The United Kingdom digital television market has entered a new phase this week with the news that the two major cable operators, ntl and Telewest Broadband, launched Video-on-Demand (VoD) services. This is one of the first major deployments of VoD services by cable operators outside of the United States and may lead to the cable operators becoming more of a competitive threat to satellite pay-TV operator BSkyB.

ntl will be launching its VoD service initially to customers in Glasgow, Scotland and then roll it out nationwide. Telewest is initially launching a movies on demand service to 2,000 customers before rolling out the service nationwide and expanding the content beyond movies.

Philip Snalune, Telewest Broadband’s director of product management and marketing believes the launch of VoD will help the operator compete better against the satellite platform. He told Satellite News‘ sister publication Inside Digital TV this week, “This heralds the strength of cable and its ability to deliver this type of VoD service. This is something we see as being a strong reason for customers of other platforms, whether it be DTT (Digital Terrestrial Television) or satellite platforms, or people in the United Kingdom who are still questioning the motivation to move into taking a digital TV service.”

The launch of VoD has been long awaited in the United Kingdom, but whether Telewest and ntl can seriously start to taking customers away from BSkyB is open to question. BSkyB’s subscriber growth has slowed in recent months, but it still has close to 7.5 million subscribers. Also, the fastest growing digital television service in the United Kingdom has been Freeview, the DTT service which has been nothing short of a phenomenon with around five million set top boxes (STB) sold in around two years making it easily the fastest growing digital television service in the United Kingdom in recent times.

Customers can buy a Freeview box for under $100 and get access to around 30 television channels for no monthly charge. The success of Freeview was such that BSkyB launched a ‘Freesat’ option in 2004 where customers could access a number of channels for no monthly charges and just pay for installation and STB costs. The hope for BSkyB here is to encourage these customers to eventually take pay-TV services.

Analyst Reaction

The launch of VoD could at last see the cable operators begin to compete against satellite more effectively. However, analysts believe VoD is unlikely to seriously impact BSkyB’s subscriber growth going forward. One leading media equity analyst who requested anonymity told Satellite News, “In the United Kingdom, subscribers with HomeChoice (another pay-TV operator which already offers on-demand services) spend only about 10-15 percent of total viewing time watching on-demand content. Sky has an extremely impressive library, so it is not a ‘must have’. If you look at the way [the cable operators] are marketing it, it is going to appear as one option on the menu so there is not going to be an impressive new STB. This keeps the costs down, but also many subscribers might not be aware of the service as it is buried on one of the options on the menu. I think it is a natural evolution of the cable business model and it will generate more ARPU and we will see higher buy rates of movies, but in terms of a big competitive swing from satellite to cable, I very much doubt it.”

Paul Richards, a media equity analyst at Numis Securities added, “You may find some avid movie buffs are excited by VoD, but I don’t see this as being a big driver. I still think there is a lot of clear blue water between Sky and cable in terms of perception on customer service. I don’t think cable’s reputation for customer service is as strong as that of BSkyB. It will be useful in reducing churn and driving up ARPU but in terms of a real competitive threat to Sky, I don’t really see it.”

However, the launch of VoD and PVR (Personal Video Recorder) services will mean cable operators will be able to compete on a more equal footing. BSkyB was the first out of the blocks with PVR services with Sky+. Its interactive services have also been some of the most impressive deployed anywhere in the world. But, new services could be a factor in cable improving its performance in the digital television area.

Paul Erickson, a market research analyst at IMS Research told Satellite News, “There are basic fundamental differences between satellite and cable in how they operate. So, you will see a near-VoD offering on satellite but with cable it is more of a real time proposition. I am not sure whether it is something where satellite can respond in a direct tit-for-tat fashion if it could. I certainly think it will increase the competitive picture.”

One of the keys for cable operators in the United Kingdom, and across Europe, this year will be the ability to market and sell VoD services to consumers. While the terms VoD seems to have been around for years, for U.K.-based consumers, it is mostly a new concept. Also, both satellite and cable operators have to compete against Freeview, which means attracting new pay-TV subscribers is tougher now.

“They need every tool that they can to try and convince people that pay-TV is the way to go and we have ‘a’, ‘b’ and ‘c’ value-added services,” Erickson said. “It becomes part of a larger picture to attract and gain the pay-TV subscriber. As Freeview becomes more popular and continues to be popular, it becomes more of a difficult proposition to attract that pay-TV customer versus some of other markets where terrestrial is not as advanced as an alternative.”

In terms of how on-demand services may develop, Erickson thinks it will have a significant impact, particularly when there are other similar options on the market. He said, “There is going to be increasing consumer demand for it, especially as other enabling technologies such as IPTV will offer similar on-demand real time type services as infrastructure permits and we all become more high speed enabled, I think offering something similar will be a necessity. It will also become more prevalent in the public eye. There is going to be more press about it. VoD is going to be more of a buzz word.”

