BY KEITH DUNNAVANT CALL IT THE KILLER APP, BECAUSE, AT LEAST FOR NOW, THE satellites can’t do it. Video-on-demand subscriptions are poised to grow rapidly in 2003. All major MSOs have now deployed some form of VOD; programmers, ranging from ESPN and Discovery, to smaller players, such as Wisdom Television and Atom Films, are providing content. The actual number of VOD deployments is still small — an estimated 80 cable systems offered the service at year-end ’02, a fraction of the more than 9,000 systems in the U.S., according to research firm In-Stat/MDR. “As a percent of total cable systems, it’s infinitesimal,” says In-Stat/MDR senior analyst Mike Paxton. Time Warner Cable is the leader, with VOD service deployed in 32 of 34 divisions, followed by Comcast and Charter (21 markets each) and Insight (10). Expect those numbers to grow this year, says Char Beales, CEO of the Cable and Telecommunications Association for Marketing. “We’re seeing an unprecedented level of cooperation from all of the on-demand players — cable operators; basic, premium and studio programmers; hardware, guides, integrators, etc,” says Beales. “We’ll see the payoff — lots of buys — in 2003 and beyond.” David Novak, VP of marketing for Pace Micro Technologies, agrees that “2002 was about reach for operators, [with] good progress in rolling out the capability to much of their coverage area.” He says, “2003 is about quantity, packaging and promoting the service, and getting the marketing mix right and profitable.” Cablevision credits its VOD offering, more than 700 titles strong now, with increased stickiness for its iO digital package. Kristin Dolan, VP of digital product management, says, “This new technology is changing the way our customers view television, increasing satisfaction and reducing churn.” Cox also points to the early results of its San Diego entertainment-on-demand rollout as proof that the investment is paying off. Cox San Diego’s mix of hit and library movies, off-cable programming and ad-supported long-form content (dubbed FreeZone) saw the number of customers who made at least one pay-per-view or EOD purchase a month almost triple by year-end. Transactional movie revenue per digital customer increased 50% within the first few months of marketwide availability and full marketing. FreeZone is also regularly attracting up to 10% of EOD customers each week. Cox Hampton Roads, meanwhile, is planning a more local ad-supported VOD variation for its rollout this quarter (see page 28), plus a lineup of movie and subscription-based content. Two other undisclosed markets will move from VOD tests to full launches this year. Time Warner Cable spokesman Mark Harrad says the MSO moved “full bore into launches” in the fourth quarter, with all clustered markets (such as New York City) rolling out the service by December. Only two divisions — national and Southwest — remain, while 13 are already offering SVOD (for a monthly rate of $6.95 on top of digital cable) in addition to movie titles and free fare from Scripps and others. New content is also being tested, such as local news on demand in Hawaii. Thanks to deployments in 19 markets since 2001, plus two former AT&T Broadband markets (Atlanta and greater Los Angeles), VOD was available to almost 6 million Comcast subscribers in its 21-state service area by year-end. The momentum will continue in 2003, such as the addition of two markets representing 280,000 subs in New Jersey in the first half of this month. The company’s flagship market for Comcast On Demand is now its home base of Philadelphia. Hundreds of hours of free and paid material — including content from A&E, Comedy Central, CNN, Scripps, NBC News and its own Comcast SportsNet service — were launched in the last quarter, with an aggressive marketing campaign across the entire Philly market this month. Early returns are promising. “On average, between 4% and 5% of our customers in any given month will use VOD just for our movie-based VOD version,” says Comcast EVP of marketing Dave Watson. “In Philadelphia, where 900 to 1,000 hours of additional free content is available, we see that number jump to 25%. It’s a significant move forward in terms of how people are using the product. And this is before marketing, so it’s very exciting.” Comcast’s other VOD markets will introduce its “three bucket” (free, paid and subscription) philosophy of expanded content after evaluating the Philly launch. Former AT&T Broadband markets are also being primed for VOD, Watson adds. Insight weathered a transition to a SeaChange platform after VOD vendor Diva Systems folded last year. An early VOD adopter, the company last year expanded its on-demand marketing push and launched Mag Rack (in October), while its Kids’ Unlimited package added Disney content in October and Turner titles in November. Discovery content should be in place in the first quarter. SVOD is now being firmed up, with discussions to add HBO On Demand in April and Showtime and Starz in ’03. Like Insight, Charter also transitioned from Diva last year and is hoping that Mag Rack will entice more customers in its VOD markets in 2003. Mediacom also has been expanding its VOD offering, with two markets in Iowa and Illinois added to its Mobile, Ala., deployment last year. SVOD and extensive marketing are next on the agenda. The only major MSO to be in a VOD holding pattern is Adelphia, where bankruptcy proceedings have put any further trials on ice.
