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Video without demand

As cable operators push to make video on demand the "next big thing," they continue to scratch around to figure out how to make what is clearly a great product into something that is more clearly a great business.

The biggest move came from Cox Communications last week, as the MSO disclosed that it was trimming back its ambitious plan to launch VOD service in seven markets this year, about 40% of the company's cable footprint. Instead, Cox is going to hold VOD to four markets, including two—San Diego and Hampton Roads, Va.—where the service has already been deployed.

Other MSOs are making similar deployment tweaks. For example, Insight Communications has ceased marketing VOD to its subscribers, planning to resume in September. That's in large part because of the Chapter 11 filing by Diva, which provided Insight with VOD equipment, movies and other programming. As Diva withered, so did the quality of the movie product the company delivered. Insight plans to come back not just with movies but shows from cable networks offered as subscription-VOD packages. Cablevision is also tinkering with pricing on its VOD product.

Cox COO Pat Esser acknowledges that, once the company determined that VOD technology was sound, "I think we got caught up in the euphoria of how wide we could roll this out" and that reducing the number of VOD markets is aimed partly at reducing capital spending. But he added that working in fewer markets lets Cox focus on pricing, packaging, marketing, product supply and developing opportunities for advertisers. "You've figured out the system, now legitimate business models are built on your back. This is not a bad day for VOD; it's a good day for VOD."

But Sanford Bernstein & Co. media analyst Tom Wolzien remains wary, particularly since no operator, including Cox, will disclose much buy-rate data from early VOD users, which presumably means they're not promising. "This is still a technology in search of a business plan."

Cox's news came as the company joined Comcast in posting strong earnings results for the second quarter, including 15-16% operating cash-flow growth and 1% basic-subscriber growth. Insight and Time Warner Cable posted similarly strong results two weeks ago, a stark contrast with the dramatic 70% drop in MSO stock prices in recent months.