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Television has traditionally been a mass marketing medium, but targeted TV advertisements may be the wave of the future. New efforts underway could enable video-on-demand (VOD) to carry ads tailored to specific audiences, providing fine-tuned marketing opportunities that transcend what television has been able to offer.

An array of new technologies now in the testing phase could provide advertisers with an unprecedented ability to gear TV ads to specific demographic groups — and even to individuals. For example, by merging ZIP code data with user patterns — such as whether a household subscribes to HBO or frequents home shopping channels — cable operators would be able to serve up different commercials to appeal to different audiences. An upscale ZIP code might see an ad for a luxury spa, while a middle-income market would view promotions for discounted cruises. Companies could go one step further, merging a third-party database overlay with user data to drill down to the household level. An unmarried woman could hear about a singles' resort special, while a family of five could view an ad about hotel discounts for kids. VOD viewers could also choose to provide data about their needs and preferences, such as letting their cable operator know they are shopping for a car.

The interactive nature of VOD has the potential to create a two-way stream of information between consumer and advertiser, allowing an ad to be customized for a consumer. And though VOD has not caught on as quickly as some advocates predicted, developments in technology and workable subscription models place VOD at a crossroads: It is now poised to gain traction among viewers, possibly in late 2002 or early 2003, according to industry estimates.

The recent flurry of activity surrounding VOD is promising for the industry, and reflects the potential riches offered by the now $53 billion market for TV advertising. However, numerous technological, legal and business questions must be answered before VOD advertising can take off.

“The holy grail of advertising is knowing exactly who's sitting in front of the television at any moment in time and what they're interested in,� says Ken Ripley, vice president of advertising sales and digital networks for Discovery Kids at Bethesda, Md.-based Discovery Communications. “We're still in the early developmental stages, but [VOD] technology is a step toward getting there.�

With VOD, instead of having network and cable programmers decide what the audience can watch on TV and when, viewers can choose programs to suit their own schedule. Rather than drive to the nearest Blockbuster, they can “rent� a movie on TV. Here's how it works: A viewer who has a specially enabled digital set-top box can, with a remote control, select and access movies listed on a VOD channel. Cable companies update each digital box with their latest offerings via fiber-optic lines. So when a viewer chooses a movie, the cable operator's servers stream video into that specific digital cable box.

Although far from a mass phenomenon, an increasing number of homes are opting to try VOD technology. By the start of 2002, about 2.5 million homes — slightly more than 2 percent of the 105.5 million TV households in the U.S. — were able to receive video-on-demand from their cable company via subscription. However, only one-third of those households, or approximately 833,000 subscribers, elected to use the service. That's up from 300,000 households that used VOD technology in 2001, according to New York-based research firm Jupiter Media Metrix.

Several roadblocks have slowed the adoption of VOD. First, VOD requires digital cable, which hasn't spread as quickly as expected; it is in only 14 million homes nationwide. Time Warner Cable, one of the most active operators in the digital field, has penetrated no more than 26 percent of its 12.7 million basic cable subscriber base with digital subscriptions. Second, delays have been caused by unwieldy negotiations aimed at determining how to make the system profitable for all involved — cable operators, VOD distributors and, especially, movie studios. Third, the number of movies available to consumers is not yet substantial. Most cable systems offer a selection of fewer than 200 films — because studios have been reluctant to give up rights and because many releases are tied up in licensing arrangements that preclude a VOD run.

It looks like things are about to change. With companies developing workable business models, primarily based on subscription revenue, 8 percent to 10 percent of the nation's television homes — or about 8 million to 10 million households — are expected to have access to VOD by the end of this year. And by 2006, according to Jupiter Media Metrix, 5.3 million people are expected to use VOD to watch movies, spending $642 million.

“It seems like this will really be the year that VOD rolls out aggressively,� says Matthew Strauss, executive vice president of New York City-based Mag Rack, an online content provider and subsidiary of Rainbow Media in Jericho, N.Y.

Video-on-demand follows two models. One is subscription VOD (SVOD), which allows “all you can watch� access to selected programming, for a monthly fee. The other model is standard VOD, in which users order individual movie titles for fees that are typically $3.95 for a new release and $2.95 for other titles. (With pay-per-view, also known as NVOD, or near-video-on-demand, viewers cannot control when and how they view movies or programs; they cannot rewind, pause or choose precise viewing times.)

Among the advertising options in the testing phase are “pre-roll� commercials, sponsored programming, infomercials, post-movie-viewing commercials and opt-in requests for viewer information. According to Larry Gerbrandt, chief content officer at Carmel, Calif.-based research firm Kagan World Media, advertising on VOD is going to be what TiVo would like to offer but doesn't have the technology to achieve.

Says Gerbrandt: “TiVo wants to do customized, interactive commercials but is unable to; VOD will be designed to do that from the start.� (Note: American Demographics and Kagan World Media are both owned by Primedia.)

