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The VOD Guessing Game: Give Viewers Fees Or Ads?

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Ad agency executives were puzzled last week by two precedent-setting video-on-demand deals involving CBS and NBC: Neither embraces the free VOD model; instead, both require viewers to pay an extra fee each time they access on-demand programs.

The agreements run counter to recent research commissioned by Publicis Groupe's MediaVest that concludes viewers would generally prefer putting up with some ads in lieu of additional payments for VOD programming.

"I think it is positive that the networks realize they need to make changes, but I don't believe this is the answer," said Donna Speciale, president, U.S. broadcast and programming, MediaVest. "The viewer realizes that commercials are tied to the 'freeness' of what they get, so they are willing to see a limited number of commercials if VOD is free."

The major networks have been grappling with how to launch their VOD platform for some time now, because like many others in the industry, they believe that TV viewing will continue to fragment and that viewers increasingly will want to watch shows when it is convenient, which often conflicts with designated programming periods.

At the same time, advertisers and agencies have been pushing for an ad-supported, free VOD system. They believe that VOD viewers, because they actively navigate through special on-air menus to get to programs they really want to watch, are more engaged and may be more receptive to commercials than the general audience that tends to surf away from spots or leave the room when they appear in regularly scheduled programs.

But there are several obstacles to VOD deployment of network shows. Among the key issues: The networks are worried about program piracy and Napster-like entities that could begin to transmit their content to consumers at no charge, in violation of copyright laws. Albert Chang, evp, digital media, Disney/ABC Television, said that networks need to figure out how much viewers would be willing to pay for VOD—if anything—in order to know how high the piracy stakes are. David Poltrack, evp, research, CBS, said the networks could reap billions from paid VOD in the future.

Chang also said that, in the long term, content providers believe more of their revenue will come from direct consumer payments than from advertising revenues. "That is not to say that there won't be an ad model as well to meet the needs of consumers" that don't want to pay, he said, but the ad model for VOD isn't there yet. Aside from technical issues, the networks haven't determined how to position pods in a show, or even what the acceptable level of inventory is, Chang added.

But others, such as Speciale, argue that these issues can be worked out and that the pay model for VOD won't hold up. Said Steve Lanzano, evp, Havas' MPG: "I think there is a tipping point where the viewer gets the monthly bill and says, 'I spent a hundred bucks more than I expected for pay-on-demand, and the price is too much for the value received.' The question is, what is that tipping point?"

No one knows the answer, but Lanzano is confident that advertisers "will find a way to be relevant" on the VOD platform.

The network deals have probably added to viewer confusion about VOD, said Mitch Oscar, evp, Aegis Group's Carat Digital, because the agreements cover different VOD platforms and coverage areas with varying prices. Oscar, who works with clients to develop ad-supported VOD models, also thinks viewers will resist paying for VOD and wonders about the logic of taking just a few network hits and putting them on that platform. "Who wants to wait to watch Lost?" he posed. "It's appointment viewing, and people want to watch it at 8 o'clock on Wednesday nights." Which also prompts the question, why wouldn't a viewer simply tape the Lost episode on VCR or DVR?

A CBS source said that's the point of the deal. "It's a test. We don't know which model is going to work. It could be pay- or ad-supported, or both."

ABC was actually first to market last month with a VOD licensing deal for prime-time shows among the big networks. ABC's VOD is for the really small screen—Apple's new video iPod, which charges a $1.99 per-access fee and offers Desperate Housewives, Lost and Night Stalker. The CBS deal, with cable operator Comcast (but only in markets where CBS owns TV stations), includes CSI and Survivor, while the NBC deal, with satellite television operator DirecTV, covers Law & Order: Criminal Intent and Monk on NBC and co-owned USA, respectively. Viewers pay 99 cents to access VOD versions of the CBS and NBC shows. The VOD versions of the CBS shows include the ads seen during the network airings. The NBC and ABC shows, however, are stripped of ads.

"There is no ad model right now for VOD, at least in any realistic way, and that's why these deals happened the way they did," said Forrester Research media analyst Josh Bernoff.

Today, most of the VOD programming on TV uses a pay model, such as VOD platforms for HBO and Showtime, said Bernoff. But advertisers are gradually coming to grips with the new medium. GM is a big believer and has purchased VOD ads on Comcast cable systems. Carat's Oscar helped client Schick create its first ad-supported VOD campaign last month on three small cable networks to help launch its new Quattro razor. The average VOD ad buy is between $50,000 and $100,000, and total sales are only a handful of millions, according to agency estimates.

But Bernoff believes there will be a brisk ad-supported VOD business five years from now, when perhaps 75 percent of network shows will migrate to that platform. But the prediction assumes the successful development of technology (now in the works) that will allow cable and satellite operators to marry DVR and VOD technologies. That would allow the VOD viewer to pause the show when he sees an appealing spot that might direct him to a longer format on the VOD server or to a Web site for more product information, and then back to the original show. "That's the real potential," said Bernoff. "Not the regular 30-second commercials, but advertising that's on-demand."