Digital cable takes on satellite TV

Jul 23, 2001  •  Post A Comment

Four years ago, the cable industry needed a competitive weapon to vie with the direct broadcast satellite industry’s growing encroachment in the multichannel universe. Today that weapon, digital cable, is on nearly equal footing with satellite in subscriber count.
By the end of the year, digital cable will have attracted 15.9 million subscribers, predicts research firm The Carmel Group, compared with a projected 18.2 million for satellite.
While the numbers indicate that digital cable has lived up to many of the industry’s expectations, questions persist about how the product can fulfill its pro-mise. High churn rates have proven to be a chink in the armor of the technology’s early rollout, and the ability to offer robust interactive services-cable’s major claim for differentiation from satellite-on older, or “legacy” set-top boxes remains an issue going forward.
“As an enhancement to broadcast TV, it’s all it’s cracked up to be,” said Michael Harris, an analyst with Kinetic Strategies in Phoenix, Ariz. “The question is where do we go in the future? It’s been evolutionary rather than revolutionary-and with more revolutionary services, it’s a better revenue opportunity.”
Enabling interactive services on legacy boxes is essential to the product’s continued success, say experts. However, many operators have scaled back their plans to introduce next-generation boxes, and interactivity on the current legacy boxes is simply not as robust, Mr. Harris said.
Joe Rooney, vice president, marketing, at Cox Communications, acknowledges that interactive TV is not as easy as originally thought. Issues with program guides, such as which ones will best support interactive applications, continue, he said.
That makes digital cable in its current form a me-too alternative to satellite, Mr. Harris said. Interactive services that take advantage of cable’s two-way pipe, such as video on demand, will be key to the future growth and penetration of the product. Most cable operators agree they need more than just a large number of channels to fully compete with satellite.
Given the growth and penetration rates of satellite, digital cable needs to be a better product, said Kim Kelly, chief operating officer for Insight Communications, which launched digital service in February 1999. “We’re very bullish on interactive digital cable, which is very different from digital cable because it really exploits the platform,” she emphasized.
Ms. Kelly pointed out that Insight does offer some basic interactivity with its service-an interactive program guide with access to local news, weather, sports and information as well as video on demand, which the operator offers in three markets and will expand to the majority of its digital homes in the third quarter. She expects in the future to be able to offer additional interactive services, including gaming, commerce and instant messaging.
Advanced broadband services like VOD should go a long way in driving penetration of digital cable. Charter Communications has launched VOD in four markets and plans to be in 10 by the end of the year. “It’s another differentiator,” said Rick Lang, corporate vice president of marketing for the MSO. He predicts Charter will count 2 million digital cable subscribers at the end of the year, up from 1.3 million at the end of March. “We’ve seen defects to DBS ramp down very well where we launch digital. This is the platform for the future,” he said.
Time Warner Cable employs a different philosophy. “This is not a new or separate product. It is just more cable,” said Mike Luftman, a company spokesman. Cable has other features that set it apart from satellite-and which make it a better product, he said, pointing to local signals, lower cost for a second receiver and the presence in the local community.
If digital cable is just more programming without any additional features, then providers can expect it to look like pay channels, pay like pay channels, churn like pay channels and penetrate like pay channels, said Ms. Kelly. It must be different, she emphasized.
Cox relies on bundling rather than interactivity as its differentiator against DBS. The operator packages digital video with its high-speed offering and telephony service. Digital is a “secondary arrow in the quiver,” said Mr. Rooney.
But that arrow has hit some rough spots when it comes to churn rates, which have been high in the early going, most cable operators admit. That is attributable in some part to special offers and trial subscriptions, which some customers choose not to renew. Charter saw churn rates as high as 10 percent in some areas in the very early days of its 1998 launch, said Mr. Lang, Now that number is hovering around 5 percent, thanks to the growing experience of the installation teams, he said.
Customer education has been essential to customer retention, especially during the first few weeks following the installation, said Mr. Lang. Charter installers provide handouts detailing the features and benefits of the service and the program guide. The company also offers an informational videotape, which has helped reduce churn in markets that use it. As customers better understand the service and its features, retention levels rise, he said.
When selling the service, cable operators usually pursue the low-hanging fruit first and then work their way up the tree. About 50 percent of Cox’s digital customers come from the existing customer base, said Mr. Rooney. Cox targets existing premium households first, followed by nonpremium customers, then former premium homes. The other 50 percent of digital connects come from “digital sell-in,” selling the product to new customers, such as those who are moving within the market or from another market. About 40 percent of Cox’s new basic customers opt for digital.
AT&T has seen its digital sell-in rate rise from 40 percent last summer to about 50 percent today, since it now offers digital value packages. Selling the service as a package with a single price point instead of layering services on top of one another has helped sales, said Cathy Kuo, vice president of consumer offerings for AT&T Broadband in Denver.
The name “digital cable” is a bit of a misnomer, points out Jim Stroud, an analyst with The Carmel Group. While digital cable does offer a digital tier of programming, not all of the channels are digital. “That’s the chink in the armor,” he said. That’s also why it’s so important for cable operators to capitalize on their ability to bundle services and their always-on connection, which satellite doesn’t have, Mr. Stroud said. “Both satellite and digital cable have their advantages, and now satellite has a stronger competitor in digital cable,” he said.