Can We Make On Demand Pay? - NMA March 10
New Media Age - Mar 18th, 2010
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In the last couple of articles I’ve addressed both the supply and demand-side of TV VOD. In this article I’d like to use some figures from Trefis to determine what VOD is contributing in terms of value. Trefis estimates the intrinsic value of a company through its stock and estimates how a company’s products impact its stock value. In this article we’ll look at VOD, HD, PVRs and triple play and determine to what extent these products are drivers of value and how much they are truly worth.
We’re going to focus on the US cable giants Comcast and TimeWarner since their present strategies have significant parallels to those adopted by UK pay TV platforms. Comcast has 24m digital TV subscribers or 25% share of US households. TimeWarner is the second largest cable company with a 12% market share or about 13m subscribers. Graph 1 provides a valuation of Comcast products in so far as they impact on its stock market value. From graph 1 it’s possible to see how significant the combination of TV, voice and broadband services are to today’s platforms, since it effectively represents 3/4s of Comcast’s stock value. For TimeWarner the significance of triple-play is even higher since it represents 83% of the estimated stock value of the platform (graph 2).
HD and PVR products contribute a surprisingly small amount to the overall valuation of Comcast and TimeWarner, at 6% and 7% respectively. They also represent a declining contribution to the valuation of both companies. Just like in the UK, where both Sky and Virgin are price promoting their PVR and HD-PVR products, Comcast and Timewarner are heavily price promoting these services in order to acquire new customers or keep existing ones. For example, in 2008 Comcast estimated that 25% of its total subscriber base had come from some sort of introductory or promotional offer. This obviously pushes down overall subscriber revenues but also depresses the value of the STB/PVRproducts being used as the spearhead for such promotional campaigns.
Finally on demand contributes 3% of the stock valuation of Comcast. 3% might sound insignificant, but Comcast is a huge company. On the basis of this stock valuation Comcast’s TV on demand business is worth £2.6bn, annually (Seeking Alpha). To put it another way, Comcast’s on demand business is worth 30 times the market valuation of Blockbuster (US), which faces ongoing challenges to its movie rental business as well as high overhead costs. Time Warner’s on demand is worth just 1.8% of the overall stock value of the business. What’s striking is the tiny contribution on demand makes to the overall value of the business. More striking is that almost half of this valuation is based on a fraction of the total usage: 40% of the all revenue generated from Comcast’s on demand currently comes from PPV which represents just 6% of the content actually viewed (graph 3). So despite the inevitability of an ad solution to monetise on demand it’s going to have a lot of ground to cover.
So VOD is making a small contribution to platform valuation because it hasn’t yet been effectively monetised. This is despite the huge take up of TV VOD on both sides of the Atlantic. Both Virgin and BT Vision have recently reported record VOD usage for the 4th consecutive quarter, while Comcast has reported that it delivered 4.6bn ‘views’ in 2009, up from a record 3.3bn in 2008. However, the overwhelming majority of content is ‘free’ (95% in the case of TimeWarner) and is perceived as a cost to the business. The immediate value of VOD is in differentiation and churn reduction, not cash-flow. In the long-run value will be will realised through a combination of premium subscription VOD packages and advertising. On both sides of the Atlantic platforms are trialling dynamic ad insertion technologies and cross platform measurement tools. In the US, Comcast has partnered with Black Arrow and TimeWarner has continued to develop the cross-platform potential of its ‘TV Everywhere’ concept. It remains to be seen how much revenue cane be generated from such technologies
So what conclusions can we draw from these pay TV platforms? Well, it’s interesting that VOD makes so little impact on the valuation of US pay TV platforms. This is despite estimates that Comcast will deliver 10bn VOD views by 2016. In fact, analysts seem to be more concerned about the deflationary impact of VOD to company value than its potential revenue generating ability. This is obviously contrary to industry excitement about the potential of TV VOD. In 2010 we clearly have something to prove.
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