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Providers Aim to Keep Up With Growth

Mar 16, 2008  •  Post A Comment

When MGM was preparing last year to launch a high-definition channel to showcase its archive of classic films such as the “Rocky” and “Pink Panther” movies, it made perfect sense to talk to Comcast. After all, the largest U.S. cable company is a 20% stakeholder in MGM HD.
Finally, in October, MGM HD announced it was ready to make its initial splash—with DirecTV.
“The irony doesn’t escape me,” said Douglas Lee, executive vice president of worldwide digital media at MGM HD. “But DirecTV gave us a national footprint, and it wanted to be known as the ultimate HD provider. It just happens to be competitive with our 20% owner.”
Cable companies such as Comcast have been on the defensive since DirecTV, the largest U.S. satellite television company, said in January 2007 that a new satellite would give it 100 high-definition channels by the end of that year. The company, which has about 17 million subscribers versus Comcast’s 24 million, finished 2007 with about 90 HD channels, or about the combined total for Comcast and No. 2 cable operator Time Warner Cable.
“Cable companies were early to the game,” said Ian Olgeirson, senior analyst at research firm SNL Kagan. “The place they’ve had trouble keeping up is having the available bandwidth to provide enough HD channels to hit the 100-channel mark, which is a nice round number when it comes to marketing.”
Comcast and its smaller competitors have fought back since then by promoting their own HD channels and video-on-demand services. Comcast returned DirecTV’s salvo in January by launching a video-on-demand service that will have an inventory of more than 1,000 series and movie choices a month by the end of this year. The company also said it may have as many as 60 linear HD channels by the end of this year, up from about 40 now.
“We don’t really think it’s about the linear channels anymore,” said Derek Harrar, Comcast’s senior VP and general manager of video services, in a January interview. “High-definition customers are more advanced, demanding and technology-savvy. Most say they’d rather have programming on their own schedule.”
At stake is a base of high-definition television owners that has increased as HD programming has become more prevalent and the price of flat-screen TVs has dropped. North American consumers bought 10.3 million HDTVs during the fourth quarter, up 52% from a year earlier, according to NPD Group unit DisplaySearch. Those numbers are likely to grow, as about six out of seven U.S. households still don’t get true HD because they don’t have both an HDTV and an HD tuner, Nielsen Media Research said last October.
Shifting Market Share
By boosting HD choices, cable companies are trying to stem the flow of customers to DirecTV and No. 2 satellite provider Dish Network, which has about 14 million subscribers. Cable companies delivered TV services to 61% of U.S. households last year, down from 62% in 2006, while satellite TV’s market share rose to 28% from 24%, the Television Bureau of Advertising reported, citing Nielsen Media Research. Cable’s market share has dropped as much as 8% since its peak in 1998, according to SNL Kagan.
Of the four largest public cable companies that reported earnings last month, Time Warner Cable had the largest annual jump in cable subscribers, at 10%, while Comcast and No. 4 Charter were flat. Meanwhile, DirecTV cut its fourth-quarter turnover by 10% from a year earlier, largely because of more HD and digital video recorder subscribers, DirecTV Chief Executive Officer Chase Carey said in the company’s earnings call last month. HD and DVR subscribers made up 40% of DirecTV’s total, up from 30% a year ago; that’s expected to jump to 70% by 2010, the company said.
“DirecTV has obviously done a good job creating the appearance they carry more [HD channels] than we do,” said Bob Wilson, senior vice president of programming at No. 3 U.S. cable company Cox Communications. Cox has about 30 linear HD channels and is working on acquiring about 20 more. “But a lot of those [on DirecTV] are multiplied, with East and West Coast feeds of the same networks, and not all of them are true HD.”
“That’s an empty attack,” said Derek Chang, DirecTV’s executive vice president of content strategy and development. “Clearly, given that they’re in a much inferior place, they’re doing anything they can to discount our advantage.”
Cable companies are more likely to boost HD programming through video-on-demand than by adding linear channels, which push cable’s capacity constraints and can be expensive, said SNL Kagan’s Mr. Olgeirson.
Matching DirecTV channel for channel “is technically a possibility, but it depends on how much cable operators want to spend to get there,” he said. “There’s some diminishing returns with the HD lineup as it grows beyond that 40-channel mark.”
Cable companies also are trying to woo customers by bundling television, phone and Internet services, making them cheaper than it would be for a customer to combine satellite-HD service with separate Internet and phone services.
Such a strategy may help cable companies stem the flow of customers to satellite companies, which offer only TV service, said Mr. Olgeirson and Bear Stearns analyst Spencer Wang, who covers DirecTV, Comcast and Time Warner Cable.
“New technologies such as high-definition, video-on-demand and digital video recorders are the least important features in driving consumer demand for pay TV,” Mr. Wang wrote in a note to clients this month. “This could imply that DirecTV’s current stronger relative performance, which has been attributed to its 100 high-definition channels offering, may not be sustainable over the long term.”
Keep Focus on TV
Still, Mr. Wang said cable companies run the risk of losing more customers to satellite competitors by losing sight of television operations. While Comcast has been touting on-demand HD programming, Time Warner Cable, with about 15 million subscribers, may have fallen behind.
“Video, according to management, is the company’s product that currently faces the most competition,” Mr. Wang said in a Feb. 6 note to Time Warner Cable investors. “Like other cable operators, it appears that TWC has not done a good job of marketing its video product, especially its high-definition offering.”
Additionally, as cable companies ramp up HD choices by expanding channels and boosting VOD options, another competitor for customers may be on the horizon—fiber-optic television service. As cable companies’ market share continues to fall and satellite TV demand stabilizes, telecommunications companies, whose market share was negligible last year, will account for about 11% of the market by 2017, according to SNL Kagan.
So far, the most visible telco entrant is Verizon, which started its FiOS television service in September 2005 and surpassed 1 million subscribers this month. FiOS is promoting its HD service by touting its picture quality, which it says is better than satellite and cable because fiber-optic lines require less compression of picture signals.
“Everyone’s running after leadership based on quantity because customers understand that,” said Terry Denson, Verizon’s vice president of content strategy and acquisition. “But quality is highly subjective, so you need to come up with a more textured marketing position.”

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