Slowly and steadily, subscription video-on-demand is starting to pay dividends on the digital-churn and premium sell-in front.
"SVOD is a critical part of HBO's everyday business with our cable affiliates," says Juliette Morris, vice president, acquisition marketing, HBO. "The key part as you look at SVOD is its positive impact on churn."
MSO and premium suppliers report digital churn dropping anywhere from 15% to 25%, in some cases, after SVOD has been launched. Insight Communications Co. says regular VOD users churn at half the rate of other digital subscribers. Overall digital churn dropped 14% in 2003, according to the company. "I can't recall any kind of new product that has that kind of impact," Morris says.
There's also early evidence that SVOD is helping premium sell-in. Insight launched Starz On Demand last fall and reported 18% fourth-quarter growth in Starz premium units after launching SVOD, according to Greg DePrez, vice president at Starz. "The early headlines are very good," he says.
"It comes down to the price/value equation for the consumer," says Mark Greenberg, executive vice president, corporate strategy and communications at Showtime. "SVOD provides consumers with enormous choice." Greenberg is seeing some of the same trend lines on churn and sell-in, as well as increased usage
"They are watching more television," he says. "We know we're getting utilization out of our series. We're seeing more satisfied viewership. All the things we thought would be true are true."
In most cases, wherever VOD has been launched, MSOs are carrying HBO and Showtime's on-demand services. Starz is rapidly catching up, with Time Warner Cable the biggest fish it hasn't caught so far.
MSO Lineup
Comcast Corp. has rolled out VOD to more than half its subscribers, and SVOD services from all three major brands have followed. Starz, the last in the fold, reports that it has been launched in 26 Comcast systems serving 11 million subscribers.
TWC has launched HBO and Showtime in basically all of its systems. "We're in full-bore discussions," says Starz president Robert Clasen, "and we're optimistic we'll see some action in the three to six months."
Cox Communications Inc. has gone a slower route, with only Showtime reporting an on-demand launch in Oklahoma City.
Charter Communications Inc. president Carl Vogel told analysts on the company's last financial-earnings call that the MSO has launched SVOD in 12 markets before 1.2 million subscribers. "We started to aggressively launch in those markets in January," HBO's Morris says.
Showtime reports the same launch schedule. "We've been very aggressive with them," Greenberg adds. And Starz reports that it has just rolled out SVOD in St. Louis. "We expect to be in most markets by year's end," Clasen says.
Insight has launched all three SVOD services nationwide.
In most cases, MSOs are not charging extra for the on-demand component. Rather, digital subscribers of any premium service receive the on-demand content as part of their package. SVOD programmers are getting paid for their SVOD subscribers, according to HBO, Showtime and Starz executives, so it's up to the MSO to repackage or adjust retail rates to cover the on-demand component.
A few MSOs, led by Cablevision Systems Corp., remain with the à la carte pricing model, which programmers and Cablevision executives say works for them. "They are doing very well," Morris says. At the same time, "We are real strong supporters of the imbedded model. It just increases the value of the digital package for the consumer."
Both TWC and Charter launched SVOD service by charging extra, but both are moving towards "category" pricing.
As the pricing model settles in, increased attention is being paid to the next key round of metrics — churn, sell-in and usage — all of which are intertwined in what has become the new price/value equation for premium programmers, which also includes HDTV.
Churn reduction and acquisition top the list, Morris says. She's seeing churn numbers drop as much as 16%. "SVOD is a churn buster," DePrez added.
"And the acquisition opportunity is huge as well," Morris says. "It provides a proprietary product on a platform."
"It's an awful lot easier to sell Starz when you have on demand," Clasen adds.
Insight launched SVOD and provided subscribers a free Starz trial lasting anywhere from 30 to 45 days. Starz offered up its Starz Jeep for local Insight events. The Jeep has a large plasma-display TV screen in the back. "We put the Jeep in 17 events at Insight," DePrez says, which has helped Starz grow 18% in the fourth quarter.
"MSOs, in general, are still selling digital pretty much the way they've always sold it," Clasen says. "There are special teams within customer-service rep groups whose focus might be on-demand. In some places, CSRs are making pitches that focus on on-demand rather on than digital or linear channels, and these targeted CSRs have higher close rates. They are finding subscribers that turned down digital and are talking on demand to them."
Building momentum
"We are seeing a strong correlation in the greater the usage, the [higher] reduction in churn," Morris says. "The more they use it, the more they love it. And they don't make that call [to disconnect]. We are providing more satisfied customers," she says. And, she adds, SVOD is producing churn reduction numbers HBO didn't necessarily see with multiplexing of a decade ago.
"We're very pleased with the usage and satisfaction," DePrez adds. "We sense this will be important to them." In some systems, 70% of Starz On Demand subscribers are using the service, according to DePrez, who says the average Starz On Demand user accesses eight to 10 titles a month.
Comcast reports that overall VOD usage in Philadelphia doubled when it added Showtime On Demand, then doubled again months later when it added HBO On Demand. It's latest usage stats for Philadelphia showed that 50% of all digital subscribers were using VOD, while the average number of titles accessed was 15 per month. Premium SVOD executives say a healthy chunk of that usage is to their SVOD packages.
Over time, there have been slight changes to the programming schedules on the SVOD services. "We have a real opportunity to leverage our original programming to create stunts," Morris says. One Feb. 22, HBO aired the final episode of Sex and the City. In March, it will carry 30 episodes of Sex and the City, the entire first two seasons, on SVOD. Normally, six to eight episodes of an original series will appear on any monthly HBO SVOD schedule.
HBO will follow that with all the Sex
episodes from seasons three and four, in April, and seasons five and six, in May, in essence, giving Sex
fans their fix throughout the spring. "That's the type of thing we'll continue to create," Morris says. "We will do a Six Feet Under
stunt and a theatrical summer stunt."
Increasingly, HBO On Demand is taking the high ground in premium marketing campaigns. A new round of Sopranos
episodes premieres on air in March. "If HOD [HBO On Demand] has been launched, it will be the lead message," Morris says. "The affiliates are strongly feeling it's a point of difference. No one can dispute the value, and it helps to provide a new enhanced and more elevated combined product."
One of the unique twists at Starz is the launch of Encore on Demand in Comcast's Philadelphia system. "That's very important," Clasen says. "85% of digital subscribers have Encore and the thematic products." So most of Comcast's digital subscribers have access to Encore's 50 on-demand movies each month, giving on-demand movies a far wider audience than traditional premium suppliers.
Clasen says Starz plans to roll out a broader SVOD marketing campaign this spring. "We'll trial some new video and print approaches to on demand," he says, including perhaps retail promotions. "We don't need to send out 1 million direct-mail pieces. On-demand plays very well in a retail environment."
And while there is further refinement to many business aspects of SVOD, there is still more to learn, says Showtime's Greenberg. The newer user is different from the older one, he points out. "We will have to evolve programming just like we evolved Showtime in the 1980s and 1990s."
But the premium programmers have no doubt where they think they stand in the on-demand universe. "We think SVOD is now the centerpiece of on-demand services," Clasen says. In fact, SVOD usage in VOD systems can account from to 50% to even 80% of all usage.
Years ago, that may have frightened system engineers worried about contention rates and giving too much storage to SVOD services. But if the trend lines on lowering churn and increasing pay acquisition continue, SVOD services will look like a bargain, given that they take up less than one-third the server space, yet deliver two-thirds or more of all usage. And higher contention rates will only mean more satisfied customers, which will have a positive impact on the bottom line, SVOD executives say.
