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HD Television: Defining the Future of TV

Nov 22, 2004  •  Post A Comment

Bryan Burns said he has received quite an education in the two years since ESPN first announced its plans to launch a high-definition cable network.

Mr. Burns, ESPN’s VP of strategic business planning and development, remembers that at the time of ESPN HD’s March 2003 launch, the network was having trouble with its backhaul encryption, which enables feeds from sporting events to be beamed from remote trucks to the network’s headquarters in Bristol, Conn., for distribution to operators. In getting the data to Bristol, there were times when the equipment would freeze up, briefly leaving viewers of both the HD and standard-definition channels without a picture.

Other times, because ESPN was broadcasting in both HD and standard-definition format, the remote trucks became laden with so much equipment that power would drop out. There were also problems with the equipment itself, much of which consisted of early-generation models rife with flaws, Mr. Burns said.

“There were a number of times that it was harder than we thought it was going to be,” said Mr. Burns, one of the early architects of ESPN’s HD initiative. “Things happened that stumped us. But there was never a time that we thought it’s not worth it.”

Mastering the technical aspects of HD delivery might have been the easy part when compared with the challenge of convincing the mass market to jump on the HD bandwagon. Indeed, despite the increased comfort level with the processes used to deliver HD signals to consumers, the picture remains unclear whether HD is simply another example of a technology in search of a use-at least in the near term-or in fact the means by which consumers will watch TV in the future.

“There is some appetite, though limited, for this product,” said Mark Lazarus, president of Turner Entertainment Group. “But the question is, at what point do you stop getting early adopters and it becomes mainstream? This is going to be [the standard for] television, but it will take some time.”

It’s a refrain repeated by many cable network executives who have launched or are about to launch high-definition programming or channels devoted entirely to HD. As they see it, HD is going to do to television what color did to the medium when it was first launched in 1953. And while no one knows exactly how long that process will take, most agree there’s no time like the present to put their flag in the sand.

“If you look at the evolution of television, from cable to DVD and now to HD, it has been an unrelenting quest for picture quality,” said Clint Stinchcomb, senior VP and general manager of Discovery HD Theater. “We see HDTV as a natural progression.”

Competition with content distributors is another reason networks are getting into the HD game. With cable and satellite operators locked in a pitched battle over subscribers-especially premium subscribers-both sides are viewing HD as an important weapon. Customers who tend to get HD services from either a satellite or cable provider are more likely to buy other services from that provider, reducing the chances that the customer will bolt in favor of the competition.

“We find [HDTV] a tremendous differentiator,” said Stephanie Campbell, senior VP of programming at No. 1 satellite operator DirecTV Group. “It is one of our top priorities at DirecTV, in conjunction with offering local HD channels.”

Some forms of programming-sports, movies and epic or highly visual content-lend themselves to HDTV. Beyond that, its demand remains unclear.

A quick look at who’s betting on HDTV proves that point. At one end of the spectrum are such networks as Discovery and ESPN, both with channels that broadcast entirely in HD, using a combination of repurposed and original content. ESPN is now on pace to broadcast 180 events in HD by year-end and plans to boost that number to 300 in 2005.

In the middle are networks that have put their toes into the water with a measured approach.

At the other end of the spectrum are networks with no plans, at least public ones, to dive into the HDTV pool. These networks, which include Lifetime Television and MTV Networks, may not own content that has been the traditional lifeblood of HDTV, and appear to be taking a wait-and-see stance, according to people familiar with those networks’ plans.

That said, there are nearly 20 broadcast and cable networks that either have a channel devoted entirely to HD or broadcast at least a few hours a day in HD. Some, like Turner Broadcasting Group’s TNT in HD, are simply high-definition versions of a parent network’s feed. Others feature a combination of programming produced in HD along with newly converted library material.

NBC Universal’s Bravo HD-Plus, for example, uses a combination of concerts, movies and theater performances for programming. NBCU is relaunching the channel in December to feature HD content from Universal Studios, as well as TV series from some of the company’s cable channels, that will supplement programming currently on Bravo HD-Plus.

Scripps Networks is experimenting with HD by mining the libraries of its four networks for content that could be folded into a channel. So far, Scripps has about 25 hours’ worth of content, with plans to ramp up next year.

“We’re very excited about [HDTV],” said Mark Hale, Scripps Networks executive VP of operations and production. “This is a medium that we can get a lot of benefit out of.”

But while many cable executives in particular are bullish about the format, consumers aren’t yet showing the same kind of enthusiasm.

According to JupiterResearch, just 7 percent of television households owned an HDTV monitor in 2003. While that is up from 0.7 percent in 2000, it could be several years before networks see the kind of critical mass that could make programming investments pay off. Though JupiterResearch predicts the penetration rate will grow to 49 percent by 2008, some observers are less sanguine.

A key hurdle is cost. Up to now, most HDTV set owners have been early adopters-sports fans and videophiles who don’t mind spending thousands of dollars on a set.

For most consumers, however, the price of admission is still too steep. The average wholesale price of an HDTV set hovers around $1,300 this year, according to the Consumer Electronics Association. That’s down from $1,440 in 2003, but still far more than a standard-definition TV, which typically sells for less than $300.

A different kind of cost challenge confronts cable networks. Creating and producing HD content is more expensive than standard-definition content. Though the price differential is narrowing, HD content still commands a 10 to 15 percent premium. There are significant costs associated with converting existing libraries to an HD format as well.

What’s more, recouping those costs in any meaningful way is probably years off. While some advertisers are dabbling in the format for their commercials, many remain on the sidelines, held back by the higher production costs and relatively small target audience.

While the networks can earn higher carriage fees from cable and satellite operators eager for HD content to attract and retain high-end customers, they won’t be enough to offset losses generated by the cost of running an HD channel.

“The thing about HD which is so interesting is that economically it makes no sense at all,” said Todd Chanko, an analyst at JupiterResearch. “There are significant costs that networks have to engage in if they are reprocessing and transferring film to [the HD format] and to managing parallel systems and conversions. Preproduction and post-production resources have to be allocated to get content on the [satellite] for distribution.”

Network executives admit that they are rolling the dice by launching HD content today in anticipation of a sizable audience materializing tomorrow. But for a number of networks the risk is worth it, even if it takes as long as five years before their HD channels turn a profit.

The reason is simple: Better to stake a claim on the HD waterfront now than try to get a spot once HD is a widely used format. High-definition channels take up considerably more band
width than standard-definition channels, which means there will likely be fewer opportunities down the line for a network to have a shot at carriage than there are today.

“We did lose money entering the space, but we got a lot out of it,” said David Zaslav, president of NBC Universal Cable, who added that the company learned about viewing habits and which content is best suited to HD. “By moving early into the space, it gave us a slot that will be very valuable in the future.

“By the time it’s a profitable venture, everyone is going to be saying, `Let me get into that space,”‘ Mr. Zaslav said. “But it will be too late; there will be a long wait at the door.”