Several companies are gearing up to provide such customized services. Maynard, Mass.-based SeaChange International, in conjunction with New York-based Visible World Inc., plan to help advertisers create marketing campaigns that will be carried through VOD systems. They are developing targeted ads using software that recognizes household-level demographics and user habits and preferences. Although the companies have just begun such services for analog cable systems, Bill Borrelle, vice president of marketing for Visible World, predicts that in the next few years, VOD will be used like direct mail. “The VOD server becomes a mailbox,� he says. “Cable operators would be able to deliver customized messages to their subscribers about their services.�

In April, Cleveland-based Everstream, which creates software for VOD advertising, and nCUBE Corp., a digital advertising company in Portland, Ore., announced a partnership to offer customized advertising via VOD. Stephen McHale, president and CEO of Everstream, says VOD “sessions,� in which the viewer can connect with the cable operator, will open the door to richer advertising messages.

The first step, McHale says, is to establish VOD as an advertising medium, which he predicts will take two to three years to hit critical mass. Everstream is also working with Concurrent, a Duluth, Ga., VOD developer that builds file servers for 1.6 million Time Warner, Cox, Comcast and Mediacom digital cable subscribers. Joe Parola, vice president of market development for North American cable for Concurrent, says Concurrent is exploring how information gathered from the servers, such as how consumers use on-screen menus, can be married with demographic databases to target ads. He believes such a system is at least a year away.

“To have 1.6 million digital subscriptions is a nice number for VOD, but it's not enough to make [large advertisers like] Procter & Gamble jump up and down,� Parola says. “But those numbers are rising, and the type of person who has a digital set-top box is highly desirable.�

One sign of VOD's imminent rise in popularity is the number of cable operators rushing into the testing stage. Cablevision Systems began offering a digital option in September 2001 in 750,000 homes on Long Island and expanded to New Jersey in April. Comcast offers VOD in 19 markets; its total of 3 million VOD-enabled homes is expected to nearly double by the end of 2002. And Charter Communications offers VOD to 500,000 homes and expects that about half its digital customers will have access to VOD technology by the end of this year.

Meanwhile, programmers and cable network executives are gearing up to provide more content. Time Warner Cable is testing HBO on Demand in several markets. Court TV currently offers about 200 VOD titles per month, and IFC on Demand is scheduled to launch later this year. In April, Discovery Communications announced the launch of a new SVOD service, Discovery on Demand, with 500 titles from Discovery's library. In addition, a free VOD service, Choice 10 Discovery, will be packaged with upgraded digital converter boxes. Both will carry advertising and include menu sponsorships, according to Discovery's Ripley.

Preliminary user data from SVOD test markets offers a preview of how consumers might respond to VOD. For example, executives at Starz have found that viewers of their Starz on Demand, which has been available for over a year on Cablevision, Adelphia and Comcast systems, use the SVOD for an average of 43 minutes per session — some watch movies, others surf the system. On average, viewers use it eight times per month, for about 362 minutes. Starz recently purchased demographic overlay software for its VOD subscribers, enabling the company to merge that data with user habits and thereby create the opportunity for more sophisticated targeting. Greg DePrez, vice president of subscription VOD for the Starz Encore Group, emphasizes that research is still in the early stages.

At this point, little demographic information on viewers is available. In broad terms, the parties involved say the digital cable user base is a likely predictor of VOD users: upscale, educated and suburban. They're early adopters and, therefore, tech savvy. John Boland, vice president of advertising systems group and general manager for nCUBE, says the new digital subscriber “tends to be more consumer-minded and more upscale — a demographic that Madison Avenue would want to attract.�

For now, there are still several obstacles to overcome. First, the number of digital cable subscribers and the number of VOD service-enabled households need to be increased, as does the extent of the content offered. Technical issues remain regarding the roll-out of targeted advertising via VOD. In addition, it's unclear how advertising agencies will work with suppliers of targeted advertising software, and what economic model will be able to serve all interested parties — consumers, advertisers, cable operators and software vendors.

There's also the possibility of consumer backlash. Just as movie audiences are adverse to commercials, VOD users may resent the appearance of ads during programming they've paid to watch. If they have the chance to fast-forward and bypass such advertising, as they do with TiVo, targeted advertisements may not even reach their intended demographic.

Moreover, marketers may have to contend with the thorny issue of consumer privacy. Says Leo Kivijarv, director of publications at New York-based Veronis Suhler Stevenson, an investment firm that specializes in the media business: “Privacy issues will definitely be raised. There are still some major legal questions that need to be resolved before any of this comes to pass.�

Advocates within the VOD ad community, such as Visible World's Borrelle, predict that targeted VOD advertising will come within a year. Others are less convinced. Kivijarv doesn't expect it within the next five years. Even McHale of Everstream, a company devoted to digital cable advertising, concedes that targeted TV advertising is still at least three years away.

Despite the challenges, advertisers are likely to persist in their efforts to reach target audiences through VOD technology. At the annual Kagan VOD Summit in April, only one panel of the two-day convention was devoted to video-on-demand advertising. Yet early in the conference, Digital Video Arts president George Breen warned, “Next year, this conference will be all about [VOD] advertising.�


VOD movie revenue is expected to triple in the next three years.

1999 $12.00 —
2000 $11.40 $27
2001 $9.12 $329
2002 $7.30 $480
2003 $6.93 $733
2004 $6.58 $1,138
2005 $6.26 $1,735
2006 $5.94 $2,202
2007 $6.12 $2,757
2008 $6.30 $3,261
2009 $6.49 $3,754
2010 $6.69 $4,224
2011 $6.89 $4,659
2012 $7.10 $5,048
Source: Kagan World Media
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