Parks Associates Blog

Monday, February 04, 2008

Hello DVR/Goodbye DVR

I am somewhat leery about writing about digital lifestyle industry predictions the day after one of the most surprising Super Bowl victories. I am not a gambling man, but on Friday my prediction was New England by 10-11 points. Given the close game that the Giants had given New England during the last game of the regular season, I thought that the game would be closer than the spread indicated. However, I certainly didn't foresee a New York win.

That was some amateur prognostication; let's talk about one of the forecats that we recently issued for 2008. You'll recall that we ended our recent Webcast "What's Great in '08"with a few predictions about what we would expect to see, and we referenced one regarding video-on-demand:

"The first major cracks will appear in the movie distribution widows, and video-on-demand services will be enhanced by the earlier availability of certain content."

The video-on-demand numbers coming from the cable industry are pretty staggering. Using Comcast's own reported numbers for VoD streams in 2007, we estimate that 3.3 billion streams of VoD content were served to Comcast subscribers last year. Time Warner Cable was equally impressive, streaming an estimated 1.2 billion pieces of content. This is all positive, but the vast majority of that programming (90%) is the free content that comes as part of a standard digital cable system. So, it's not Hollywood blockbusters that are lighting up the VoD servers; it's HGTV or Discovery Channel programming. And, the cable industry needs to ramp up advertising for these programs to really start to monetize their potential.

The Hollywood offerings for VoD haven't caught on yet due to the timing of the content - it's stale by the time it hits the window. Basically, the breakdown of movie release windows is as follows:
1. Theatrical
2. Hospitality (airlines and hotels): +2-4 months
3. Home Video/Rental: +4-6 months
4. PPV/VoD: +6-9 months
5. Premium TV (HBO, Showtime, etc.): +12-15 months
6. Networks/Cable TV: +24-30 months
7. Syndication: +36-42 months

Given the rise of Netflix (7.5 million subscribers as of year-end 2007) and Blockbuster's TOTAL ACCESS (3.1 million subscribers as of Q3 2007) DVD-by-mail rental businesses, it's no wonder that premium VoD offerings are hardly touched. If you compare the results from our two Global Digital Living surveys, you find that the needle has hardly budged in terms of the percentage of broadband households indicating use of a premium VoD service on at least a monthly basis. At the end of 2004, it was 16%; at the end of 2006 it was only 18%.

Pay television providers, however, are going to be key to Hollywood's re-thinking of the movie release window timing. Even as the next-generation DVD format war appears to be winding down, the DVD cash cow has lost much of its luster in the past few years. We have long argued that the stall or even decline of DVD sales and rental revenues would be the primary impetus for some "window cracking." Now, it looks as though this may be a significant trend for 2008.

We've already seen some experimentation in day-and-date release in the VoD distribution channel. Comcast has experimented with it in the Pittsburgh and Denver area. Verizon notched a win last summer by receiving the rights to air High School Musical 2 via FiOS on-demand prior to the August 17 showing on The Disney Channel.

Now, Cablevision has entered into the day-and-date world with a service that will allow New York-area subscribers order a DVD and receive instant access to titles such as "American Gangster." This should be the first of many such announcements that we see this year as pay TV operators seek to strengthen their on-demand offerings and as Hollywood continues to grapple with significant changes to business models, brought on by both declining audiences and because of technology's impact on their traditional entertainment services.

The DVR is definitely a double-edged sword for pay TV operators, and I would expect that we'll see on-demand offerings increase in scale, scope, and content availability to offset the expected rise in time-shifting capabilities in U.S. homes. Consider, for example, that DVRs provided by service providers reached 25 million households in 2007 - that's more than one-third of all homes with pay digital TV services (and is projected to be more than two-thirds by year-end 2012). Although DVRs (and multi-room DVRs) will continue to be critical components of TV service provider offerings for the foreseeable future, I'd expect that we're going to see pay TV providers and their content partners seek ways to push more on-demand content to consumers (with non-skippable ads).

That's enough on this subject for today. I've got to go online to find all of the great Super Bowl commercials that I missed thanks to my frequent visits to the chicken wing table!


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