It's like cable's outlet mall
Digital-tier channels are filled with remnants and repeats from bigger parent nets
By Allison Romano -- Broadcasting & Cable, 3/3/2002 7:00:00 PM
For cable operators, digital is a fairly clear success. Most operators have gotten 20%, even 30% of their basic customers to sign up. Sales are giving a clear financial boost. The promise of dozens of extra channels has clearly dampened the growth of rival DBS companies. Digital customers are churning out at an annoyingly high pace, but the billions of dollars spent on upgrades seem to be paying off.
The story for cable networks, though, is less clear. Networks developed for digital cable tiers are still thinly distributed by cable standards. Advertisers consider them an afterthought to analog buys. Operators don't want to pay full freight in license fees. And, from the viewers' standpoint, the channels are loaded with the cheapest possible programming, mostly recycled shows from a network's library.
There's no financial windfall in sight, and programmers are still playing digital as a way to lock up shelf space. Channel slots on cable systems became scarce—and expensive—in the mid '90s. Established programmers pounced on the slots created by operators' digital com- pression of signals; early on, operators needed the programming, and the networks hoped profitability would come later.
"It's like the Oklahoma land rush: Get the land while it's available," said Lifetime's head of research Tim Brooks.
"As distribution grows," said Lori McFarling, Discovery Networks senior VP of distribution and marketing, "you'll get the eyeballs and, eventually, a healthy advertising business and subscriber fees."
There are about 25 purely digital networks and a dozen more hybrid channels, such as BBC America or Oxygen, that would rather be on basic but are willing to settle for any carriage. There are about 14 million digital-cable subscribers and 18 million more on EchoStar and DirecTV's satellite system.
MSOs added almost 6 million subscribers to digital cable last year. Morgan Stanley estimates they will add about 5.2 million this year and 4.5 million next year.
Operators should focus on developing the programming, advises Sanford Bernstein & Co. media analyst Tom Wolzien. "They are going to top out unless they have compelling programming that people want to pay the money for."
Programmers understand that the value of their digital nets is in "sticky," targeted programming. "They need content that is compelling enough to keep viewers," said MTV Networks President of Affiliate Sales and Marketing Nicole Browning.
Most major cable programmers have added multiple digital services over the past four years. A&E counts Biography Channel and History International; USA has Trio and News World International. Discovery has five, the biggest being Discovery Science and Discovery Wings. MTV Networks just added MTV Jams, MTV Hits, Nicktoons and VH1 Mega Hits to bring its total to 13 services.
The digital network menu "is going to start to resemble the magazine rack," said Patrick Vien, who heads Trio, the new digital play from USA Networks. "Digital is more targeted. You don't have to satisfy volumes."
Without volumes, though, no one is making a buck. "All the big companies keep adding networks, and they can hardly stay even," said Wolzien. "The advertising money keeps getting diluted."
Digital channels can't count on the dual revenue stream from subscriber fees and ad revenue that fuels their analog counterparts. Most receive subscriber fees, but insiders say the amount is paltry compared with that paid for analog channels. One price break: Digital nets looking for purely digital carriage don't often pay launch fees.
As for ad revenue, most digital nets are eager for advertisers, but, without widespread distribution or Nielsen ratings, opportunities are limited. They are largely sold in concert with established sister nets.
"Some advertisers will follow viewers through the analog network to digital when they find that the niches appeal to a very particular viewer," said OMD USA Director of Entertainment Programming Guy McCarter.
But media buyers agree that digital networks are judged by different criteria than analog. Their universe and national footprint are much smaller. Where it takes an analog channel 30 million or 40 million subs to attract major advertising, a digital net is considered a viable ad vehicle with half as many.
Buying firm Horizon Media Executive VP Aaron Cohen believes only some clients will go on digital nets. "Digital distribution numbers are below the minimum for some advertisers, but others see it as a special audience with differentiated programming."
Programmers use digital nets to tinker with new formats. For instance, when original MTV digital property, "headbanger heaven" MTV X, goes dark, replacement MTV Jams will focus on red-hot genres R&B and hip-hop.
MTV diginets reach fewer than 10 million homes. "We view digital networks as laboratories," said Van Toffler, president of MTV and MTV2. "We can be creative and inventive, and, if we screw up, not that many people notice."
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