There’s no question that video-on-demand is gearing up to revolutionize the television industry over the next few years. And with worldwide VOD cable subscribers projected to number 17 million by 2008, the time to get into the game is now.

VOD first hit the U.S. scene five years ago as an in-home movie rental service. But it expanded to include TV fare in under a year, and cable nets such as PBS Kids, Cartoon Network and Discovery Kids were quick to start providing content from their vast libraries to the digital cable operators running the show. These early adapters now work with U.S.-based services including Comcast and Time Warner to offer between 10 and 45 hours of on-demand programming a month to the more than five million U.S. families who regularly use VOD services to view what they want when they want.

‘We quickly came to an understanding that securing VOD space would be like securing linear channel space on a cable service in the mid-’90s,’ says Deron Triff, VP of digital ventures at PBS. ‘This is the logical evolution of television.’

Nelvana’s Doug Murphy, executive VP of business development, says it’s just as important for content producers to start evaluating the service. He’s spent the past six months doing just that and is on the brink of completing a number of strategic deals with cable operators and content aggregate partners in the U.S., the U.K., France and possibly parts of Asia in the coming months. Murphy expects that the VOD market will soon be an important revenue pocket for the kids TV industry, and he doesn’t want Nelvana to miss out when the wave crests. But, he cautions, ‘it’s an economics issue because no one is expecting to make a lot of money on this today.’

Traditionally, VOD rights have been lumped in with pay-per-view rights as an afterthought broadcast stream that wasn’t expected to generate any revenue. But Neil Goldberg, senior VP of programming for on-demand content aggregator TVN, says producers need to become more conscious of these rights during distribution negotiations. As VOD penetrates the market more deeply and becomes a viable moneymaker, he says producers will want to start dealing with these rights separately in their broadcast agreements.

As the market matures, producers selling individual VOD-enabled shows will probably benefit from dealing with a big broadcast brand that has some built-in cachet with viewers and existing relationships with the service providers. PBS Kids, for one, is looking beyond its current cable schedule for VOD programming, having picked up new episodes of Thomas the Tank Engine (which used to air on the pubcaster as part of its Shining Time Station program in the late ’80s and early ’90s) from HIT Entertainment.

Cartoon Network and Boomerang, meanwhile, are sticking with proprietary content to build their on-demand lineups. ‘Since Cartoon Network is producing more and more original shows, we’re getting an increased base of programming we can use for VOD,’ explains Mark Norman, senior VP of business operations for Cartoon Network U.S. and Boomerang.

But as on-demand service becomes more of a mainstay, most cablers plan to use the medium to experiment with lesser-known series that haven’t really hit yet on cable, as well as possibly debuting new shows on the service before they hit the linear channels. ‘We haven’t tested pilots or new series in VOD yet, but it’s an interesting idea,’ says PBS senior VP of programming John Wilson.

Producers who’d rather not approach VOD under a cable net umbrella can either go directly to the cable operators or opt for representation by content aggregators like TVN or In Demand, which is wholly owned by Comcast, Cox Communications and Time Warner. These companies occupy the middle ground between producers/distributors and the VOD service providers, packaging and promoting shows to various U.S. cable operators. ‘It’s our job to tell them what programming they need,’ TVN’s Goldberg explains.

TVN has constructed a branded Kids Unlimited package that features a rotating lineup of programming from its content partners, which include Scholastic, PBS Kids, Mainstreet and RCN. Cable companies Charter, Bresnan and Insight use this package on their VOD services, and Adelphia has just signed up for a Kids Unlimited launch before the end of the year.

When parents hit the Kids Unlimited area of their on-demand service, they’re presented with a list of household-name content brands (i.e. PBS Kids and Scholastic) from which to choose programming. Shows from indie studios that don’t have the brand exposure of these big companies appear under a Best Of Kids option. ‘There are some cable companies that think they only need content from major networks,’ says Goldberg. Because it’s early days still, most VOD players are holding usage figures close to their chests. But Goldberg says that his data shows kids are watching a lot more programming than just the big hit shows.

At In Demand, top-performing series from well-known producers are what VOD operators go for first. But Rebecca Glashow, director of content planning and management, is also eager to look at healthy libraries of classic kids content, as well as non-theatrical movies for kids and families. ‘We’re not necessarily looking only for big-name stuff,’ she says. ‘Direct-to-video kids movies do really well.’

Whether you choose to work through a content aggregator or directly with the cable service providers, VOD contracts are set up differently than traditional TV license deals. In most cases, the producer/distributor will get a share of VOD revenues rather than a flat license fee.

But it may be awhile before kids entertainment players start to see any payback from this arrangement. Comcast, Time Warner and other operators are still very much focused on signing up more viewers, and they’re currently offering content for free as a subscription incentive. Whereas movie and premium channel offerings like HBO and Showtime charge viewers about US$5 for access to a film or show for 24 hours, Free On Demand is a complimentary service featuring kids and family programming and designed to introduce customers to VOD.

According to Kevin Cohen, senior VP and GM of interactive and enhanced television for Turner Network Sales, it simply doesn’t make long-term business sense to offer free programming indefinitely. ‘We ultimately believe our Cartoon Network and Boomerang VOD streams will be subscription services, but we’re willing to experiment in the short term to see how people are actually using the content.’

When it does come time to switch over to a pay model, there are limits to what consumers will pay for children’s programming on-demand. According to a study conducted by Innovista Research in 2002, only 53% of viewers interested in ordering a 30-minute kids TV show would pay US$2, compared to 81% who’d dish out US$1. (Based in Newton, Massachusetts, Innovista has also published two broader-based studies on the video-on-demand market, both of which are available for download at www.innovista.tv.)

So far, viewers appear to be interacting with VOD content in the same way they do with cable programming. Based on audience measurements calculated using a buy-in metrix by Portland, Oregon’s Rentrak, PBS Kids’ Wilson says there’s a definite correlation between broadcast ratings and VOD buy-in. ‘Barney is a number-one draw on the cable channel, so it makes sense that it’s a number-one draw for preschoolers in on-demand,’ he says.

But branding is a big issue for the cable nets, which are providing the bulk of kids VOD content right now. VOD was originally designed to support a movie platform featuring one-off titles that needed no brand support. But the addition of blocks of TV programming has forced the development of new positioning. ‘We’ve expressed a lot of concern to the operators about the current user interface, which is like DOS before Windows came along,’ explains TCN’s Cohen. ‘But we’re starting to see more brand-friendly environments now.’ On Comcast’s kids VOD user interface, for example, each cable net’s name is listed in a different typeface. And when viewers click through, they end up on a branded screen that looks a lot like the cablers’ website homepages.