AFN Pay per View (PPV) Situation

History

AFN has contracted with TVN for pay per view service since we launched CATV services in 2000. The current contract with this vender is due to renew in April 2005. When the service began, TVN offered 32 channels of pay per view choices for AFN customers. Over time, they have reduced their offerings to the current situation where only 6 channels are now available.

When first alerted by TVN's notification of downsizing the number of PPV channels, AFN staff immediately contacted PPV principal in September 2004 to give us a 6-month window of opportunity prior to the TVN downsizing and contract renewal date of April 2005.

Staff contacted PPV billing vendor, Great Lakes, to confirm they could handle the billing process for another PPV vendor. This was confirmed by Great Lakes. InDemand is the sole PPV vendor available for use by AFN. AFN staff quickly completed and submitted InDemand's affiliate survey forms. It took over two months for InDemand to send a contract to AFN and it was received on January 12, 2005.

Staff submitted the proposed contract to the City of Ashland's Legal Department for their review. They identified 13 areas of concern and agreed to contact In Demand to see if they would renegotiate. As of Feb16, Legal has never received a response from In Demand.

The most troubling aspect of the In Demand contract is that it has a 5-year term with no way for the City to exit before the end of the contract. Also, we could not add any other pay per view service to AFN's offerings because the In Demand contract requires AFN to exclusively offer their service. In Demand as since then dropped this exclusively requirement.

PPV service has never been a profitable venture for the City. It appears that it was initially offered to make AFN competitive with Charter. Due to the reduction in titles available, and the fact that the timing of their availability coincided with this being offered for rentals and purchase by local venders, the take rate by AFN customers has been minimal and continues to decline.

Because AFN has no Headend Controller (HMS), we must rely on outside venders to configure the set top boxes, enable impulse buying and bill for PPV purchases. Right now payable to venders consume all of our PPV revenue. AFN is last in line for payment, and the cable system is responsible for collecting all late and non pays.

At the launch of AFN, all set top boxes we enabled for PPV. When the City saw the size of the bad debt that was being generated, AFN switched to requiring the customer give us a credit card that would be used to bill PPV purchases.

Right now we have 2022 active set top boxes of which 870 are PPV enabled and 342 of the 870 have credit card billing. Those 528 without credit card billing are sent a paper bill each month and it is the City's responsibility to chase all late pays. When AFN began operations, the total turn key solution was $1.00/Digital Box/Month. This included enabling set tops, TV Guide channel, remapping services, billing, filing and paying for studio right, and 32 channels of PPV with preview channels to showcase the offerings. We currently pay $2.25/box ($.75 of which is for PPV enabling), have only 6 channels of offerings with no preview channels. Therefore, we are at a decision point as to how to proceed with the future PPV services.

The business model for this industry is decaying. Titles are no longer fresh as consumers can buy Hollywood blockbuster titles at Wal-Mart and other retailers, before they are available on PPV.

Netflicks, Amazon, and Wal-Mart are now in the PPV rental business with movies mailed directly to consumer's homes. Blockbuster has eliminated their Late Fees (former 30% + of their annual profits) in response to the mail delivered movie services.

As an example of the decline of the PPV model, InDemand will downsize its product offering 6 channels in the spring. Staff expects InDemand to follow TVN's trend in downsizing product and transponder expenses.

Below are the options we need to consider in making this decision:

Option 1 Drop Pay per View

This option save us $.75 month for the 870 PPV enabled boxes for a gross saving of $653/month or $7,830 annually. Because Charter offers In Demand as a part of their service, we will be at competitive disadvantage if we drop this service. This action would negatively impact between 100 and 200 customers who use PPV.

Option 2 Continue with PPV with TVN

This retains the ability to promote that we have PPV but since titles are limited, continuing the current process results in a net loss to AFN. Adult titles which account for about half of the month's revenue were discontinued b y TVN in December 04, causing AFN's PPV revenue decline and revenue would continue to decline reflecting this fact.

Option 3 Continue with PPV with In Demand

Since this has 32 channels and preview channels we might increase PPV buys. Also, adult titles would become available again which account for about half of PPV revenues. Since this contract is for 5-years with no early out and no ability to supplement with local PPV or Video on Demand, this is a risky venture. If we did offer PPV, we could enable all boxes and write off the losses as a cost of doing business, like private cable system. Enabling all boxes would also increase our costs ($.75 month for 1152 additional boxes) by $10,368. Because our profit amounts to $1.60 for a $3.99 movie and $6.00 for a 9.95 movie, we would need to sell an additional 1,736 expensive titles or 6,480 regular titles to recapture the increased expenses.

Option 4 Move to Video on Demand (by purchasing Hardware and using a vender to supply content, or use a VOD vender for Hardware and content)-Turn Key Solution

Video on Demand allows viewers to select titles and operate them like a VHS tape or DVD by starting/stopping and viewing them on their own time frame. This is different from our current offering where titles are offered at a set time and you pay to view the selection at a specific time and is only available for one time for the price. The costs to AFN of purchasing the hardware are unknown, but could be determined with some more research. In order to make an accurate business case estimate for moving in this direction this research would need to be completed.

Going to a real video on demand system would give us competitive edge over Charter. Adding a local events ands either PPV or AFN exclusives would further add to our CATV competitive advantage.

Basic components of VOD

Equipment

• Video Servers (MPEGs Video Pumps)
• Video Storage

Software

Business Management
Content Ingestion------------------Bring down movies from satellite
Content Management--------------Keep library fresh
Subscriber Management-----------Current payables
Bandwidth Management----------400 streams of available playback
Client (system) support------------Technical support
Billing interface---------------------(method to bill customers)

Content

• Movie rights from studios
  Paid per title
  Studio rights fees

Other Critical Issues

Two factors will affect future VOD or PPV decisions:

• 1) AFN has no cable TV specific billing software capable of handling PPV purchases in house, so AFN must rely on an outside vendor for this service
  2) AFN has no Headend controller to communicate with set top boxes so this also must be out sourced.

A Headend Control costs about $150,000 but we recently came across a used on for $36,000.

Staff Recommendation

Staff recommends that we execute a new PPV contract with IN Demand and reinstitute Pay per View service on June 1, 2005. This recommendation is based on some customer's expressed dissatisfaction with the loss of Pay per View offering and also In Demands dropping of their exclusive requirement. While PPV is not a major profit center for AFN, staff feels we need a PPV product to stay competitive with a segment of our customer base.

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