Cable Report: Digital Death Match

Cable and satellite giants fight harder than ever for subscriber dominance

The digital battle between the major cable companies and direct-to-home satellite services is intensifying. Both sides, desperate to make their offerings attractive to customers increasingly willing to pay more for digital entertainment and information, are rushing new services to market.

In their quest to take cable’s market share, satellite execs gathered last month in New York to hear what reps for News Corp., the prospective owner of DirecTV, had to say about the future of the business. Chase Carey, who will become president/CEO of DirecTV owner Hughes Electronics after News Corp. completes its purchase of the company, boldly predicted the U.S. satellite market will expand from 20 million subscribers to 30 million by the end of the decade. “It’s well within the reach of satellite TV,” he said.

That anticipated growth, driven largely by the push to develop advanced on-screen programming guides, personal video recorder (PVR) capability and interactivity, will come at the expense of cable. “News Corp. is prepared to make the investment necessary” to keep the pressure on cable, said Carey, who noted that 2002 was the first year cable lost subscribers, falling by about 700,000. According to the Satellite Broadcasting and Communications Association, DBS grew its sub base 10.7 percent in the past 12 months.

Still, cable is not going to cede those customers easily. The rollout of bells and whistles like video-on-demand (VOD) and high-definition TV—services that neither EchoStar nor DirecTV can presently offer—as well as high-speed Internet access, digital video recorders (DVRs) and telephone service not only have potentially wide operating margins—they also make customers more sticky.

By the end of 2002, NCTA estimates, there were 19.2 million digital cable subscribers in the U.S., an increase of more than 400 percent from 3.7 million in 2000. This year, digital cable is expected to hit 25 million. “These services are designed to give the customer more control of the video experience,” says Lynne Elander, vp/product development for Cox Communications. The new services “are really powerful glue to the video customers.”

As the nation’s largest cable operator, with 21.6 million subscribers, the rollout of digital has been a important directive for Comcast. As of first quarter 2003, the company had 6.7 million digital subscribers, with 6 million of those capable of receiving VOD. “VOD helps us to move past satellite,” says Dave Watson, evp/marketing. VOD has “clearly been the front runner, but soon following will be HD. While that’s not a product for everyone, we’ve been continuously surprised by the returns,” adds Watson. He says Comcast is testing a new DVR system in Arlington and Alexandria, Va. “We fully expect to have a broader DVR rollout in fourth quarter this year,” he says.

Time Warner Cable has been aggressive on the digital front. With 10.8 million customers, the nation’s No. 2 MSO has 3.9 million digital subs, almost all of which have access to VOD services. The company also has 500,000 homes with subscription VOD (for pay services like HBO and Showtime) and 100,000 with DVRs. TWC is also offering telephony and home-networking services. “Time Warner has launched more new services in the past 18 to 20 months than in its history,” says rep Mark Harrod.

While execs at Charter Communications declined an interview request, a first-quarter 10-Q filing reports that the company, which has 6.5 million customers, had 2.6 million digital subscribers as of March 2003. The company passes another 3.2 million homes with VOD. Rounding out the top four cable players, Cox Communications presently has just over 2 million digital subs and has an entertainment-on-demand (EOD) service up and running in San Diego and Oklahoma City, with 538,000 and 262,000 EOD households, respectively. The company also has on-demand service in Las Vegas and Hampton Roads, Va., and a DVR offering in Gainesville, Fla., and Fairfax County, Va.

Kagan World Media predicts on-demand services will contribute significantly to cable’s bottom line by driving new customers to digital and reducing the churn that has been a problem for digital services. It also predicts that by 2007, VOD homes will reach 28 million.

HD service will continue to be a key competitive foil for cable, despite the fact that there is a paucity of available programming for few HD sets (less than 5 percent of U.S. households). Murdoch said DirecTV had the capability to offer HD programming eventually. But cable has the advantage of using its broadband pipe to offer HD now, and most are eager to push that advantage.

“This is a long-term competitive differentiator to DBS,” says Cox’s Elander. “It’s really important for us to say to those customers, ‘If you’re going to get HD, the best way to do it is through us, because not only do we have these nationally distributed services like Discovery and ESPN, but we also have the local broadcast stations in HD,'” says Elander, adding that Cox offers three local broadcasts in HD in Phoenix. “If you want the Super Bowl, which is carried by ABC, [in HD], you have to get it through your local cable affiliate. DBS will never have that.”

Perhaps as a response to cable’s HD advantage, a News Corp.- owned DirecTV will go after cable not only on the digital front, but also by delivering more local service to more local markets. DirecTV and EchoStar now provide local programming to more than 100 markets across the U.S. “That’s a real deal-maker for many of our customers,” says Carey. “Two hundred and 10 markets is not beyond our reach.”

Jim Cooper is news editor of Mediaweek.