The future of european video on demand is tv based

For Consumer Product Strategy Professionals
Includes data from Consumer Technographics®

May 21, 2009
The Future Of European video On Demand Is Tv-Based
by laurence meyer
with J. P. Gownder, Abe K. Garon, and Dan Wilkos

ExECUT I v E S U M MA Ry
The European video-on-demand (VOD) industry has been particularly dynamic over the past nine years.
To date, PC-based-VOD services outnumber TV-based-VOD services. In the medium term, however,
TV-based-VOD services will play a central role in the European VOD industry. Growing consumer
interest in TV-based VOD will not be the only factor that explains this evolution; targeted advertising
will also contribute to helping TV-based VOD flourish.

TV-Based-VOd serVices increasingly cOmpeTe wiTH pc-Based-VOd serVices
Since mid-2000, VOD services have been available to European consumers via both the PC and the TV.
Although nearly 100 TV-based-VOD services are now available in Western Europe, PC-based-VOD
services continue to outnumber TV-based-VOD services.1 But Forrester believes that during the next
five years, TV-based-VOD services will eclipse PC-based-VOD services because:

· The TV is the consumer device of choice when it comes to watching video. The rapid uptake
of the BBC’s catch-up TV service, iPlayer, on Virgin Media in the UK suggests that European
consumers prefer to watch on-demand TV programs on a TV set rather than on a PC.2 Forrester’s
European Technographics Consumer Technology Online Survey, Q4 2008 confirms this preference:
The TV is the clear choice for most consumers, followed by the TV or the PC (see Figure 1).

· TV-based-VOD services are becoming affordable for small TV service providers. Although
the cost of deploying a TV-based-VOD platform has declined over the past five years, the capital
expenditures (capex) and operating expenses (opex) for VOD are still too high for small TV service
providers with fewer than 100,000 subscribers.3 To counter this problem, some vendors, such as
SeaChange and Technicolor in Europe and TVN Entertainment and Avail Media in the US, have
developed turnkey VOD solutions that target small TV providers.4 For a very small one-time set-
up charge and a flat monthly fee per subscriber, it is now possible for small TV service providers to
offer VOD. Given the availability of this solution, small cable and IPTV networks will increasingly
offer TV-based VOD in the short term.

· Net-enabled TV devices are widening the addressable market for TV-based VOD. Connected
TV sets will result in the delivery of more (over-the-top) VOD services to TV viewers. In the US,
Netflix’s content is already available on Internet-connected HDTV sets from LG Electronics, while
Panasonic has announced that Amazon.com’s Video On Demand service is now available on its
VIERA Cast-enabled HDTVs.5 Similar moves will soon take place in Europe. More generally, Net-
enabled TV devices will mean that VOD becomes “TV-network-agnostic” — and thus can be
delivered to satellite TV and DTT households as well.

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The Future Of European video On Demand Is Tv-Based 2

· The business case for PC-based VOD is weak. With only 9% of European online adults
watching full-length video online on a monthly basis and many PC-based-VOD services only
available at the national level, the audience for most PC-based VOD remains very niche.6
Compared with the demand, the capex and opex required to enable the service are high.7 In
addition, even if they reach a critical mass of users, PC-based-VOD services face bandwidth
costs that greatly reduce their profit margin; TV-based-VOD services delivered via cable and
IPTV networks don’t have this problem.

Figure 1 European Online Consumers Prefer Tv-Based vOD To PC-Based vOD

“Would you be interested in watching TV programs or movies on demand on: a) a TV;
b) PC with a monitor and speakers?”

Interested on doing Interested on doing Interested on doing Not interested
it on a TV or a PC it on a PC only it on a TV only
60%
54% 52%
50%
43% 45%
41%

31%
29%
26% 26%
21%
15% 14% 16%
11% 11% 9%
9% 9%
7%8% 7% 7%

Germany Spain France UK Italy EU-5
(N=3,644) (N=1,670) (N=2,517) (N=2,883) (N=2,046) (N=12,761)
Base: online adults
(percentages may not total 100 because of rounding)
Source: European Technographics® Consumer Technology Online Survey, Q4 2008
53580 Source: Forrester Research, Inc.

