MSOs Take Many Roads to HD

Some offer pay tiers, some offer free tiers, but all offer HBO
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In the continuing hunt for a competitive advantage, cable operators and DBS are increasingly wielding HDTV programming as a weapon. Last week, DirecTV announced the launch of an HD pay tier while major cable operators continue to roll out HD services to more markets.

"We see HDTV as a differentiator from DBS, especially because we're able to offer local HD signals, something satellite can't do because it doesn't have the bandwidth," says Lisa Pickelsier, Cox Cable director for video product development.

The biggest HD dilemma facing cable operators is no longer whether they have capacity for HD. All major MSOs are driving hard to offer HD services to all their digital subscribers. Time Warner Cable currently offers HD to 93% of its subscribers while Comcast expects to offer it to 65% of its subscribers by the end of 2003 and 80% by the end of 2004.

The most pressing issue concerns carriage of ESPN-HD and Discovery HD Theater. The two networks, which typically eat up a number of digital channels with their multiplex of services, are asking for fees from MSOs, most of which are balking for a number of reasons.

There's a touch of irony in a situation in which broadcast signals are the best reason a consumer has for signing up for HD cable while the cable networks' HD signals are the best reason to sign up for satellite. For example, ESPN-HD, Discovery HD Theater and HDNet will be part of an HD tier that DirecTV will launch next month priced at $10.99. The vast majority of cable subscribers are not able to receive any of those services, let alone more than one.

Executives at both ESPN-HD and Discovery HD Theater use the word "thrilled" when discussing the opportunity DirecTV's carriage presents. It's estimated that nearly 10% of DirecTV's subscribers own an HDTV set, giving the tier a potential audience of nearly 1 million homes.

"That represents a great opportunity," says Clint Stinchcomb, senior vice president and general manager for Discovery HD Theater. "That helps us and DirecTV."

It also might create consumer shifts that would press cable operators to reach a deal with ESPN-HD or Discovery.

Sean Bratches, ESPN-HD executive vice president, affiliate sales and marketing, expects the marketplace to continue to dictate the demand for ESPN HD. ESPN expected a slow rollout of the digital net when it launched its services at the end of March, but the

DirecTV deal goes a long way towards establishing a national footprint.

One of the difficulties cable operators still have to sort through is the business plan, Stinchcomb says. "They have to figure out whether they want to sell the set-top box, lease the box, and what to do in terms of a tier."

Business plans aside, MSOs also are reluctant to add a service like ESPN-HD or Discovery HD Theater if it's only a better-looking and -sounding version of content already available to their subscribers. That's one reason Discovery has responded with original programming like Wild Nights: A Night Underwater, which premieres later this month.

"Bandwidth real estate is an issue, but the bigger factor is if the programming is new or a little different from [the existing network]," says Dave Watson, Comcast executive vice president of marketing. "If it's already existing content, then it's something we don't want to pay for."

That's partially because of bandwidth issues. A 256 QAM cable plant requires 6 MHz of bandwidth to carry one HD channel, displacing one analog channel or 10 to 12 standard-definition channels. An HD pay tier simply wouldn't drive the higher revenues than other uses of the bandwidth.

There are, however, exceptions. Charter leads the way, offering Discovery in 19 markets and HD Net in three. Monthly cost is $9.95 for access plus $9.95 for an HD tier that typically includes HBO and Discovery. Some markets also receive Showtime and/or HDNet.

Cox is another major operator offering à la carte HD services. Both ESPN-HD and Discovery HD Theater are available to HD subscribers in Las Vegas. Discovery HD Theater costs $5; ESPN-HD is available on a HD tier with Discovery HD Theater for $6.99. ESPN-HD is not available by itself.

Phoenix and Northern Virginia subscribers also have access to Discovery HD. Viewers in Las Vegas lease an HDTV set-top box for $10.15, $7 over the regular lease price (in Phoenix, Omaha, Oklahoma City and Cleveland, subscribers need to buy the set-top from local retailers for about $499).

Pickelsier says pricing is up to the individual operators but Cox does provide some corporate guidance. "In any of those scenarios, the upfront equipment prices are very competitive and often lower than what satellite has to offer. It depends on what DBS equipment the customer already has."

Moving to a retail model for the HD set-top box is beginning to look like a trend. Charter, too, is moving to a retail model. And Scientific-Atlanta is introducing the Explorer 3270HD set-top designed for sale through retail outlets (it's also the box tied in with Cox's service in Phoenix, Cleveland, Oklahoma City, Pensacola, Fla., and Northern Virginia.

Comcast viewers can receive local broadcast HD signals plus HBO and Showtime HD. HBO and Showtime consider the HD service a value added to keep subscribers and, in turn, the service is an additional multiplex. Comcast and Time Warner Cable have no extra charge for their HD services, requiring only a swapping out of an SD set-top box for a Scientific-Atlanta or Motorola HD set-top. The HD tier for both includes local broadcast signals as well as HBO-HD and Showtime-HD for HBO and Showtime subscribers. Comcast offers a similar package but also offers its own Comcast SportsNet in selected markets around Philadelphia and Baltimore.

The battle between cable and DBS for HD viewers is extending into consumer-electronics retail outlets.

"Satellite has out-innovated and really had complete ownership of the retail distribution channels," says Watson. "But we see the combination of VOD, HDTV and PVRs as a great way to partner with retailers."

Comcast is looking to change that situation. Few stores have HD cable signals, and that's one of the reasons Comcast launched an initiative with Best Buy. Under the deal, 31 Best Buy stores in Baltimore, Philadelphia, Washington, and Knoxville and Nashville, Tenn., will sell a co-branded sales-activation kit.

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