BANGALORE: Video on demand (VoD) revenues will reach $12.7 billion worldwide in 2011, making it one of the fastest-growing digital content services over the forecast period, predicts Ovum, the analyst and consulting company.

Starting from a base of $2.7 billion in 2007, Ovum expects to see more telcos across the globe launching their on-demand content propositions, moving themselves into content distribution.

"VoD is not a revenue generator at the moment but a 'must have' vision of the future in terms of both cash flow and telcos' content business survival," says Aleksandra Bosnjak, content and media analyst at Ovum.

"From a content provider's perspective, telcos and ISPs will be the new contributors to content distribution and film finance, especially over the long term as the service improves and reaches a more significant scale and enhances its on-demand functionalities," explains Bosnjak, who will be presenting her research at the 60th Cannes Film Festival.

Ovum's forecasts show that over the short term, VoD is not a revenue generator but a vision of the future. Telcos are facing competition from all kinds of players - from old pay TV media to new digital distribution entrants - and the pressures of network convergence. This, coupled with challenges around content acquisition costs and finding the winning VoD business model formula, will mean that it is not a source of cash for the moment.

"We argue that over the next five years, 50 per cent of telcos' costs will come from content acquisition and marketing-related activities," says Bosnjak. "In their quest for an innovative content strategy, some telcos will experiment with various forms of content finance, such as financial backing via minimum guarantees, or go even deeper into the actual co-productions or co-ventures. In fact, we predicted this move back in February 2006 when we ran into telcos at the Berlin Film Festival. And we already see it happening with France Telecom and a baby IPTV operator Croatia Telekom Max TV service, which is producing its own short-format shows, and by using its own in-house production talent and facilities."

Ovum's view is that a careful content strategy and locally adapted VoD proposition will be a major driver of telco VoD service revenues, now estimated to comprise one third of the whole VoD revenue pie, depending on the country.

"Understanding the cash flow of traditional content distribution and collaboration with local content players will be the best approach for many operators in this tough VoD race - because the future of TV content, and especially European content distribution, is based on an on-demand business model," concludes Bosnjak.

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