May 21, 2009 © 2009, Forrester Research, Inc. Reproduction Prohibited


TV-Based VOd OFFers sTrOng adVerTising pOTenTial
Compared with video revenues, on-demand TV revenues — i.e., from near-VOD (NVOD), pay per
view (PPV), and TV-based VOD — remain small in Western Europe. But they have grown quickly
since 2004, representing €1.1 billion in 2007 in the EU-5 (see Figure 2).8 In the medium term, TV-
based-VOD revenues should grow rapidly as:

· TV-based-VOD audiences grow solidly in the next three years. TV-based VOD is
experiencing strong uptake on the IPTV and cable TV networks on which it is available.
According to TV service providers, VOD reach now often approaches 50%, and VOD views of
paid content range from 1.5 to three per month per user. VOD usage is, of course, higher.9 The
UK’s Virgin Media, which offers most of its on-demand programs for free, receives 30 views per
user per month. Catch-up TV services, which can be offered both for free and on a paid basis,
are by far the most popular on-demand TV services. TV-based VOD’s reach will continue to
grow steadily as TV service providers promote their VOD services to their subscriber base.10

· TV providers develop attractive TV-based-VOD offerings to differentiate themselves.
For IPTV and cable TV service providers, VOD and catch-up TV services act as a market
differentiator. They increase subscribers’ loyalty and can help increase their average revenue per
user (ARPU). In addition, given the sensitivity of TV-based VOD’s profitability to scale and the
rise of video piracy resulting from the economic recession, it is imperative for providers to take
action so that consumers increasingly use their VOD service.11 In the short term, VOD service
providers will continue to offer occasional discounts, attractive VOD subscriptions or packs, or
innovative bundles to drive demand for VOD.

· Consumers quickly realize the benefits of TV-based VOD compared with DVD rental. Once
mainstream consumers become aware of TV-based VOD, it will start eating into DVD viewing. TV-
based-VOD rental offers users real benefits compared with DVD rental: They don’t need to plan to
watch a DVD; they don’t need to go out to get the DVD; the service is available 24x7; the range of
titles available is much wider; there is no penalty for late delivery; and it costs roughly the same. As
films and TV shows become increasingly available on demand from the TV, European consumers
will increasingly replace their DVD viewing with TV-based VOD — especially if the TV-based on-
demand content is available for free and they can find similar content to that on DVD.

· TV-based-VOD services attract advertisers through targeting. VOD categories naturally
enable advertisers to reach a segmented audience, making advertising more efficient. Some
European TV-based-VOD service providers have already sponsored some VOD categories
as a simple way to generate advertising revenues. However, the dynamic ad insertion systems
that many vendors now offer — such as those from Alcatel-Lucent, Cisco Systems, Motorola,



SeaChange, and TANDBERG Television — could help them take VOD-related advertising
to the next level with targeted pre-rolls or mid-rolls.12 Targeting will make VOD-related
advertising extremely enticing to advertisers, all the more so because it is possible to disable the
fast-forward capability when delivering VOD ads.

· TV-based-VOD service providers can charge higher CPMs than TV broadcasters. Because of
targeting, TV-based-VOD service providers should be able to charge higher costs per thousand
(CPMs) than the average of €6 that we see for TV in Northern and Western Europe.13 In fact,
they could logically charge an average CPM similar to that currently seen for online video — or,
at least, for prime-time TV. Thus, on the basis of an average of 25 free VOD views per month
per user, a VOD service provider with 1 million users that sold two targeted ads per view for an
average CPM of €20 could potentially generate annual advertising revenues of €12 million —
and, as a result, cover a significant part of its annual VOD expenditure. VOD-related advertising
thus also looks very attractive to TV service providers: Once they reach a critical mass of users,
VOD-related advertising will become a key component of their annual TV-based-VOD turnover.

