With most broadcasters still groping for a way to make any money off digital television, a Utah startup has quietly launched a mini wireless cable system using the spare DTV capacity of local TV stations.
U.S. Digital Television is on the air in Salt Lake City, offering a package of 11 cable networks plus, of course, local high-definition broadcast signals for $19.95 a month—40% less than the local cable system's basic service.
The initial cable lineup includes four of the top 10 cable networks, including ESPN, Lifetime, TLC and Disney.
A USDTV digital set-top retailing for $99 delivers the cable networks to any TV set but can also serve as a tuner for consumers who own HDTV monitors but lack a tuner.
"At its heart, it's a low-cost alternative to cable and an opportunity for a new market as it reaches the antennas across the U.S.," says USDTV President and CEO of Steve Lindsley, who was formerly president of Bonneville's KSL(TV) Salt Lake City. "And the twist is, we provision the box to also do HD."
Lindsley envisions eventually offering the service in 30 markets. However, USDTV is showing other industry executives a plan that lists only four markets any time soon, with Las Vegas as the next target.
USDTV launched three weeks ago with virtually no promotion. People in Salt Lake City say that they have seen no advertising and that the promotion seems to be limited to in-store materials at Wal-Mart and local furniture and electronics chain RC Wiley. As of last week, the company had signed up 300 subscribers.
The company has been trying to keep quiet until a formal launch event next month in New York. At that time, it's expected to announce rollout plans, its channel lineup (USDTV expects to add more cable networks), and financial and broadcasting partners.
The company is negotiating with TV-station groups for spectrum. Station and cable executives say that USDTV executives hint tantalizingly that their equity backers have ties to Wal-Mart, but the company would not comment. Lindsley concedes only that Wal-Mart will help retail the boxes and service.
The financial challenges are tough. USDTV's set-tops cost $250, but it's retailing them for $99 (or as little as $49). For a DBS company, signing up a new customer costs around $600 in marketing, equipment and dealer commissions. Even if USDTV spends just $400, getting say, 10% of the Salt Lake market, would cost more than $30 million. Launching 30 midsize markets could require almost $1 billion.
The idea of pooling the spare digital capacity of several stations for a package of cable channels has been circulating for a few years. Other multicast services are in the works, including Cache Networks and All TV Connect (see box right).
"I want to have USDTV viewed as the strategic initiative for broadcasters to participate in recurring revenue," says Lindsley. "They need to get recurring revenue into the equation. This country does not need another free-to-air advertiser-sponsored business. We need to create an environment where customers will pay us recurring revenues."
Randy Rigby, general manager of independent station KJZZ-TV Salt Lake City, which is owned by car dealer and Utah Jazz owner Larry Miller, said USDTV's plan is the only he has seen to generate any money out of digital TV. He's leasing USDTV about 60% of the station's digital bandwidth, enough to carry five cable networks. Rigby wouldn't give details but said the station gets paid more as USDTV's subscriber base grows. "What do we have to risk, based on the other opportunities we have?"
USDTV's offering in a given market hinges on how many TV stations sign on and how much capacity they have to spare. Each DTV broadcaster in a market has 19 Mbps of bandwidth available. A typical standard-definition channel requires about 3 Mbps. An HD channel needs 12-14 Mbps, with leftover bandwidth available for leasing to a third-party service like USDTV.
Broadcasters haven't conjured up many other lucrative ways to employ their digital spectrum. NBC, for example, is working with its affiliates to multicast a mix of local and national services. And there are many independent stations that now carry home shopping and TV preachers and may never go HD and have that capacity to lease out.
Still, securing crucial long-term deals for bandwidth may be tricky. "Pennies per sub is attractive today, but, maybe a year from now, we can get dollars or more for our spectrum using it a different way," says Nat Ostroff, technology vice president for Sinclair Broadcasting, who is discussing teaming with USDTV. "So making long-term, hardcore commitments to this model is dangerous to do."
Lindsley believes the package will be compelling to two consumer groups: households that don't have cable and subscribers to analog cable. In Salt Lake City, Comcast's cheapest package with the likes of ESPN is $40.80 monthly, but it has 60 more cable services than USDTV's $19.95 package does. Dish Network's low-end package has 50 channels and costs only $25 a month. and DirecTV's lowest 60-channel package is $31. USDTV's Web site, however, includes a distorted price comparison, making its rivals offerings seem worse.
What channels those customers will end up receiving is still to be determined. The Salt Lake City offering comprises Lifetime, Discovery, ESPN, ESPN2, HGTV, Disney, FoodTV, Toon Disney and TLC. Most of those networks confirmed that they have deals with USDTV. Lindsley says negotiations are under way with other nets and, as DTV encoders continue to compress more data into less bandwidth, more channels will be added to the mix. Network executives said Jed Palmer, a consultant who was previously programming negotiator for Tele-Communications Inc. and EchoStar, has been helping USDTV line up programming and stations.
"Getting the content isn't going to be the problem," notes Lindsley. "And if the technology continues to work in our favor, then we'll be able to add new products, including new HDTV offerings." The service also will be able to offer more SD channels and even pay tiers with networks like HBO or Showtime.
At last week's CES, Chinese electronics manufacturer Hisense disclosed that USDTV has committed to buy 100,000 set-tops. But Hisense is financing the bulk of the purchase, fronting $15 million.
Lindsley and other executives at USDTV were closely involved with WOWTV, a Salt Lake City-based company that was working on concepts like live multiple angles for sports and datacasting of statistics and other information during the 2002 Winter Olympics. That company later went bust.
USDTV seems to be the next-generation idea on how best to use excess spectrum. Instead of using it to distribute data like Web pages or computer software, it will be used to multicast.
"At WOWTV, we put a cool product out there," says Lindsley, "but it didn't meet the litmus test of being a compelling product for consumers, and it didn't have a business model attached to it."