Internet & Technology
Wednesday, May 8, 2002
Cable Firms Hunting For Digital Viewers
BY REINHARDT KRAUSE
INVESTOR'S BUSINESS DAILY
U.S. cable TV companies, like marathon runners, might hit a wall.
They've signed up almost 16 million U.S. households to pricey digital services that offer more channels and pay per view. That's about 20% of the industry's customer base.
By year-end, that figure should rise to 30%, say people in the industry. Most of the digital subscribers are from high-income homes.
How many more people will be willing to shell out an extra $10 or $15 a month for these services isn't clear. Some observers say cable TV firms will be hard pressed to drive penetration rates to 40%.
Cable TV firms hope to get a second wind from such new products as video on demand. They'll likely need such offerings.
"That 30% is kind of a ceiling, a market cap given their current product mix," said Michael Goodman, an analyst at market tracker Yankee Group. "To move beyond that, they need to add more value. It could be VOD, interactive content or more local content."
Digital Demand
Digital video is driving one-fourth of the cable industry's revenue growth, says Morgan Stanley. Another big source of revenue is fast Internet access via cable modems. In all, the cable companies' digital revenue is expected to jump 55% this year to $3.1 billion.
That's good, say analysts. But some see digital subscriber growth leveling off. Yankee Group projects that cable TV firms will add 5.5 million digital subscribers in 2002. That's down 15% from 6.5 million last year.
In the first quarter, some cable TV firms kept running at top speed. Others slowed down. Total industry figures aren't in, but among the five largest cable firms, growth in digital subscribers fell 22% to 1.21 million from 945,000.
The biggest cable TV firm, AT&T Broadband (T), added 257,000 digital customers in the first quarter. That's down 23% from 335,000 in the fourth quarter and down 19% from 319,000 in the year-earlier quarter.
No. 2 AOL Time Warner (AOL) added 265,000 digital customers in the first quarter. That's down 44% from the fourth quarter and 26% year over year, says Merrill Lynch & Co.
No. 3 Comcast Corp. (CMCSK), which plans to buy AT&T Broadband, did better. It added 204,000 digital viewers in the first quarter. That's down from 213,000 in the fourth quarter but up 29% from 158,000 a year earlier.
And Atlanta-based Cox Communications Inc. (COX), the No. 5 player, expects no slowdown in digital subscriber growth rates this year, says Chief Executive James Robbins. "Our first-quarter results bore that out," he said in an interview.
Cox added 155,000 digital customers in the first quarter. It netted 158,000 in the fourth quarter and 119,000 a year earlier.
Charter Communications, (CHTR) the No. 4 cable firm, led the digital race early on. It upgraded its network to digital faster than most others. By the end of 2001, it had converted almost 30% of its 6.95 million customers to digital. In the first quarter, though, Charter's growth slowed. It reported a net gain of 64,000 digital subscribers, down from 194,000 the previous quarter and 281,000 a year earlier.
Why the big drop-off? Charter says it disconnected 80,000 digital customers in the first quarter who weren't paying their bills.
It also pointed to a 5% monthly "churn rate." That's how many people disconnect digital after trying it out. Most go back to analog service, with fewer channels and movies.
Churn's Toll
Projected over a year, a 5% monthly churn rate means that more than half of digital customers would end service. Many cable firms are dealing with high digital churn, says Yankee Group's Goodman. Having more than 120 channels to choose from appeals to many digital subscribers. Some analysts, though, see a dearth of quality programming.
Another factor: Digital TV is available from satellite broadcasters. They already offer high-definition TV in many markets. Cable firms, though, have been slow to offer improved picture quality via HDTV.
On the other hand, cable firms can wield marketing weapons that satellite TV firms can't match. Consumers that buy both Internet access and digital services from cable TV firms are less likely to cancel, analysts say. "In households where we have high-speed data and digital bundled, we're seeing much lower churn," Dave Barford, Charter's chief operating officer, said in a recent conference call with analysts.
Less than 100,000 homes get Internet access via satellite links, says Forrester Research Inc. The top five cable firms signed up 2.89 million cable modem users in 2001 alone, says Information Gatekeepers Inc.
Video-on-demand services also help improve customer loyalty. "It's an element of glue," said Cox CEO Robbins.
VOD takes pay per view to the next level. Instead of showing movies or programs at fixed times, cable TV firms make them available to subscribers any time. Video servers - computers installed in cable networks - let consumers stop and re-start programs at any time.
Satellite firms DirecTV, owned by Hughes Electronics Corp. (GMH), and EchoStar Corp. (DISH) don't offer VOD. They don't have enough network bandwidth.
Charter expects that VOD will be available to half its digital service areas by year-end. Most of its network has been upgraded to digital.
AOL Time Warner, Comcast and Cox have said they plan to roll out VOD this year. Cable firms say they'll hit a home run with VOD. But some analysts say consumer demand for VOD is unclear.
Content is an issue. Cable firms are haggling with Hollywood studios over timely access to new movies. Some cable firms, such as Charter, are upbeat about offering local performing arts and sports via VOD.
The cable TV industry spent more than $40 billion to convert old analog cable systems to broadband technology. Now they're adding new services over broadband pipes.
Most of the new services, such as home shopping and interactive games, require snazzy digital set-top boxes. Motorola Inc. (MOT) and Scientific Atlanta Inc. (SFA) strutted out digital set tops at this week's annual cable trade show in New Orleans. |