— Shirley Brady THE MAJOR MEDIA OWNERSHIP RULES ARE UP IN THE AIR, thanks to the Telecom Act of 1996 and a few critical court cases that went against the FCC. Chairman Michael Powell decided that the only way to revisit them was to roll them into one proceeding; ripple effects are included in the discussions of broadcast and cable caps and cross-ownership matters. Powell is expected to present the FCC proposals in late spring. He anticipates that no one will be pleased — not the big nets, not the affiliates, not the cable industry, not even the consumer groups. And that will be a sign that he’s spread the pain equally. The affiliates are fighting to keep the caps in place on network ownership, but with a GOP Congress and White House, the time is ripe for deregulation. Most likely scenario: Cross-platform prohibitions will be removed, setting off buying sprees hindered only by the slump in cable earnings. There will be a looser definition of “independent voices” that includes the Internet, giving large conglomerates more flexibility in pressing for new acquisitions. Network caps will probably go up — perhaps to 50%. Cable caps may go up to 45%. No matter what, it’s not over. It will all land in Appellate Court in D.C. where the battles will be fought again. But this time, Powell thinks he’s immunized himself against losses in court with a series of academic studies analyzing the caps, the rules and the playing field. Prediction: Rupert Murdoch’s News Corp. will use the end of the newspaper cross-ownership ban to buy The Washington Times.
— Alicia Mundy PREDICTING WHAT’S IN STORE FOR DVR/PVR-ENABLED SET-TOPS is like trying to guess the outcome of a fight between a polar bear and a great white shark — anything could happen, but either way, the struggle should be wildly entertaining. This could be the year these devices finally make it into homes on a grand scale, but a few things will have to happen first. There’s no question that DVR is blipping on consumer radar screens. Retail devices such as TiVo and ReplayTV have trickled into homes at a rate of about 250,000 per year. And while those aren’t overwhelming numbers, there’s no denying that the boxes (TiVo especially) have become a part of the zeitgeist. TiVo has popped up as a plot point or a bit player in Friends and Will and Grace. It’s huge, and it’s getting bigger. But TiVo won’t be able to gut it out on its own. Not a single MSO has cut a deal with the company, and Hollywood continues to freak out about the whole ad-skipping thing. Enter the top dog set-top manufacturers (read: Scientific-Atlanta and Motorola). Now’s the right time for the big box makers to go through with a comprehensive retail strategy. A cagey bricks-and-mortar approach could put another quiver in the industry’s bow with which to fend off satellite, and it could serve as an excellent branding opportunity as well. Look for S-A’s Explorer 8000 to be the first DVR box to hit the shelves some time in 2003; if success can be had in a Best Buy or a Circuit City, Motorola will logically be the next to jump into the pool. Still, lots of industry types will remain steadfast on the topic of retail boxes, arguing that the model that works best for cable is the lease model. In that case, look for MSOs to bundle DVR with VOD as the ultimate one-two time-shifting punch in the fight against churn. Janco Partners research analyst April Horace said the marriage of the two services will serve as a solid “defensive offering” to keep cable customers out of the clutches of DBS. “There aren’t going to be millions of boxes deployed this year,” Horace said. “But there will be a significant rollout.” Agreed. Look for no more than 50,000 DVR-enabled boxes to reach MSO customers by year-end; slice that number in half if Cox isn’t leading the charge.
— Anthony Crupi FIRST THE GOOD NEWS: FCC CHAIRMAN MICHAEL POWELL IS prodding and pushing cable, broadcasters and electronics manufacturers to get the transition to digital TV finished. He’s serious about it, and he’ll take action against recalcitrant industries. With his “encouragement,” the set makers and the cable industry have hammered out an agreement on plug-and-play, getting one obstacle out of the way. Cable and broadcasters have also been encouraged to develop a solution to must-carry issues before the FCC does; at issue is whether cable operators must carry additional free digital channels from the networks. That issue should face a vote at the FCC in the next few months. Now the bad news: In Congress, the digital transition issue will end up in the “weather” category — everyone complains about it but does nothing. When Rep. Billy Tauzin (R-La.) held a hearing three months ago on prospective DTV legislation, his own GOP colleagues couldn’t come together for him. There’s simply no consensus about this huge industrial policy or how to make the industries work together. Furthermore, much of the issue hinges on a copyright policy amenable to the content providers. In theory, broadcasters have to return the analog spectrum to the government in 2006; an Al Gore presidency is more likely than that outcome. No sane politician will allow even a handful of their constituents’ TV sets to go “black” if they can’t get digital signals. Even if it stalls, however, the digital transition is certain to provide many hours of amusing House and Senate hearings. Watch for at least two senators to decry the old “digital spectrum giveaway” of 1997.
