Staging the cable industry's biggest test yet of dynamic video-on-demand (VOD) advertising, Charter Communications Inc. has begun inserting commercials freely on two VOD channels in the St. Louis metro area.

Charter, now the nation's third largest MSO, says it launched the field trial of dynamic on-demand ad insertion in 250,000 digital cable homes at the end of October. The large, three-month trial, which follows a much smaller lab test of the enabling technology earlier in the year, will run through January in the company's hometown market.

If all goes well, Charter officials intend to advance to a more ambitious "phase two" test of targeted addressable VOD ads next fall. That would pave the way for a broad rollout of dynamic, targeted advertising on potentially hundreds of on-demand cable channels in 2008 and 2009.

"We want to start really using it," says Todd Stewart, corporate VP of national advertising sales and development for Charter.

In the trial, Charter is placing commercials from two big advertisers -- reportedly Allstate and Sears Roebuck -- on free VOD channels Vehix TV and Hollywood Media. Using a new technique called "playlisting," the dynamic system cues commercials to run right before or just after a selected chunk of on-demand programming stored separately from the ad files.

Several cable tech vendors, including C-COR Corp. (Nasdaq: CCBL), Harmonic Inc. (Nasdaq: HLIT), and Atlas On Demand, are helping Charter conduct the trial. C-COR is supplying the video servers and video management software, Harmonic the video encoders, and Atlas the automated campaign-management tools.

"We've actually had this technology developed for quite a while," says Joe Matarese, senior VP of advanced technology for C-COR. "We can assemble things on the fly... The watershed event is that you've now got the advertisers, programmers, and Charter ready to kick this off."

Charter and other MSOs are pursuing dynamic ad insertion to capitalize on the growing popularity of VOD programming. With close to 30 million cable homes enjoying access to on-demand shows, MSOs now serve up billions of VOD "program views" to their digital video subscribers each year, giving them a huge potential audience for targeted commercials.

"VOD advertising is very much kind of a greenfield," Matarese says. "It has broad appeal."

But, under the ad insertion technology currently in vogue, it takes anywhere from 45 days to 90 days for on-demand commercials to run because they're encoded, spliced, and stored with the VOD programming as a single file on the same video server. That makes it impossible for cable operators to refresh or rotate on-demand ads frequently, never mind target them to narrow demographic groups or individual subscribers.

As a result, TV advertisers have mostly shied away from placing spots on cable VOD offerings so far. In 2005, on-demand advertising generated just a nominal $50 million for cable operators, according to a published report.

Charter and its tech suppliers hope to change all that. Under the system now being tested in St. Louis, the MSO is changing the ad content on the two free VOD channels every two weeks. Stewart aims to speed up the ad rotation to weekly and even daily eventually.

"In phase one, we're getting the Scarecrow up and walking," says Stewart, making a "Wizard of Oz" analogy. "Now we want to put the brain in the Scarecrow."

The MSO has encountered a few technical glitches so far. Most notably, a green line or flash would sometimes show up between a commercial and the VOD show, due to some older digital set-tops looking for a new video channel. But company officials say they've resolved the problem.

"This is harder than it looks," Stewart says. "Our goal is to make this thing work."

Charter is not alone. In early September, a much smaller cable operator, Sunflower Broadband, rolled out a similar trial of dynamic ad insertion with SeaChange International Inc. (Nasdaq: SEAC), Atlas, and other vendors in Lawrence, Kan. The 30,000-subscriber cable system began inserting commercials for a Paramount movie, Jackass: Number Two, into free VOD programming from Comedy Central.

Comcast Corp. (Nasdaq: CMCSA, CMCSK) is also exploring the use of dynamic ad insertion. Since the summer, it's been testing a similar system on three minor free VOD networks in its labs. But it hasn't announced a field trial like Charter's yet.

"They're all talking about it," says Gil Katz, director of cable solutions for Harmonic. "I would expect to see massive deployment in some of the biggest cable markets" by the end of next year.

— Alan Breznick, Site Editor, Cable Digital News