HD Television: Carriage Key to New Model

May 2, 2005  •  Post A Comment

Though at least 18 national networks offer content in high-definition and consumer demand for programming is on the rise, many HD networks lack the distribution agreements they need for widespread visibility. How such carriage issues are resolved could set the tone in the coming months for a new business model that affects cable operators, programmers and consumers alike.

At issue, primarily, is the question of license fees. Most cable operators offer HD tiers free to consumers and are not inclined to pay extra for that content. In addition, HD channels are notoriously taxing to an operator’s system, occupying about the same amount of space as five standard-definition digital channels.

Still, many of the incipient HD networks are optimistic that their carriage will increase dramatically as consumer demand rises.

Scripps Networks, for example, has predicted that HGTV in HD will be fully distributed when it launches early next year. “My expectation is we will be in every single hi-def household,” said John Baird, executive VP of affiliates sales and marketing at Scripps. Scripps also expects to command a license fee for HGTV and Food Network in HD.

Those are bullish predictions, given that other HD networks that launched first are still angling for carriage deals with multiple system operators.

Comcast, which late last month announced it would add TNT’s HD feed to its lineup, said it maintains a policy of not paying license fees for HD content.

Generally, Time Warner does not pay extra for HD either, unless the content is exclusive to the HD platform and does not have an underlying standard-definition component. Time Warner does pay for networks such as HDNet and INHD and INHD2, but it recoups that expense by charging consumers an additional fee in a paid HD tier to cover the costs. The operator also has a free HD tier with other content, such as Discovery HD Theater.

Fees in the ‘Tens of Cents’

The no-license-fee stance also allows cable operators to look local broadcasters in the eye and say they don’t pay twice for HD content when local stations want to be paid for their HD signals.

HD programmers need to look toward ad revenue as their core, said WealthTV CEO Charles Herring. “It seems clear the business model needs to be ad revenue, but to supplement the ad revenue, there needs to be a small amount of fees,” he said.

Mr. Herring said his network has been getting license fees in the “tens of cents” per sub. WealthTV is available through some small cable operators and has inked a deal with Charter.

As a new round of networks such as HGTV, Food Network and National Geographic Channel gears up to enter the HD world next year, no one seems to doubt that demand for HD is rapidly expanding. The Consumer Electronics Association predicts 31 million digital TV sets total will have been shipped to retail by the end of this year, up from a base of 16 million at the end of last year. Nearly 90 percent of those sets are HD sets.

But when customers unwrap their shiny new sets, they may not be able to watch all that much in HD. Many networks, including Universal HD, TNT HD, HDNet, ESPN2 and new entrants such as WealthTV and the Outdoor Channel, are still in pursuit of mass distribution. Despite the broad license fee philosophy shared by the MSOs, most distribution agreements are complex, allowing for compensation to be worked out in indirect forms. These could include carriage of other digital networks, a longer-term deal or a higher license fee for other networks.

“HD is often part of a broader affiliation agreement,” said Clint Stinchcomb, senior VP for Discovery HD Theater and VOD, which is fully distributed, with the exception of Cablevision. “It’s not one for one, which makes it challenging for new entrants with no additional services.”

Universal HD, for instance, is part of the larger NBC Universal family, with 14 properties. Universal HD, now available to 26 million homes, has been gaining momentum with new carriage deals, partly as a result of its parent company’s overall attractiveness as a program supplier. “We have a lot of stuff we make available,” said Ron Lamprecht, VP of new media at NBC Universal Cable.

Parceling Bandwidth

In addition to business issues, operators face bandwidth constraints. They need to parcel out capacity among SD, HD, digital, VOD, high-speed Internet and telephony, said Bob Wilson, senior VP of programming with Cox.

Still, he said it’s important to try to carry as many new HD networks as possible to support a natural evolution in TV format to HD and to compete effectively with satellite. But Cox does not intend to pay license fees for HD content, he said, characterizing HD as a basic investment networks must make for the future.

Until then, networks that launched during the initial HD land grab earlier this decade are sitting pretty as new players scramble for space. “There are some networks that had a long-term vision and got in the game early,” Mr. Wilson said, citing Discovery HD Theater and ESPN HD as among the networks with foresight.

Those networks are widely available in HD, but HDNet, which was launched at about the same time, is not. Mark Cuban, HDNet’s co-founder, chairman and president, said bandwidth is one reason his network isn’t fully distributed. Bandwidth is likely to remain an overhang until cable operators transition to all-digital infrastructure, he said.

Capacity issues are temporary, said Pamela Euler Halling, senior VP of marketing and programming for Insight. “When you launch phone, high-speed, then all the video requirements, you have to manage it carefully,” she said.