— Alicia Mundy THERE ARE FEW MEDIA EXPERTS THAT DON’T THINK NEWS Corp. and Liberty Media will get their hands on DirecTV, the DBS service that serves some 11 million customers in the U.S., says Ted Henderson, a media analyst with Stifel, Nicolaus. “I think they see this as a mechanism to create and incubate programming they will eventually sell to other distribution mechanisms, including cable,” he says. “I don’t think you’ll see them putting on a lot of exclusive programming to lure customers. And I don’t think you’ll see a lot of new innovative services coming from the company for a while. That’s not their style.” If News Corp. and/or Liberty own DirecTV, Henderson says, the rules exempting DBS from the exclusivity rules that prohibit integrated media firms from selling their product to competitors likely will disappear. Maybe, says Sean Badding, SVP and a senior analyst for the Carmel Group, a consulting group that concentrates on the DBS and cable industries. But it will take a while for legislation incorporating DBS services into the exclusivity rules to be drafted and passed. Badding predicts News Corp. chairman Rupert Murdoch and Liberty Media chairman John Malone will use their programming power — especially News Corp.’s sports programming — to compete against cable programming lineups. He expects exclusive programming to thrive and to be a major marketing ploy for DirecTV until the rules change. “There is plenty for operators to worry about if Rupert and Malone buy DirecTV,” Badding says. “First, they will be more competitive with pricing. They have deep pockets, and their size will enable them to cut deals that will keep their costs in check, which will enable them to be more competitive with cable operators.” A News Corp./Liberty-owned DirecTV will also likely be an aggressive marketer. The companies could use cross-channel avails to hype their DBS service, and their deep pockets will allow them to use other media to sell the service. Expect DirecTV to concentrate on stealing cable customers rather than Dish Network customers, Badding predicts.
— K.C. Neel THEY ARE STILL CALLED CABLE NETWORKS. BUT THEY ARE really programming services, and through government regulation and simple economics, they are available to all. At the start of 2003, that means primarily DirecTV and Dish, cable’s chief competitors. By year-end, however, if broadcasters begin multicasting on their digital frequencies, they too could be looking to the cable nets for content, which, since many of the cable nets are owned by broadcasters, would not be unthinkable. Which leads to the question of whether the cable nets will continue their involvement with the National Cable Telecommunications Association. It also portends intensified Sturm und Drang in negotiations between operators and networks. If the parties can’t settle their differences, Congress could step in and make rules that neither side finds palatable, says American Cable Association president Matt Polka. ACA has threatened for the better part of a year to ask for regulatory and/or legislative relief from rising programming costs and “bullying” tactics the association says is killing its members — small and independent cable operators. It’s not just rising rates that irk the operators. Tying retransmission consent deals to carriage of new or fledgling networks and/or forcing operators to buy a bundle of networks they have little desire or capacity to carry has left many ACA members at the mercy of the programmers. Larger operators have experienced some of the same problems with programmers but have more leverage. Cliff Duncan, owner of Duncan Cable TV in Wilmington, Vt., says he is hit doubly hard when programmers play hardball with carriage deals and rates. “I’m paying more than Comcast or Adelphia because I have fewer customers,” he says. “Then, [networks] promise me two minutes an hour for advertising. But with 1,100 customers, I can’t get the rates I need to offset the increase in rates.” Programmers say their costs have skyrocketed and that necessitates increases to their affiliates. But it’s the operators that take the heat from consumers. Clearly, the balance of power has shifted to the programmers’ side, says Sean Badding, SVP and senior analyst with the Carmel Group. As VOD takes hold and more programming is offered a la carte and on demand, operators will be able to better serve their customers and subscribers can pay for what they really want; that balance of power could shift back toward the cable operators. “But that isn’t going to happen for at least another five years,” Badding says.
— K.C. Neel HIGH-DEFINITION STARTED TO SIZZLE IN 2002 ONCE MAJOR MSOs caught on to the potential (with a little nudge from FCC Chairman Michael Powell) and made it a priority. Now that the rollout is firmly underway operators have to push beyond the first wave of early adopters and into a return on their investment. Making it pay starts with using HD to keep or to lure back high-end subscribers. That may not be as visible a return as the revenue from selling or leasing HD set-tops and from charging for HD programming, but those are the subs most likely to be willing to plunk down money for more top-of-the-line service — $90 per month and more on just video. The next step won’t be as easy. Think about what it takes to make cable HD happen after an MSO makes it available. A consumer has to make a significant video investment, be interested in moving beyond progressive-scan DVDs for programming and choose to get that programming from their MSO instead of over the air or DBS. Add in consumer confusion over equipment and a lack of MSO and programmer consensus on how to charge for HD. Heck, MSOs are still trying to decide whether to lease or to sell the HD box. Much of the confusion should be gone a year from now when manufacturers send HD plug-and-play sets to the stores. That’s when HD could really catch fire. In the meantime, look for steady growth in the number of subscribers and the number of markets as consumers make the most of the HD sets already in homes.
