Industry overlooking $6 billion biz

New research hammers the cable industry for fumbling VOD badly enough to miss out on billions in ad revenue and paving the way for the emergence of over-the-top alternatives like Netflix.

The Diffusion Group estimates that VOD makes up just 1% of U.S. TV viewing, or 3.6 billion of 350 billion total hours watched in 2010. In contrast, analyst Bill Niemeyer noted that the 2 billion hours Netflix claimed to have streamed in the fourth quarter of 2011 alone was 80% more than cable and telco distributors racked up for their VOD offerings.

While VOD is available in approximately 9 million more homes than the 42.9 million homes reported to have digital video recorders in 2010, DVR viewing was eight times greater, according to the research. Keep in mind commercials are often better protected in the VOD environment, where the fast-forwarding that allows for rampant ad-skipping via DVRs is disabled.

In terms of revenue, the $263 million in ad dollars Hulu reported in 2010 was nearly twice what MSOs from Comcast to Verizon managed to bring in via VOD that year. Niemeyer projected multichannel VOD would be a $6 billion business had the operators realized the technology’s potential over the past decade, squandering a multi-year headstart ahead of OTT challengers.

“Online services are now generating impressive consumer viewing, subscription revenue, advertiser spend, and network mindshare that well could belong to operator VOD if only they had prepared for the inevitable: competition from the Internet,” wrote Niemeyer.

TDG outlines numerous problems that have plagued VOD from the start, including the absence of dynamic ad insertion, adequate measurement techniques and compelling user interfaces that discouraged programmers from giving the platform any programming beyond what they were contractually obligated to deliver via affiliate agreements. Niemeyer blames the cable biz for failing to develop VOD because return of investment wasn’t easily justified without broad-scale testing, though solutions to VOD’s myriad shortcomings were readily available via vendors.

Niemeyer also criticizes the MSOs for focusing too much on TV Everywhere efforts aimed at countering Netflix and its ilk on digital platforms when bolstering VOD would better protect the value of the core TV product, and open up opportunities for interactive advertising as well.

TDG estimates that Comcast, the single largest purveyor of VOD, hasn’t seen any growth among VOD usage for the past five years even as the company has doubled the amount of content available on the platform.

Comcast and Cablevision recently announced separately that they were updating their VOD capabilities with dynamic ad insertion, though specifics on the deployment haven’t been disclosed.

Satcasters were not included in the study because their VOD offerings were deemed to minimal to measure.

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