Figure 2 On-Demand TV Services Revenues In The EU-5 Reached More Than €1 Billion In 2007

Consumer spending on DVD rental and on-demand TV services in
Germany, France, Italy, Spain, and the UK
(€ millions)
On-demand TV* DVD rental Annual average growth
rate for 2005 to 2007:
€1,723 On-demand TV: +41%
DVD rental: -14%
€1,488
€1,277
€1,133

€838

€544

2005 2006 2007

Source: Forrester aggregated information from the International Video Federation (IVF), operators, and national
regulators in April 2009.
*Note: TV-based on-demand TV services include pay per view, video on demand (VOD), and near-VOD.
53580 Source: Forrester Research, Inc.



W H AT I T M E A N S

TargeTed adVerTising is THe saViOr OF THe eurOpean VOd indusTry
Consumers’ interest in vOD and the business case for vOD suggest a promising future for Tv-
based free vOD (FOD) in Europe:

· The european pc-based-VOd market will go through restructuring in the short term.
With just one in five Europeans interested in watching Tv programs and movies on demand
on a PC, most of the existing PC-based-VOD services will find it hard to reach a critical mass
of users and become profitable. In the future, European consumers will mainly use online
vOD services to complement Tv-based-vOD services. Given the current recession, vOD
services that are only available through the PC will soon exit the market unless they develop
a short-term strategy to reach the Tv set as well. As distribution via Tv service providers
may turn out to be difficult, European vOD service providers should consider short-term
alternatives, such as getting onboard with over-the-top VOD platforms like the Xbox 360.14
· VOd advertising systems will be widely deployed in europe by 2011. As advertising is an
essential component of Tv-based-vOD service profitability, trials of dynamic ad insertion will
multiply throughout 2009 in spite of the recession. Within two years, most European digital
cable Tv and IPTv networks with a critical mass of subscribers will offer advertisers dynamic
ad insertion on their vOD service. Tv advertisers and advertising agencies should then
start working with Tv service providers to define the appropriate business models for vOD
advertising. vOD service providers will also need to convince advertisers of the advantages of
the Tv-based-vOD platform compared with other new media channels.
· TV-based-VOd revenues in western europe will surpass €2 billion by 2013. According to the
International Video Federation, consumer spending on DVD rental peaked at €2.7 billion in 2002.
Although it is declining, mainly because of the competition of retail DvDs and video piracy, it still
totaled €2.2 billion in 2007. As TV-based VOD is also a direct competitor to DVD rental, we believe
that the minimum potential overall revenues that Tv-based vOD will share with video piracy,
online VOD, and retail DVDs in the long run is €2.7 billion. By 2013, a significant portion of analog
PPv and NvOD transactions will also have become vOD transactions, while vOD advertising
attached to catch-up Tv and FOD services will start to generate some valuable additional
revenues. We believe that Tv-based-vOD revenues in Western Europe will grow at a minimum
annual growth rate of 25% to surpass €2 billion by 2013.



endnOTes
1
According to the European Audiovisual Observatory, more than 200 VOD services were available in
Western Europe at the end of 2007. Most of these VOD services were, in fact, PC-based-VOD services.
TV-based-VOD services are actually relatively new to the European TV industry, as most TV-based-VOD
pioneers, such as B2, Orange, and Telefónica, launched their services at the end of 2004. Source: “Number
of VoD services in Europe grew remarkably in 2007,” European Audiovisual Observatory press release,
February 19, 2008 (http://www.obs.coe.int/about/oea/pr/vod2008_update.html).

