For most of the country's smaller, independent cable operators, the video-on-demand (VOD) vision has evolved into a "must-have" service for the rural, smaller markets, but with a "not yet" reality. The reality is that all of the necessary ingredients needed to deploy a quality VOD service remain out of reach for the majority of the country's smaller operators.
The cost and availability of equipment, software, installation and the skilled people to integrate them into a viable VOD business model are stalling the smaller operators' entry into VOD.
And though prices have dropped considerably for many of the components crucial to a VOD offering, the complexity of integrating disparate pieces of equipment, software, security, encryption codes and more into a smorgasbord of different systems, many of which are still in the refinement stages of digital upgrades, is testing the mettle of even the most entrepreneurial of smaller operators.
"There is nothing more difficult than VOD. Technologically, operationally and content-wise, it is much harder than launching telephony. There are few experts with the experience to help make it work, and we haven't received the help from the vendors we had hoped for. No one really knows for sure how it all works, so we're all hedging our bets," says Patrick Knorr, GM of Sunflower Broadband, an operator based in Lawrence, Kan.
Sunflower is one of the few smaller operators launching VOD, and essentially schooling themselves on the rigors and frustrations of deploying the technology. "There are multiple layers of challenges, and the technology has changed so much. It's still very new from end-to-end and very complex to maintain QoS. But it is a must-have service for us," Knorr acknowledges.
Challenges aside, VOD is a big bet smaller operators know they have to make, and a crucial addition to help reduce churn, increase retention rates and provide a much-needed competitive edge versus their satellite opponents.
"The financial model still works, but much of it is the adult market, so we need layers that are free and local and seen as an asset to the community. The core business model tells us consumers want VOD and we need to build that model," Knorr says.
For the bulk of smaller operators, building the new VOD model is a matter of craftily and prudently cobbling together a workable system—both operationally and financially. And it's not easy.
"For many, the cost of equipment is prohibitive with an ROI (return on investment) of around 10 years. Comcast has taken the free VOD model and run with it, but with no ROI. How do smaller operators justify the expense? In many cases they are faced with either launching VOD or VoIP, and VoIP rolls right off the shelf. VOD doesn't," maintains Rob Shema, vice president and COO of the American Cable Association.
Some VOD alternatives are surfacing, however. One in particular has content being sent to a DVR and set-top box, with customers accessing content, albeit limited, in a quasi-VOD model already in use by DBS service providers. "It's not full VOD, but it's a much lower cost alternative for smaller operators," Shema says.
The downside, some operators contend, is that customers must still plan ahead to access the content and it's not a true on-demand service.
As the bigger MSOs grow their VOD business, obtaining equipment second-hand could provide a low-cost VOD entrée for smaller ops. Adds Shema: "As the big MSOs get more aggressive in the VOD world, used equipment will become more available."
Some smaller systems are tinkering with their entire service lineup, Shema notes. "NPG Systems, a very small 330 MHz system, tilted the system, cut video to 12 channels and launched VoIP and high-speed Internet, both with as much bandwidth as you can eat. They are playing with the idea of adding VOD to the model and how it plays in the small system."
Once the play period with VOD gets down to business, however, the smaller operators that have launched the service are generally glad they did, even if it meant learning some harsh lessons.
"The model took awhile and it wasn't to make more revenue from VOD, but to improve subscriber growth and retention and take rates for VOD. The challenges were greater than we first thought they'd be," admits Steve Weed, CEO of Wave Broadband, a Seattle-based operator with 89,000 subscribers in three states.
Content acquisition and error codes, Weed says, were the two biggest culprits. "The Co-op (National Cable Television Cooperative, or NCTC) was slow getting VOD content, so we had to get it directly. And VOD is a new model for programmers, so it took lots of time and money. There were integration issues as well. Integrating Motorola set-tops, a Great Lakes billing system, TVN content, nCUBE (servers and software, now part of C-COR) and TV Guide. They all had to be in sync. It's working now, but it would have been nice to have someone solve them before the customers call," Weed says.
The error codes, Weed adds, continue to be a pesky issue, but are manageable. "They [the error codes] aren't defined well enough. We need better ones."
Yet despite the frustrations, Weed and a growing number of smaller operators are catching on to VOD, and with some surprising results. "Session use is skyrocketing and customers like it. The net result for the business model has turned subscriber losses into gains, digital losses into gains and dramatic gains for the premium channels. We're bullish on VOD and plan to launch it on all of our systems," he says.
Massillon Cable, an Ohio-based system serving 47,500 customers, recently launched VOD. "It's in our system with only individual signal issues now. But it's very hard to do. It doesn't go like you would expect. But costs have been halved in the past year for storage and set-tops and content are improving. It's a must-have product for us now," says Bob Gessner, president of Massillon Cable.
