Frank and all,
This is the best article on digital I have ever seen. There is a wealth of info here. TCI is showing a roadmap for the digital world of the future. I suggest more than one reading to catch all the implications. Please post your comments after you have read the article.
Regards, Jim
TCI last week detailed it's aggresive digital cable agenda and made points with investors gathered here by minimizing the financial impact of it's plans.
TCI will halve the cost of advanced open cable digital set-top boxes to about $150 each, same as an advanced analog box, via a joint venture that will
subsidize manufacturing. Further deals may offset the entire cost.
TCI Chairman and CEO John Malone also urged broadcasters to settle on a high-
definition standard and then allow cable operators to transmit local and
network digital signals in multiplex and time shifted configurations on a
subscription basis, sharing the proceeds.
''We are uniquely qualified to assist broadcasters,'' said Mr. Malone, who is
discussing the idea with major station groups and network owners.
''We want to support local broadcasters to play in the high-definition arena in
a way that is cost effective for them and us,'' he told a three-day meeting of
upbeat investors.
TCI also acknowledged negotiations with Time Warner and US West MediaOne to
merge their respective high-speed data services have ended in differences over
content control, the lack of compatible cable system upgrades and other issues.
However, the parties continue to discuss the use of Time Warner's Road Runner
content.
Digital gives an edge
Mr. Malone said TCI is ''indifferent'' as to which HDTV standard is selected
but said 720-line progressive would be a compromise for all concerned.
Mr. Malone said local programming that is produced for digital gives
broadcasters and cable an edge over satellite distributors. TCI could help
accelerate HDTV deployment by transporting and multiplexing broadcasters' HDTV
signals ''and treating it like a subscription business.''
''Basic cable could become the dominant platform'' in a fully developed digital
world, Mr. Malone said. He also said broadcast networks may continue losing so
much of their market share that they eventually ''will need us to carry them.''
''There will be an interesting shift between cable operators and broadcasters
as their digital platforms are distributed,'' he said.
''This can be a win-win for the broadcasters and the cable operator,'' he said.
Otherwise, ''broadcasters view HDTV as a cost line with no return.''
Paying for boxes
TCI announced that Intuit, Bank of America, TCI and @Home will launch a broad
interactive personal finance service that will generate substantial upfront per
box payments to TCI.
It will be a free, basic service beginning early next year and is expected to
steer more cable subscribers to TCI's @Home service. It also will provide a
vehicle for electronic bill paying that could save TCI more than $180 million a
year in bill-related costs if fully deployed.
Sources say TCI is soon expected to announce similar alliances with Amazon.com,
Barry Diller's Home Shopping Network and other national retailers. One option
would be for Mr. Diller's HSN and Ticketmaster to provide electronic commerce
support to all Liberty, Encore,*Fox Sports and TCI Music program services. In
exchange TCI would boost its 21 percent interest in USA*Networks Inc. The
upfront payments and shared revenues from these alliances are expected to
collectively offset the entire cost of the next-generational digital boxes,
which will be available early in 1999, company sources said.
''In order to get the most bang for the buck in this digital environment, we've
been active trying to work on strategic alliances on the hardware and software
development side,'' Mr. Malone said.
The market capitalization today of HSN and QVC has to be about $11
billion for two channels using an arcane impulse technology-the 1-800
number-and selling merchandise with very narrow appeal,'' Mr. Malone said. ''It
will be interesting to see how people respond to point-click buying.''
TCI said it has put 180,000 digital boxes in circulation since first offering
the service in December and expects to have up to 1 million digital boxes in
subscriber homes by year's end.
TCI President Leo Hindery Jr. said he will take the financing of the new boxes
off balance sheet by securing institutional lenders or lease them through a
specially established arm of TCI Ventures.
Negotiation denied
Mr. Malone and Mr. Hindery denied their negotiation of details for Microsoft's
operating system, SunMicrosystem's Java language program, and Sony's operating
system for TCI's open cable boxes were threatened by major differences among
the parties. Definitive agreements must be completed by April 30.
CableLabs, the consortium of major cable operators, plans to announce the
initial open cable standards by the National Cable TV conference in early May.
TCI will complete $1.8 billion in system upgrades a year earlier than
originally expected-by the year 2000.
More than 90 percent of all TCI subscribers will have the option to order even
the most bare bones digital service, providing 144 program channels.
Mr. Hindery said the company is seeking 15 percent penetration within one year
of launching digital cable in any market.
Some $400 million in capital earmarked for upgrades this year, coupled with 15
percent increases in program costs and average 5 percent hikes in cable rates,
will push TCI's free operating cash flow well below the targeted $913 million
reported last year.
However, TCI officials said they are ''committed to positive free cash flow''
and pointed out that the company's financial profile will be bolstered by
moving $5 billion in debt off of its books through ongoing system-clustering
joint ventures that will reduce its subscriber base to about 10 million.
''The transition from analog to digital will be the most important thing the
cable industry has experienced, and it will be a tremendous value for those who
do it properly,'' Mr. Malone said.
In Denver, Mr. Malone said, digital service costs the company 47 cents a month
in third-party payments while nearly doubling the average cash flow from a
single subscriber.
''With this kind of return, we can expect a one-and-a-half-year payback on the
boxes,'' he said.
TCI will create up to $6 billion in equity value, or up to $10 per share, from
pending clustering deals.
Still, TCI officials said they expect subscriber growth to top 2 percent this
year, after ending a year of steady losses with the addition of 155,000 basic
subscribers in the fourth quarter of 1997. We're clearly back on track,
Mr. Hindery said.
Controlling program costs
Mr. Malone said in the future, TCI will try to better control spiraling program
costs, much of which are sports induced, by relying more heavily on program
sources in which its Liberty Media subsidiary owns substantial stakes.
He cited Discovery Communications as an example of a company that could easily
dip into its own film banks and those of allies such as the BBC to create at a
low cost numerous niche channels.
"We will be able to add new channels at an incremental cost and keep the
money inside the family," he said.
Liberty expects to invest a minimum $100 million a year over the next several
years developing at least 18 new digital channels.
TCI also will make an aggressive push to sell to the largest national
advertisers its cable service and interactive ads.
Electronic Media has learned that TCI is working to form a national
interconnect advertising consortium by next year that would service cable homes
in the top 100 markets.
"The most important set of deals we can make are alliances with
advertisers and retailers," Mr. Malone said. "Broad deployment means
will change the advertising world forever."
Interactive advertising
TCI-launched and partially owned @Home will play a heightened role in
interactive advertising, once the standardized modem inside the advanced cable
boxes can be used to bring the high-speed data service to TV screens.
Aiming for as many as 100,000 @Home subscribers by year's end out of a two-way
cable universe of 490,000 homes, TCI recently announced it would use @Home as a
supplier of e-mail services and that all of its cable homes will be two-way
interactive by the year 2000.
"Advertising-supported e-mail is enormously profitable. So, that's one of
the businesses we want to own and operate ourselves," Mr. Malone said.
TCI also continues its high-speed data and telephony talks with AT&T.
However, Electronic Media has learned that TCI
cannot engage in a deal with AT&T until after this year at the earliest
because of a noncompete agreement it has with
Sprint PCS.
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