Forrester estimates that nearly 100 TV-based VOD services were available in Western Europe at the end
of 2008 — either on IPTV networks, cable, satellite, or terrestrial TV networks. See the March 23, 2009,
“Video On Demand Must Compete With DVD And The Economic Downturn” report.
2
Since June 2008, requests on BBC’s iPlayer delivered on the TV set have represented roughly one-third of
the total requests — either through the PC, the TV set, or handsets — recorded by the service. Source: BBC.
This reflects the strong appeal that TV-based catch-up TV services hold for UK consumers, as iPlayer’s TV
user base of 3.5 million households (14% of UK TV households) is smaller than iPlayer’s PC user base —
UK home broadband penetration was 65% in 2008. Source: Rahul Chakkara, Controller of TV Platforms,
BBC, “Public service, interactivity and IPTV?” IPTV World Forum 2009, March 8, 2009.
3
According to vendors that Forrester interviewed recently, if the TV service provider subscriber base reaches
500,000 households, the set-up cost per user to launch a VOD service on an IPTV network totaled €350
per user in 2009. This cost increases to €500 per user for TV service providers with fewer than 50,000
subscribers. Even if much of this expenditure can be charged against the cost of providing basic broadband
and TV services — the component costs of the above estimate include set-top box, ADSL lines and DSLAM,
an access gateway, and general back-office software — rather than being required specifically for TV-based
VOD, the costs related to acquiring content and the operating costs of running a VOD library of more
than 1,000 titles can quickly mount and prove heavy for a small TV service provider. Prepaid minimum
guarantees for a VOD library from a major US studio that includes 30 to 50 hits are believed to reach €2
million to €3 million a year.
4
Wholesale IPTV services usually include the provision of the VOD infrastructure (servers, software) as well
as content acquisition, the preparation and distribution of content (via satellite or CDN), reporting, and
revenue distribution to the stakeholders.
5
In 2008, we watched as streaming media made its way into the home via such diverse connected devices as
set-top boxes, games consoles, DVRs, and Blu-ray players. 2009 has brought us the news we all knew was
coming: The TV is going to be connected to the Internet in a big way. See the May 14, 2009, “The Year Of
The Internet-Connected TV” report.
6
When asked about their use of the Internet over the past year and which activities they conduct online
monthly or more frequently, 9% of Europeans said they regularly watch full-length video online (e.g., TV
shows, movies) Source: JupiterResearch/Ipsos Consumer Survey (9/08), n = 4,284 (France, Germany, Italy,
Spain, Sweden, and UK).



7
According to a recent study conducted by the French Centre National de la Cinematographie in 2008, the
annual operating budget for a PC-based-VOD service with a VOD library of 500 to 1,500 titles can hit
€2.2 million. If we assume an average price of €4 for a VOD rental and rentals of 1.5 films per month per
user, a provider needs a minimum base of 366,666 users to break even. Very few European PC-based-VOD
providers reached this number in 2008. The same study indicates that the annual operating budget for a
VOD service delivered via both the PC and the TV — typically VOD services offered on IPTV and cable
TV networks — can reach more than €10 million. Source: CNC materials “L’économie de la VoD en France,”
March 2008 (http://www.cnc.fr/CNC_GALLERY_CONTENT/DOCUMENTS/publications/etudes/Etude_
Vod_180308.pdf).
8
According to figures published by Germany’s Premiere and the national regulatory or public bodies —
Italy’s AGCOM, Spain’s CMT, the UK’s Ofcom, and France’s CNC and CSA — on-demand TV revenues
(i.e., revenues generated by NVOD, PPV, and TV-based VOD) in the five main European markets reached
€1.1 billion in 2007. The 2007 VOD revenue data published by Ofcom, CMT, and CNC totaled €247million,
€222 million, and €24 million, respectively. On this basis, Forrester estimates that VOD revenues in Western
Europe reached €500 million in 2007. Sources: “Industry Statistics Quarter 2008 Reports,” CMT (http://
www.cmt.es/cmt_ptl_ext/SelectOption.do?nav=publi_trimestrales&detalles=09002719800644f4&hcombo
Anio=2008&pagina=1); David Steele, “The UK market for film on VOD,” UK Film Council, May 18, 2008
(http://www.ukfilmcouncil.org.uk/media/pdf/1/a/David_Steele_VOD_presentation_Cannes_May_08.
pdf); “Movie markets in the UK,” Office of Communications, December 18, 2007 (http://www.ofcom.
org.uk/consult/condocs/market_invest_paytv/annex11.pdf); “le dossier #305,” Centre national de la
cinématographie, March 2008 (http://www.cnc.fr/Site/Template/T8.aspx?SELECTID=2923&ID=1985&Typ
e=0&Annee=2008&t=1).
9
In 2007, Telefónica reported that 34% of Imagenio’s subscribers bought three films per month from its
“Video Club” VOD service. The most recent figures issued by some European TV providers also reveal VOD
buy rates that are not far from and sometimes higher than DVD buy rates. In Portugal, for instance, 45% of
Meo’s IPTV subscribers have paid to use VOD, watching an average of 2.8 movies per month in 2008. UPC
Nederlands reports four VOD views per user per month, as well as 50% VOD reach in 2008. On Belgium’s
Telenet cable networks, each VOD user selected, on average, 3.5 VOD views per month in 2008. In France,
Orange’s VOD users bought, on average, 1.5 films per month in 2008. In Spain, cable TV service provider
Ono, which, like the UK’s Virgin Media, offers the majority of its on-demand program library for free,
recorded 28 VOD views per user during September 2008; it also said that 60% of its subscribers that can
access the service regularly used its VOD service. Source: Q4 2008 earnings reports for each of the listed
providers.
10
Several European TV-based-VOD service providers that Forrester interviewed recently have indicated
that their VOD reach increases with time, promotion initiatives, and regular marketing campaigns.
Virgin Media’s figures for its UK VOD reach show that growth is linear and develops with the number of
VOD-enabled TV households as well as consumer awareness: In Q1 2007, Virgin Media announced that
VOD was available to 3.1 million subscribers and that 43% of these used it on a monthly basis. Source:
Virgin Media first quarter 2007 earnings report, May 9, 2007 (http://media.corporate-ir.net/media_files/