It's been no slam-dunk, however. "We just don't have the people with VOD experience, and we keep hearing from programmers that they are still developing a model for that market. Content was hard to get, but easier now, and the Co-op (NCTC) will eventually be helpful. There are household wiring issues we know are out there as well," Gessner notes.
Once those issues are solved, Gessner believes VOD will be worth the effort. "It's very important for us to have it as a customer retention tool, especially since our neighboring system is Time Warner. It's really pretty nice, and a good competitive edge."NCTC's VOD role grows
And it's an edge the NCTC believes is paramount to a small cable operator's ability to compete with similar service providers. "Our members want to be competitive and keep capital expenditures low. We presented a model that addresses 80 percent of their customer base using free-on-demand, which uses 30 percent of their storage space, so it doesn't affect their cap-ex. Admittedly, there are other factors, but that's the model we're presenting to our members," explains Alan Tschirner, vice president, hardware for NCTC.
He adds that the model's ROI, even if just for customer retention, is 18 to 24 months against subscriber acquisition costs. "And churn with on-demand is 25 percent less than without it. So it keeps the cash flow up."
NCTC is well aware of the content issue, which admits to having "no active VOD content deals," he says. "Our members are interested buyers who want cost-effective solutions from recognized names and want full service." And not only from content providers, but equipment manufacturers and other VOD support companies, though he admits some don't get the VOD message.
"Some equipment manufacturers don't understand the definition of [a] small cable operator. They still think 25,000 subscribers is small. It isn't. So there's still a learning curve there," he concludes.
Smaller operators such as Buford Media agree. "We work closely with NCTC to drive technology deeper into rural markets. When we talk to Motorola, Scientific-Atlanta and others, their idea of a small headend is about 20,000 subs. We have to push that down further to hit 5,000 subs. Their perception of a small headend is a lot different than ours," maintains Dennis Krumblis, vice president of engineering for Buford Media, a company serving 75 rural southwest markets and 55,000 subscribers.
Buford, and its two service provider companies—Allegiance and Alliance—probably typify the majority of smaller operators' mental attitudes towards VOD. "I think very few smaller operators are looking at VOD. Most are in our situation and look at voice before VOD. The proof will be if it can increase digital penetration. We've looked at it, but simply can't justify the business model," Krumblis explains.
Understandably so. Buford's rural market headends average about 2,000 subscribers spread across Texas and Oklahoma. Yet once the systems are interconnected, which is in progress, and reach 20,000 subs off one headend, Krumblis believes the time will be right for VOD.
"We could justify VOD then, and play a little with the ROI, capital expenditure and business model. We've reserved QAM channels for future VOD offerings, and could rely on the secondary markets for equipment, so it's on our radar screen. But it's not being requested much and we only just took our customers up to digital service. We're still struggling with the VOD business model," he says.Vendors starting to target small-town VOD
The vendor community could be struggling with it as well, some admit. "It's a complex system to connect all the edge QAM, encryptions, sessions manager, software for subscriber management and all the management functions, especially for smaller operators. They have to think very carefully [about] where they put their operational resources, and VOD may not be the place for them," says Gil Katz, director of cable solutions marketing for Harmonic Inc.
Nevertheless, with edge QAM prices having fallen 75 percent in the past three years, new video servers offering streams for between $5 to $10 apiece for 2,000-stream setups, and new software that can take the place of certain return path equipment, Katz says, it may not be long before the VOD business is workable for smaller operators. "They want and need VOD. The only question is when," he notes.
Arroyo Video Solutions’ Small Community Network is one of several creative new VOD ecosystems being developed for smaller, independent cable operators.
Arroyo Video Solutions, a video server supplier, is stepping up its effort to serve the small cable market as well, says John Pickens, the company's VP of technology.
"We are putting together the ecosystems to make it easier for smaller operators to integrate all the pieces, and independently scale both storage and streaming. It's the 'enclave' configuration," he explains.
Whatever configuration is deployed, however, some issues aren't likely to go away anytime soon. Admits Knorr of Sunflower: "From a hardware standpoint, manufacturers like SeaChange have fairly stable hardware for video storage, streaming, etc. But content acquisition is an entirely different subject. We need someone to only manage VOD content and the many variables between the set-top, wiring, inside plant, pitchers, catchers, receivers, metadata files and other technologies."
For many smaller operators, the VOD business model likely doesn't include a person whose sole purpose is to manage VOD. With VOD awareness spreading, however, many small operators are expected to put VOD higher on their agendas.
In the meantime, alternatives to VOD will be explored by the small operator community, including a new VOD strategy "that will alter the thought process from the headend economics side," according to Ben Hooks, CEO of Buford Media. "VOD is about large consumption and it can be absorbed in big MSOs, so their business models can handle that. We're working on a technology that could change that," he says.
With a growing number of entries in the VOD space, costs continuing to fall for key components, and impressive results being shown by operators such as Wave Broadband, some form of VOD could be in rural communities sooner, rather than later.