INSIGHTanalysis: Video On-Demand Remains On Hold

However, incumbents are once again testing the waters and forecasters are predicting a significant rise in the uptake of VOD services. But could it still be too soon to launch what on face-value appears to be a very attractive consumer proposition: television as and when viewers want it?

Demand and scale Recent research from Media Planning Group found that around half of UK consumers are willing to pay for the ability to watch programmes or films when they want to (see Viewers Not Interested In Paying To Avoid TV Commercials). Around 10% of those surveyed said that they would pay between £6 and £7 for VOD, which is the average cost of the service.

However, whilst there may be some latent demand in the markets, operators are still very tentative about launching a full-scale VOD service. Forrester Research notes that no major telco wants to commit to a commercial roll-out whilst lacklustre VOD services remain the most common experience so far: Forrester spoke to 15 VOD operators at the end of 2002 and none had more than 30,000 customers (see Broadband To Hit 30% Penetration In Europe By 2008).

This is something of a chicken and egg situation. To drive interest and uptake in this kind of entertainment service there needs to be compelling content and a broad availability. For operators, offering a large network and a broad range of content is an expensive undertaking that is only feasible at a certain subscriber scale.

This leaves operators at an awkward crossroads. They must decide whether and when to invest in a new raft of content to drive uptake for a platform which only a relatively small number of consumers currently have.

Analysts at consultancy group Ovum say that telcos should maintain their cautious approach to VOD and related services. They note that VOD seems like an attractive way of generating extra revenues and moving up the value-chain with the ‘triple-play’ offering of content, customer convenience and choice, but argue that the reality is not so simple.

“We have already advised caution when it comes to telco forays into TV on demand. Not because it is something they could never attempt to do or because the technology just isn’t there, but rather because it is a question of timing and – in the current climate – priorities,” say senior analysts at the group.

Ovum claims that it is still early days in the deployment of VOD technology. Broadband penetration, for example, is still too low to achieve the scale required to make the business viable. Even those operators in countries where penetration is a lot higher, such as Korea, have struggled to make VOD pay.

In addition, VOD still costs a lot to deploy, says Ovum. It not only requires high bandwidth, but is also bandwidth-intensive. This means there is a high cost associated with programme distribution over any kind of scale. As well as this, the associated costs are also high: Content management, billing, customer support and, importantly, content rights, all have to be covered by the operators in the first instance.

The combination of these factors means that launching a VOD service is likely to produce little revenue in the short-term. Nevertheless a number of operators in Europe – including Belgacom, Telefonica, Telecom Italia and Deutsche Telekom – are either trialling or launching a VOD offering.

However, there remains little compelling evidence for any kind of near-term profitability. Ovum suggests that telcos concentrate on their more pressing priority, which is to turn around their finances and focus on services which can be profitable in the short- to medium-term, rather than medium- to long-term.

“If telcos don’t mind spending some cash and waiting for the very long payback period then fine. However, they should think long and hard about diving into VOD now if short-term profitability is the aim,” says Ovum’s Charlie Davies.

Longer-term outlook Looking beyond the operators’ immediate objectives, it is generally agreed that VOD services will start to show significant growth over the next decade or so.

A study by International Marketing Reports predicts that VOD will grow at the expense of standard free-to-air television as broadband adoption develops. It says that the winners in these developments will be the major content suppliers including the studios, pay-TV operators, pay-per-view (PPV) services and movie channels with superior content.

The losers, on the other hand, will be video rental, distributors without good access to supply, and, importantly, free-to-air television, which will suffer from a decline in traditional TV advertising.

Forrester Research reckons that VOD will only really start to take off in Europe in 2005, with growth until that time curtailed by the conditions discussed.

Forecasts Inform Media Group forecasts that UK consumer expenditure on TV subscription, PPV and VOD combined will rise from £3.1 billion this year to £4.7 billion by 2010 (see UK Entertainment Spend To Hit £12bn By 2010, Says Informa).

Informa’s figures show that TV subscription, PPV and VOD revenues, mainly from cable and satellite operators, provide the bulk of the revenues in the UK’s electronic media and entertainment sector, as shown in the table below.

UK Consumer Expenditure (£m) On Electronic Media And Entertainment
	2002	2003	2005	2010
TV subscription/PPV/VoD	2,883	3,145	3,607	4,711
DVD/video	2,548	2,921	3,004	2,326
Theatrical exhibition	802	818	849	911
Games	1,984	1,499	971	1,706
Music	1,968	1,956	2,007	2,273
Grand Total	10,185	10,339	10,438	11,927
Source: Informa Media Group, April 2003

Informa’s subscription TV-only forecasts put UK revenues at $7.4 million (£4.6 million) by 2010, making it the largest market in Europe at that time (see Boom Years Ahead For Subscription TV).

European Subscription TV Revenues* ($ million)
	2002	2003	2005	2010
France	2,414	2,651	3,090	4,446
Germany	4,204	4,473	5,114	7,291
Italy	875	1,037	1,343	2,225
Netherlands	828	864	949	1,381
Spain	954	983	1,283	2,173
Sweden	1,091	1,160	1,312	1,788
UK	4,536	4,948	5,674	7,401
Other	5,179	5,685	6,674	10,012
Total	20,081	21,801	25,439	36,717
* includes monthly subscription fees and PPV/VOD revenues
Source: Informa Media Group, April 2003

Global forecasts from In-Stat/MDR put VOD revenues at $1.9 billion by 2006, with US commanding almost half of this; Europe will provide around 15% of the worldwide revenues at this time (see Global Video On Demand Revenue To Reach $1.9bn By 2006).