irol/13/135485/Q1_07_Analyst_presentation_FINAL.pdf). After actively promoting its VOD services
among its subscriber base and, notably, the launch of the BBC’s iPlayer, Virgin Media reported that its VOD
service was available to 3.5 million subscribers, with 53% using it on a monthly basis. Source: Virgin Media
first quarter 2009 earnings report, May 5, 2009 (http://phx.corporate-ir.net/External.File?item=UGFyZW50
SUQ9NDM4N3xDaGlsZElEPS0xfFR5cGU9Mw==&t=1).
11
TV-based-VOD service providers need to strengthen the consumer experience and define relevant pricing
strategies if they wish to boost consumer interest. Content merchandising as well as better integration with
the linear TV experience will also help raise consumer awareness. All this will only be possible if providers
can sign more flexible licensing agreements with the rights holders. See the March 23, 2009, “Video On
Demand Must Compete With DVD And The Economic Downturn” report.
12
When a consumer requests a VOD stream, the system immediately picks the most relevant ads to
accompany the content and creates a dynamic playlist on the fly. The criteria used to pick the ads can be as
simple as the geographic area where the consumer lives or the pay-TV packages he subscribes to. But these
systems can also consider other specific details that the consumer has provided to the TV service provider,
such as the number and age of children in the home, as well as previous video consumption. Service
providers can also implement VOD-related ad viewership measurement so that advertisers know exactly
how many households watched the ad and for how long.
13
According to a study commissioned by JCDecaux, the average CPM for TV and adults aged 15 or older was
€5.90 in Northern and Western Europe in 2008. Source: JCDecaux, “Comparatif coût pour 1000 contacts,”
(http://www.jcdecaux.be/pdf/Comparatif%20co%C3%BBt%20pour%201000%20contacts%20par%20
pays%20et%20m%C3%A9dia.pdf).
14
Most European TV-based-VOD services providers have tended to prefer to run their own-brand, in-house-
designed VOD services, rather than offering space to third-party VOD service providers. BelgacomTV,
Ono, Orange, Telenet, Telefónica, UPC, and Virgin Media have chosen this model. Only a few TV service
providers, such as Free and Numericable in France, have opted for a VOD portal approach, giving TV
viewers a choice of different VOD brands.

Forrester Research, Inc. (Nasdaq: FORR) is an independent research company that provides pragmatic and forward-thinking advice to global leaders in business
and technology. Forrester works with professionals in 19 key roles at major companies providing proprietary research, consumer insight, consulting, events, and
peer-to-peer executive programs. For more than 25 years, Forrester has been making IT, marketing, and technology industry leaders successful every day. For
more information, visit www.forrester.com.
© 2009, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions
reflect judgment at the time and are subject to change. Forrester®, Technographics®, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are
trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. To purchase reprints of this document, please email
clientsupport@forrester.com. For additional information, go to www.forrester.com. 53580

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