— Staci D. Kramer HDTV prices have come down. With more sets in more homes, programmers are beginning to put on shows that actually make the things worth having. “It’s starting to sort of take off,” said John Ford, president of new media for Discovery Networks, which puts him in charge of Discovery HD Theater, a premium channel subscribers are scarfing up. NCTA reported last week that cable systems passing 37 million homes are offering an HDTV package, including operators in 91 markets, 62 of which are in the top 100. Though only about 4% of homes now have HDTV sets, with prices falling to a less-exotic average of $1,700, the market will grow with increasing speed. Besides the broadcasters, Discovery, HBO and Showtime are offering HDTV feeds, and ESPN is spending $11 million on new cameras to feed its new HDTV service, which will simulcast some games and eventually include a hi-def version of SportsCenter. Comcast Sports Net also is looking to televise games in HDTV. While most programmers are talking about their HDTV strategy, Ford does not know of anyone else ready to launch an HDTV service. Why? For news, sports and nonfiction-oriented networks, the cost of production is significantly higher, requiring expensive cameras and post-production equipment. (Movies and sitcoms are easily transferable from film to HDTV.) Ford said spending the money was worthwhile to Discovery, which needs to build a library to stoke its new service. Sports and movies in HD are in high demand, but general entertainment networks need to find a way of covering the cost of another channel. While cable has more room for HDTV than its satellite competition, someone will have to pay for the added capacity taken up by HDTV, a bandwidth hog. In any event, while many more people may be seeing HDTV this year, those factors will limit how many programmers will provide shows in that format. “There’s a tipping point,” Ford said, when a critical mass of consumers own hi-def sets. “I’m guessing three, four, five years” at least before the bulk of programming is in HDTV.
— Jon Lafayette LOOK FOR MSOS TO INSTITUTE SOME KIND OF TIERED PRICING/- byte-cap scenario for cable modems this year. It’s last call for the smorgasbord, data piggies. The banquet hall is closing shop and bandwidth hogs will be made to pay more or will find themselves bumped off the network altogether. It’s happening already. Cox has been testing a tiered plan in a number of markets since late last year, and Charter has always charged different prices for various speeds. But 2003 will be the year when all of the major MSOs begin to embrace tiering/capping plans. To that end, Comcast and Time Warner have said they are considering similar policies. Of course, there are as many ways to structure a tiered payment plan as there are intrusive pop-ups flogging home spy cams. Take Cox, which offers tiered pricing in its Las Vegas market, along with some coverage areas in New England and Texas. Its lower-octane $26.95 service offers 256kbps downstream and 56kbps upstream, while its flagship service offers 1.5-megabits downstream and 128-kilobits upstream for $34.95. Meanwhile, Charter gives its customers three levels of service in all its markets: a 256-kilobit downstream speed for $24.95 to $29.95, a 512- to 768-kilobit downstream speed for $34.95 to $39.95 and a 1- to 1.5-megabit service for $49.95 to $75.95. Although the particulars of a capping scheme haven’t been officially ironed out by any of the top MSOs, the data ceiling should be generously high. As the average HSD customer today uses roughly 1.5-gigabytes per day, look for anywhere from a 3- to 5-gb cutoff point for standard users. That’s an extremely comfortable parameter. The vast majority of Netizens never come close to the low end of that projection. The long and short of the issue is this: MSOs need to “monetize” bandwidth. Those who flout the rules of their contracts by gobbling up a disproportionate share of available bandwidth need a gentle reminder that a) you get what you pay for and/or b) there’s no such thing as a free lunch.
— Anthony Crupi QUESTION: WHAT DO YOU DO WHEN YOU ARE LOSING MARKET share on one product but gaining share with another? Answer: Package them together at an attractive price. This bit of brand wisdom is known well in the consumer products business. Cox Communications applied it to cable by combining telephone, cable and high-speed data service into an attractive package at an equally attractive price, and it has set a model for the industry that will spread in 2003. With traditional switched telephony a far too costly gambit for most operators, the triple service offered by Cox is not in the cards for now. Given Comcast’s slow-down stance on telephony, only the telephone subs inherited from AT&T Broadband will get the whole package until the nation’s largest MSO is ready for VoIP (voice-over Internet protocol), or, rather, VoIP is ready for Comcast. That timing is linked to the technology — and to the successful integration of the former AT&T systems. The same is true for most other MSOs. But most do have the capacity to pair video and HSD. At its heart, the bundle is about making the most money possible from each customer — making each customer a multiple-service profit center. That means giving subscribers a bundle of reasons — VOD, DVR, HD, HSD — to tack on fee-based services to their bills. Don’t just sell broadband — sell home network equipment and monthly support. It also means being prepared to offer bundles of services on the lower end for people who don’t want triple-digit bills. Until telephone is part of the play.
