we're transitioning to digital as quickly
as we can, we've also decided that we're not going to be pioneers when it comes
to VOD," Best added.

That's because Cox wants to "wait until all of
the wrinkles are ironed out," Best said, noting take rates of 150 percent to 200
percent for the MSO's existing 50-channel near-VOD service. "We like that
business model -- it works well, for now," he added.