In a television landscape dotted with about 100 digital networks, there’s still a craving among viewers for more, said analysts, programmers and cable operators.
The potential also exists to migrate another 15 percent of cable subscribers to digital service. But sources agreed that successful new services will have to compete with high-definition television, video-on-demand and digital video recorders, the current darlings of cable operators.
Heartened perhaps by the much smaller bandwidth required for the digital platform, cable programmers have continued to introduce new product. The last year alone saw the launches of new digital networks Fuel, the Tennis Channel, College Sports Television, Starz! Kids, Reality TV and others.
Later this year digital nets such as Blue Highways TV, History en Espa ‘ol and Reality Central are slated to debut.
“I don’t think that we are ever maxed out on channels,” said Bruce Leichtman, president of Leichtman Research Group, a leading cable and broadband research firm based in Durham, N.H. “The capacity is there. The question from the operator side is at what price, and what value does it add?”
Operators will decide price questions for themselves, but the value of digital is clear-as in clear sound and clear picture. In addition to these immediate technical improvements, digital is the platform that enables advances such as high-definition, video-on-demand and interactivity, which when available, are usually offered to consumers at additional cost. All this on only one-sixth the bandwidth of conventional analog networks.
The issue now is that programmers have to fight harder for distribution, especially given the competition they face from other new services on the cable plant. “If you can demonstrate to the operator that it’s truly value-add and it’s original, unique programming, they will buy it,” said John Baird, senior VP of affiliate sales at Scripps Networks. “They won’t buy it in droves. That’s long gone. You will claw and fight to get distribution,” he said.
The cable industry will count about 22.5 million digital subscribers when the 2003 year-end tally is done, while satellite operators will count about 21.6 million, according to Leichtman Research.
Cable operators still have ample opportunity to mine more digital customers, Mr. Leichtman said. This year Comcast alone expects to add 700,000 to 1 million additional digital customers to its 7.7 million base.
Mr. Leichtman’s consumer research indicates that an additional 15 percent of consumers continue to express an interest in digital programming. That would bring the possible digital universe to 50 percent of current cable subscribers, up from 35 percent today.
Those numbers make sense to Cox Communications, which counts digital penetration at about 34 percent of its 6.3 million basic subscribers. Services such as on-demand, HD and DVR have the potential to drive that penetration number to 45 percent or 50 percent, said David Pugliese, VP, product marketing and management, at Cox.
Many cable programmers are keen on the prospect of multicultural digital networks driving that growth.
Fox Sports en Espa ‘ol launched in November 1996 and now reaches 6 million homes. In the past 12 months the network’s distribution in Spanish households has grown 33 percent to 2.8 million. Last month it started a nightly sportscast from Mexico, in addition to its regular Argentinean sports news, said David Sternberg, senior VP, emerging networks, at Fox.
MTV Espa ‘ol now reaches 13 million homes and is one of the top five Spanish-language networks, based on distribution, said Eric Sherman, VP, digital services for MTV and VH1. “I think there is definitely room for more digital nets. We see opportunity in the multicultural market,” he said.
In May History Channel plans to launch History Channel en Espa ‘ol, which will include documentary specials and series on historical topics, all in Spanish. The opportunity for such a channel exists because of the increasing prominence of the Hispanic population in the United States.
“The one thing we have consistently heard from all the distributors is the demand for certain Hispanic services,” said David Zagin, senior VP, affiliate sales. Several operators have launched Spanish-language tiers over the past few years but most have only 5 percent or lower penetration numbers, he said, so there is definitely room for growth.
Interest in other networks is growing too. Science Channel added nearly 2 million homes since June, bringing it to about 34 million homes. MTV, VH1 and Nickelodeon now feature 13 digital networks, up from five in 1998.
One of the most popular networks is VH1 Classics, which is available in almost 33 million homes.
Scripps’ Do It Yourself network reaches 26.6 million households, representing 93 percent growth year to year, and its Fine Living channel is in 20 million homes, for a 54 percent rise. The two networks also snared the top two spots in a Beta Research channel carriage study of networks that operators are most interested in adding to their digital lineups in 2004, said Scripps’ John Baird.
Their skyrocketing growth speaks to the value of original content, Mr. Baird said. Fine Living is 100 percent original programming, and DIY is 85 percent original. That’s the advantage Mr. Baird said he sees in an environment where carriage is becoming limited.
“There will always be a need for great, good, compelling programming, digital or otherwise. And nobody is launching any analog services anymore,” he said.
The industry still has capacity to grow, said Rick Haskins, executive VP and general manager of Lifetime Entertainment Services. In 2001 about 32 percent of women 18 and over knew about digital network Lifetime Real Women. Now that awareness is at 58 percent, based on a 2003 Beta Research cable study, he said. That means digital cable is starting to be taken more seriously, not only by the so-called early adopters but also by mainstream consumers.
“I think the only limiting factor is the creativity of coming up with networks that have a real meaningful reason for being. That’s going to be the limiting factor for everything,” Mr. Haskins said.
Carriage of new networks means assuming more fixed programming costs that are increasingly difficult to offset through new service levels or price increases on existing service levels, said Bob Wilson, VP, programming, at Cox.
“We are more focused on developing new products like HD and VOD/SVOD [subscription video-on-demand] and not on carrying more linear programming networks,” he said.
Comcast regularly evaluates new programming services and looks for channels that offer something new and different, including through VOD, said Andy Addis, senior VP, marketing and new products, at Comcast.
Of course, not all new channels will survive, Fox’s Mr. Sternberg said. “I think in some cases there is a mismatch between supply of channels and the demand,” he said. Fox, for one, conducts exhaustive research on many channel concepts before it proceeds with a single one, such as Fuel, the extreme-sports network it introduced last year.
Services such as VOD, telephony and HD need bandwidth too. Even if operators eventually transition their cable plants to all-digital networks, a concept that has been talked about as a long-term possibility in the industry, space isn’t limitless. “Compression gives you more capacity, but it doesn’t signify unlimited capacity,” he said.
The notion of an all-digital network does open greater distribution possibilities, though, said David Meister who, along with a group of investors, last year served up the Tennis Channel, mainly on the digital tiers of Time Warner, Cox and other cable systems.
“I think what it means is we will be available at some future date wherever we need to be. There will be some systems where Tennis Channel isn’t launched, but by and large we’ll be in 90-plus percent of the county in a few years,” he said.
Bob Classen, president of sales and marketing at Starz! predicts that digital channels with low viewership will be reclaimed and t
ransitioned to an on-demand environment. “The likelihood of massive launches from digi-nets is not great. Operators will likely migrate more channels to on-demand from digital,” he said.
In the end, though, it’s important to remember that technology exists to serve the needs of programming-not the other way around, said Lauren Zalaznick, president of digital network Trio. “You need to have compelling content that people want to get,” she said.