— Staci D. Kramer THANK TIVO AND REPLAYTV FOR MOVING THIS ISSUE TO THE fore. In a nutshell, cable operators want to provide more digital and hi-def content, users want full access to the content coming into their homes — but content providers want more control of their product. This issue is a major mess. And it affects the digital transition, since the studios don’t want to provide great digital programming if they have to worry about piracy. There are more “property rights” folks on Capitol Hill right now, despite comments from Rep. Rick Boucher (D-Va.) about a new spirit of “Fair Use” for consumers. Sen. Orrin Hatch (R-Utah) is very much in the content providers’ corner here, and he is once again in charge of the Judiciary Committee that will handle this. The FCC is likely to vote in favor of a “broadcast flag” in digital signals sent over the air. There’s a powerful coalition supporting this that includes the studios, the Motion Picture Association of America, the networks and the National Association of Broadcasters. (One company, 321 Studios, has created software that makes it easy to burn copies of DVDs. It’s already filed suit against the MPAA to get the courts to deem the product legal before the association or other studios sue 321.) The Consumer Electronics Association has been pushing for Fair Use legislation to guarantee your right to tape The Sopranos, but it doesn’t look like the government will force content providers to give up their rights. When Viacom/CBS, the leader in digital programming among the networks, threatened to stop its transmission of HDTV programs if there is no piracy prevention technology mandated, it sent a clear message to Washington. This issue may be complicated by technology, but as a political issue it’s simpler; and it has leverage as an obstacle to the digital transition. The content providers will win this one.
— Alicia Mundy with Staci D. Kramer and Andrea Figler Cable operators don’t like their signals being stolen. So there’s a pretty good chance they’ll install the hardware and software the studios deem necessary to protect content from being pirated: the so-called broadcast flag, for example, which stops content from being retransmitted. Or, at least, a digital watermark that identifies legitimate copies. At this point, the technology may not be perfectly consumer friendly. Some high-tech-savvy customers may not be able to get a device in one room to play a show recorded in another. That could lead to complaints to MSO call centers. But that can be overcome. “I think we’re going to find a technological solution that will bind lawfully acquired content to a person’s digital domain,” said Preston Padden at Walt Disney Co. Without protection, content can’t be created, Padden said. “We spend a lot of money to create what we hope will be popular programming and then charge people to see it. If we can’t get that financial support then we can’t create that programming.” And without programming, cable television isn’t much more than wires in the ground.
— Jon Lafayette LAST YEAR WAS THE FIRST TIME CABLE AS A WHOLE LOST BASIC video subscribers. DBS subscriber growth surged 12%, to over 18 million. Granted, many of cable’s losses were concentrated at troubled Charter Communications and AT&T Broadband. But the stat is significant nonetheless. Last year’s third quarter was the first in which it became clear that a slowdown in subscriber growth could affect cash flow growth — a metric that, in the cable industry, is akin to the Holy Grail. Look no further than Charter’s several reductions in its cash flow guidance as evidence. That vulnerability will be a big thing to watch in 2003. Look for MSOs to up spending on marketing, both to gain new customers and to keep the ones they have. Fewer customers, after all, means it will take longer to recoup the billions invested in the plant. Investors are going to be watching the fourth quarter closely to see if MSOs can turn this around. But, after two decades of explosive growth, can they? New services such as VOD won’t supplant lost basic revenue from churn or slower subscriber additions, but cable modem subs are becoming an important driver of revenue and cash flow growth. Morgan Stanley analyst Richard Bilotti expects Time Warner Cable to add 1 million cable modem customers this year, to end the year with well over 3 million high-speed Internet customers — who’ll generate just under half of TWC’s revenue growth this year. It’s clear that operators need to continue to woo customers for their new services but simply can’t afford to alienate basic subscribers, a ready-made pool of potential customers for advanced services.