VoD Impact in the U.S.

So, will VoD will be some kind of ‘killer application’ for cable companies in the United Kingdom in the battle against satellite? Evidence so far suggests not. In the United States, where a number of cable operators have rolled out VoD services, the impact on the satellite platforms has been minimal. Between, September 2003 and September 2004, DirecTV and EchoStar added more than three million new subscribers between them. Satellite News’s anonymous analyst said, “In the United States, cable has launched VoD and their market share continues to fall. I think everybody thought 6-7 years ago VoD would be the killer application and if you actually look at the take-up rate, it has actually been pretty disappointing in the United States. It has not stabilized the cable companies market share.”

So, what lessons can ntl and Telewest learn from their US counterparts? Satellite News spoke to some leading U.S. analysts about why VoD has perhaps not had the desired impact for cable operators and whether it can indeed become some kind of ‘killer app’ for operators.

Thomas Eagan, vice president at Oppenheimer Subscription TV Research, believes VoD can be a success if sold right, something he hints has not necessarily been the case. “I think on-demand is going to be the important new application for 2005,” he said. “It will be the PVR of the 2005. If PVRs were the important application for 2004, it will be on-demand in 2005. The reason is less to do with VoD and more about subscription-VoD, where you can watch any already-aired HBO programming when you want, with full VCR functionality. I have HBO on demand now and it is great. It allows you go through five different genres within HBO, whether its kids or movies on an ongoing basis. Cable operators are slowly adopting this version of on-demand television.”

This is really the key to success for cable operators, using on-demand services to give customers what they want. Eagan said, “It is important to be flexible and find out what consumers really want. In the United States, the cable operators realized that they were not getting a lot of incremental buy rates on VoD with films in the rental distribution window. So, why try to push that heavily when that doesn’t seem to be what customers want. What consumers did want was have the flexibility with programming. What that meant was being able to record ‘Sex in the City’ without having to delete a title on the disc drive.”

The importance of the bundle is also key for cable operators. While VoD services are impressive, it is one part of the overall package, which could ultimately be key for cable operators. Eagan said, “I think VoD will help cable operators have a competitive advantage, which is why we estimate they will lose fewer subscribers in 2005 than 2004. I think the other important element is their offering VoIP. They are creating more of a bundle which may help to reduce churn especially among the higher ARPU early adopters.”

The other problem that cable operators have to face is the success of PVRs, which in some way has negated some of the competitive advantages of VoD. As Hard Disks get bigger, people are able to store more content on these boxes and consequently they are creating their own personalized libraries.

Steve Mather, a satellite equity analyst at Sanders Morris Harris said, “With a DVR, you have 40 hours or 80 hours of content, and you can just select from that. It has given the satellite operators an effective time-shifting solution. With the price of hard drives coming down so dramatically, the PVR solution is really proving to be an effective counterpunch to VoD. In fact, cable operators over here have adopted DVR/PVR strategies themselves. So, they are stuck within two strategies now. They have their original VoD strategy where you can access all the content in the headend. At the same time, DVRs are simpler, more user friendly and people enjoy using them. That is the opposite of their VoD vision.”

As well as this, Mather believes the amount of content available via an on-demand has also created some problems for cable operators. He says, “One of the tricks with VoD is now that they have thousands of titles on demand, having an interface to navigate that has been proven to be difficult. This has proved more difficult than originally envisaged. A better interface is easier said than done.”

The Message

What the Unites States experience shows is that VoD alone will not create a compelling competitive advantage on its own. The success satellite has had with PVRs, with ever increasing storage space, has given customers the opportunities to create their own libraries of content, and while VoD may have some real-time functionality advantages, it may not prove to be enough.

However, while VoD may not prove to be the killer application that was originally envisaged, it will allow cable operators to compete more effectively on the TV side of the business. But, it will be the strength of the overall bundle of services, which will remain key. VoD will be a component of that, but unlikely to be the ‘x’ factor for consumers.

For ntl and Telewest, it is a key year. They are both rolling out VoD and PVR services to the United Kingdom. While both these services will help in terms of boosting ARPU and reducing churn, both operators will hope they can start picking up a greater share of the new pay-TV subscribers. However, consumer behavior in the US seems to indicate VoD alone as a concept is not enough to sway customers. Issues such as the user interface, the content available will be key, and if ntl and Telewest can get these elements right, they could potentially pick up their share of new subscribers. Experience in the United States shows that this will be a tough challenge.

–Mark Holmes (Paul Erickson, IMS Research, 512/302 1977; Paul Richards, Numis Securities, + 44 207 776 1500; Thomas Eagan, Oppenheimer, 212/668 8000; Steve Mather, Sanders Morris Harris, 713/224 3100; John Moorwood, Telewest Broadband, +44 1483 582 802)