— Mavis Scanlon EVEN BUYERS ADMIT THAT THE TELEVISION AD MARKET IN 2003 is shaping up to be a good one for sellers. If the swirl of activity in the broadcast and cable markets today is any indication, this will be a strong year for ad sales, said Steve Grubbs, CEO of PHD USA. In a research note last week, Merrill Lynch analyst Jessica Reif Cohen noted that “demand for television remains surprisingly strong in January, despite persistent unease related to the auto and retail sales environment.” It’s still very early to forecast the upfront, Grubbs said, but right now, the market psychology clearly favors sellers. Of course, a year ago it was the other way around, but things shifted sharply before the upfront, he observed. “The thing we missed last year was that an awful lot of money was held out of the upfront and spent in scatter the previous year,” said Grubbs. That money flowed back into the 2002 upfront, boosting prices for broadcast and some cable networks. Joe Abruzzese, president of advertising sales at Discovery Networks, said the first quarter is off to a “gangbusters start,” and the strength of the scatter market will carry into the upfront, where the networks will try to force rates up. But without more inventory to sell, that should help more money flow into cable, he said. Abruzzese said the market is so strong that some agencies are inquiring about doing early upfront deals. But Dave Cassaro, senior EVP of sales and distribution at E!, said he didn’t think “any sales organization worth its salt would go for anything less than some type of an increase,” and that buyers would only buy early if they could get some sort of decrease. Cassaro added that in the background of the market is the prospect of war with Iraq. “I think in every budget meeting that anybody has, here’s what they’re saying: Here’s what we expect with the caveat that there’s no long-running war or military action. Something that lasts a short period of time shouldn’t be too, too disruptive. But if something goes on and on, it could be problematic. “Everybody’s spending, it’s just hard to figure this economy out,” he added. “The stock market tanked, but everybody kept spending.” Cable networks also have to be concerned over the Olympic factor. “I don’t know how much NBC pulls out of the markets” from Olympic sponsors, said Abruzzese. In a new survey of ad buyers by Beta Research, one third said they planned to spend more money on certain cable networks. Leading the pack was ESPN, followed by Discovery, E!, USA Network, ESPN2, Lifetime and Comedy Central. While money flows to cable, Grubbs said it’s the networks that reach specific audiences for clients that can command higher prices. “With so many cable networks fragmenting their audiences, [less well defined] networks have a hard time propping up their prices.”
— Jon Lafayette VOIP IS PRETTY MUCH THE FORREST GUMP OF TELEPHONY. It’s been slow to develop, and we won’t know how fast it can run until the leg braces come off. While a lot of cable folks are cheering on IP-based telephony from the sidelines (“Run, VoIP, run!”), the bigger, stronger and more developed rival — in this case, circuit-switched, constant bit telephony — will win out this year. Kagan World Media tells us that approximately 1.9 million customers are getting their primary line service via VoIP, which is a respectable enough share of the market. Analyst projections don’t exactly inspire a lot of confidence in a sudden growth spike, however. According to recent projections from Kinetic Strategies, North American cable operators won’t break 5 million telephony subscribers until 2006, so it’s all a matter of steady as she goes for at least the next few years. Unless…. Comcast could give VoIP a good kick in the pants, as it scooped up a sizeable network of the telephony-ready systems as part of the spoils of its AT&T Broadband acquisition. What’s more, the MSO is making ready for a mid-2003 launch of VoIP services in its Philadelphia market, an event that could reverberate throughout the cable space like the shot heard around the world. If the launch goes off without a hitch, with no breakdowns and solid, consistent customer-service, the rest of the industry could be scrambling to duplicate the feat before 2004. If not, the leg braces go back on. Whichever way the Comcast launch pans out, the tasks that lie ahead should prove to be arduous. “VoIP peering is not a trivial exercise,” Yankee Group analyst Christin Flynn said in a published report. “Obstacles for service providers include firewall penetration for VoIP, Network Address Translation (NAT) compatibility, QoS mediation, session admission control and the ability to generate session detail records. The carriers that can conquer these obstacles will be the carriers that grab the market share of the VoIP enabled enterprise business.” One question remains. As more Americans dump landlines for cell phones, is it possible that the demand for grounded, primary line service may all but disappear? “Operators who have focussed on VoIP have proven that it’s an attractive option,” said Forrester Research senior analyst Charles Golvin. “Not as a stand-alone business but as one component of a set of bundled services that provide better traction in the effort to retard churn.”
— Anthony Crupi THE QUESTION LOOMING OVER ADELPHIA — BESIDES THE intrigue surrounding its CEO search — is whether it will hang together as an operating entity or get sold, either piece by piece or in its entirety, to further the recovery efforts of the company’s creditors. It’s doubtful any sale will take place this year. Adelphia’s bankruptcy is unlikely to be sorted out that quickly, especially considering the sheer number of parties involved. Several other factors have observers betting the company remains whole — at least this year. For one thing, who’d buy it? Most other cable operators are carrying plenty of debt as it is. Then there’s the litigation over what led up to Adelphia’s June bankruptcy in the first place. Dozens of civil suits have been filed against the company by shareholders who saw the value of their equity stakes plunge. Fear of potential liabilities from those suits could deter buyers — including so-called “financial” buyers, or equity funds — interested in the entire company. A hot topic in 2002 was whether potential buyers would cherry-pick Adelphia’s most attractive systems, such as Los Angeles; in late June, interim CEO Erland Kailbourne said the company had received as many as ten inquiries from potential buyers. At this point, it seems that Adelphia’s creditors and managers are more focused on recovering the value of the systems by bringing in a credible manager rather than a quick asset sale, says UBS Warburg analyst Aryeh Bourkoff. Any sale scenario may focus on Adelphia’s less attractive systems, he adds, while the company reaps the benefit of operational improvements at its larger systems.
— Mavis Scanlon COMCAST’S $1.5 BILLION BOND SALE LAST TUESDAY KICKED OFF this year’s capital markets activity with a bang. Cox and Cablevision also may access the markets in coming weeks to refinance existing debt, according to UBS Warburg analyst Aryeh Bourkoff. But the big thing to watch for this year is Time Warner Cable’s expected IPO. If a hit, the whole cable sector could benefit. It could also lead to another round of consolidation in the industry, as TWC looks to bulk up its subscriber base to compete with cable’s new 800-pound gorilla, Comcast. If there were a little more certainty in the markets — not only over the direction of the economy but of expected military action against Iraq and a diplomatic solution to the North Korean situation — it might be easier to predict what happens. As it stands, some observers predict the merger and acquisition market will heat up after nearly two years of stagnation; others say some big equity players are sniffing around. Any loosening of FCC regulations on media ownership also could heat up deal talk, if not immediate activity. “But all bets are off with any major economic disruption,” says Pay Thompson, an SVP at Daniels & Associates who specializes in M&A activity for smaller cable markets. Thompson says that in smaller markets, “the deals that will happen are maybe not the ones in which people want the highest price possible.” The most attractive systems for rural market buyers will be those that have one head-end, serve 5,000 to 10,000 subscribers and are near a larger MSO that can interconnect. “Those will sell, and sell at a decent price.” With its own stock as currency, TWC is expected to be a buyer. Cablevision is the perennial favorite to sell out to TWC, but it’s anybody’s guess if those cable operations are for sale.
— Mavis Scanlon CABLE NETWORK AND STUDIO EXECUTIVES HOPE 2003 IS THE year cable starts to realize off-network revenue, such as syndication deals. It would certainly give studio heads a sigh of financial relief. Without this off-network revenue, studios are hard pressed to finance the types of shows that give cable a life of its own. Monk, for example, may well have an afterlife. The USA Network show already has generated extra license fees from airing on ABC following its initial cable air date. “It’s a great, great phenomenon for all cable programming that there is an afterlife and an after market for shows that originally appeared on cable,” says Russ Krasnoff, president of programming and production for Sony Pictures Television. In fact, Sony will pocket revenue this year from syndicating Ripley’s Believe It or Not, a show first aired on TBS Superstation over three years ago. And Sony is churning out its fourth season of Strong Medicine for Lifetime, which will give the show enough episodes — 88 in all — to make it a candidate for syndication. Cable networks need enough episodes to resell their content, says David Grant, president of Fox Television Studios, which produces The Shield for FX. “The Shield is as good as any other hour of television,” he says. “Why shouldn’t [it] be syndicated? The catch is how many episodes will be made and cable networks typically make less episodes [than broadcast], and that’s probably the single biggest issue.” Until this cable aftermarket revenue is realized, studios will struggle to find ways to augment revenue for cable production. Fox Television Studios, for example, will rely on its international production formats to keep revenue flowing. The studio creates a general format for a show and then exports it to foreign markets where it can be altered to meet cultural differences. “That’s become a very important component of making the business work for us on a global scale,” says Grant.
— Andrea Figler LOCAL AD SALES WILL GROW 15% FOR CABLE TV THIS YEAR, taking revenue from sales promotion budgets and newspapers rather than broadcast television, says Jack Myers, chief economist of the Myers Report. “I’m relatively bullish on local cable television for a number of structural reasons in the industry,” Myers says. First, Charlie Thurston, former president of Adlink, will help his new boss — Comcast Corp. — rejigger its systems to make it easier to buy cable advertising. Also, National Cable Communications continues to expand its representation, becoming a strong single-source account rep for media buyers and ad agencies alike. Local ad sales should total $4.7 billion in 2003 and $5.39 billion in 2004, Myers predicts. Of the 180 or more media buyers and ad agencies polled by Myers, more than 90% will spend the same or more as they did last year on local ad sales. Steve Litwer, VP of sales development for Mediacom’s sales arm OnMedia, predicts 12% to 15% growth in local ad sales for cable. War with Iraq could stall this growth, he warns.
— Andrea Figler CABLE OPERATORS COULD SIGNIFICANTLY IMPROVE CUSTOMER satisfaction by offering digital cable and/or local telephone service in a bundle this year. “We see that general trends are favorable for cable in 2003,” says Steve Kirkeby, senior director of telecom studies for J.D. Power and Associates. If a consumer switches to digital cable from analog, the MSO’s rating will rise 7 index points, Kirkeby explains. And if a consumer can get telephony along with cable on one bill, crank that index up another 7 points. On top of this increased satisfaction level, an MSO could pocket more revenue. “Products that are driving revenue should improve overall satisfaction,” he adds. And that could make 2003 a downright rosy year. But there’s a catch. Operators have to provide good customer service when they offer these new services. To date, their record hasn’t fared so well. The mean number of contacts a consumer had with cable operators last year in order to resolve a problem rose to 1.8, up from 1.64 in 1999, Kirkeby says. And the percentage of problems resolved by the first call a consumer makes to an operator fell to 67% last year, from 72% in 1999. Comcast Corp. wants to help fix this. It plans to hire 3,000 new customer service reps this year to bring its newly acquired AT&T Broadband systems up to par — and increase the amount of first-call resolutions. To help kick start this effort, Comcast is placing its reps in the local systems, bucking the industry trend toward regionalization of call centers.
— Andrea Figler No news here. Cable rates will climb. We peg that basic cable will rise by about 4% to beat inflation by a few points. Regulators will rattle their swords over gouging, but we expect nothing of significance to happen. The wild card here is competition: DirecTV and Dish are readying for battle over DBS market share. Price could become the weapon of choice, which could increase pressure on cable to cut rates.
— Jonathan Blum, Kagan For a complete breakdown of the cable industry’s rate structure, see “Mediacast 2011” at www.kagan.com. The industry has made much hay over its improving cash picture. We estimate that on an annual per subscriber basis, operating cash flow could rise in the 10% range. This improved operating performance should start flowing to the bottom line. Some MSOs will almost certainly show solid positive free-cash-flow results by year-end. Expect overall debt levels to fall as well.
— Jonathan Blum, Kagan For all implication on the improving cash flow trend, see “Kagan Media Money” at www.kagan.com. This number is so good it actually understates the positive trends. Not only will the amount of cash that services industry debt rise by about 10%, total debt, including preferred stock, will fall by about 2%. In ratio form, or so-called long-term debt to total cash flow, the position improves from 5.7x to about 5x. Or by 11%. Not bad.
— Jonathan Blum, Kagan For the inside perspective of the cable debt market, see “Kagan Media Money” at www.kagan.com. Get over it: Basics subs will fall in 2003. The question is: By how much? We kept aggregate industry shrinkage under 0.5% based on improved churn performance from leading edge operators like Cox, Insight and Time Warner. But that will not be enough to stem the bleeding from a wounded Adelphia and rural operators like Charter who face the full force of DBS incursion.
— Jonathan Blum, Kagan For more thorough subscriber data including long-term projections, see “Broadband Cable Financial Databook” at www.kagan.com. Though the industry has been betting on digital cable for nearly a decade now, it’s still nice to see actual results. Digital subscribers will grow at a healthy 25% for the year. Again DBS could be the spoiler. The cable industry has left the pricing door open. Cable’s basic digital service can cost as much as 30% more than satellite. Not a smart way to build a new service.
— Jonathan Blum, Kagan For complete revenue analysis of digital subscribers, see “Digital TV” at www.kagan.com. High-speed data has helped the industry since it was first deployed, and 2003 will be no exception. We estimate total subscriber growth in the mid-30% range for the year. However, data could become a victim of its own success. With DSL taking about a third of the market, percentage increases in subscribers will probably level off as MSOs run out of new subs.
— Jonathan Blum, Kagan For the entire picture of the high-speed data market, see “Broadband Technology” at www.kagan.com. VOD will be hot in 2003. We show a 95% jump in deployed homes and total revenue growth dominating VHS rental. The question will be operational results for VOD, which by no means are a lock. The challenger here will be disc-based media such as DVDs, backed by studios which will fight hard to maintain their release window advantage over on-demand content.
— Jonathan Blum, Kagan For full revenue projections, see “VOD & ITV Investor” at www.kagan.com. HDTV sub growth will be limited at best this year. The NCTA is making much noise about 33% of all cable homes being passed by HD-capable plant. But actual subs will be far lower. We say 120,000 subs by year-end. Even spookier, total deployed digital TVs could get above 8 million. That works out to about 7.9 million hi-def TVs that are not being served by HD cable.
— Jonathan Blum, Kagan For a better understanding of the confusion in the HD market, see “Digital TV” at www.kagan.com. MSO telephone service will continue its slow and steady march in 2003. North of 2.5 million subs will get the offering by year-end. The key here will be what Comcast does with its new AT&T subs. If Brian Roberts follows through on his telephony promise, look for a major growth spurt.
— Jonathan Blum, Kagan For more on the growth of the cable telephony market, see “Broadband Technology” at www.kagan.com. It’s nice to end on a high note. A return of the ad market looks fairly certain for 2003. We see a jump of 11% in basic network ad billings. One remote worry here is a full-scale collapse in the consumer economy on the order of 3% to 5% drop in aggregate spending. But short of this catastrophe, marketers committed to supporting their brands will stay in the game.
— Jonathan Blum, Kagan For complete projections of year-end ad spending, see “Broadband Advertising” at www.kagan.com.

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