If there is one thing Dr. John Malone taught cable operators during his time as head of TCI it was this: Don’t underestimate him.

A generation ago, Malone used a combination of financial wizardry, negotiating acumen, guts, gall and a savant-like understanding of subscription television to turn TCI, an otherwise unassuming MSO, into a cable superpower. Now the Yale and Johns Hopkins alum is back in the business, this time as head of cable’s archenemy, DirecTV. And because it’s Malone, a man whose relentlessness — some would say viciousness — is the stuff of legend, many MSO executives are fixing their attention expectantly on him and his most new acquisition.

And that attention was only sharpened last month after a Newsweek story speculated that Malone will take HDTV, a technology that has skyrocketed out of the early adopter phase into full-blown consciousness, and leverage it against his former MSO colleagues. That story came on the heels of the Consumer Electronics Show in Las Vegas, where DirecTV made headlines by declaring 2007 "The Year of HD," and announcing the planned launches of 100 national HD channels, as well as signing deals or agreements-in-principle with 70 national HD networks.

So will attacking cable using HD be central to Malone’s strategy for gaining market share? It would appear likely, given the fervor with which DirecTV touted its HD products at the CES show. In fact, given its recent deal with Major League Baseball for out-of-market games and its current NFL Sunday Ticket package, it would seem that Malone will try to outbox cable for its customer base by throwing a one-two combination punch of HD and sports.

But if HD is central to DirecTV’s strategy, at least two operators are saying "bring it on." Industry leader Comcast and small, independent MSO Wave Broadband each spent the last 12 months going toe-to-toe with DirecTV over HD superiority, and did so very effectively. And neither will concede anything to DBS when it comes to the quality or the variety of their menu of HD options.

Step Right up to HD VOD

Philadelphia-based Comcast, which launched HD in the fall of 2001, employed a novel approach to promoting its HD fare. Much in the tradition of P.T. Barnum, Comcast found great value in selling the excitement of events and letting revenue grow out of that excitement.

In contrast to DirecTV’s pricey HD tier, Comcast has opted to not alter significantly its HD box and programming package. Also, rather than promoting the number of HD channels it carries, Comcast has strategically attempted to gin up excitement over HD as a product category by highlighting HD jewels in its VOD menu of options. So while DirecTV continues to tout quantity, Comcast heavily promotes a handful of blockbuster movies on HD VOD, based on the belief that it can entice consumers by showcasing content that is both panoramic and visually stunning. In September, the MSO joined with Starz HD on a free preview tied to the hit movie, The Chronicles of Narnia, which was then made available on SVOD at no additional charge to customers who subscribed to Starz.

Similar event-type promotions were built around the original Star Wars trilogy on Cinemax and the first five movies of the Rocky series. The net result, says Page Thompson, Comcast SVP and general manager of video services, was more than 1 million HD VOD views corporate-wide in 2006. "As an HD event, the Star Wars trilogy was absolutely spectacular," says Thompson. "Not only did it drive HD awareness, but it also saw some very positive gains on Cinemax."

Thompson, who says that Comcast will continue to promote HD via VOD by doubling its hours of on-demand hi-def fare in 2007, adds that his company’s promotions would not have merit if they were not backed up by a solid programming menu. Comcast’s HD lineup offers 127 on-demand choices, including hit series like CSI, premium content, local networks and PBS. The lineup of HD fare is "as compelling as you’ll find anywhere," he argues.

During Comcast’s fourth-quarter 2006 earnings call earlier this month, executives said that although switched digital technical trials will be part of an 18-month program to increase HD capacity, the company won’t engage in an HD channel capacity race with DirecTV. Chairman and CEO Brian Roberts said during the call that Comcast would pin its near-term future primarily on HD VOD content. "We would rather allocate bandwidth to what customers want," he said.

Out Front With HD in Washington State

Meanwhile, at the other end of the distribution food chain, Wave Broadband made HD a central part of its head-to-head war with DBS. With just more than 140,000 subs, the Kirkland, Wash.-based Wave is not the kind of cable operator normally associated with high-end, bandwidth-intensive products like HD. But CEO Steve Weed knew when he started the company in 2003 that HD would be critical to its ability to earn and grow market share. He had his marketing and sales team trade on the fact that DBS did not carry local broadcast channels in HD at the time. "We knew that we would have the locals in HD, including local sports," says Weed, "so we made marketing HD a priority."

Weed says that when he first saw the DirecTV ad where actor Christopher Lloyd re-creates his Back to the Future character he "was a little ticked off," since the ad promotes 100 channels of HD on DirecTV. "They were creating the image that they have more HD [channels] than we do, which they don’t," Weed says. "But I started thinking we must be doing something right if they felt compelled to spend all that money to promote a product that doesn’t even exist yet."

Weed reports that from March 2006 to the end of the year Wave went from 3,000 HD customers to 10,000, making HD the fastest-growing service the company offers. He also says that even after DBS started carrying local stations in 2006, Wave’s HD growth continued.

Who’s Really Got the Competitive Advantage?

Although Comcast and Wave Broadband are employing different HD marketing strategies, they share at least one very critical thing in common: Before unleashing their HD promotions, each had to ensure they had the bandwidth to accommodate the technology. Given DBS’ edge in bandwidth capacity, for years cable operators found themselves at a disadvantage with respect to HD.

However, over the past 12 months, as HD gained traction in the marketplace, MSOs started to get creative in how they managed and/or increased available bandwidth. Some, like Time Warner Cable, began testing video switching; Wave started remuxing its traditional digital networks. Comcast and several others began reallocating real estate that for years had been inhabited by pay-per-view. The result was a narrowing of DBS’ bandwidth advantage and an increased amount of bandwidth available for HD deployment, so much so that Comcast’s Thompson now claims: "We have room for every linear HD channel we want to launch."

Despite the publicity DirecTV was able to generate recently and its assumed bandwidth advantage, using HD as a weapon against cable may not be a slam-dunk for DBS — at least in the opinion of some.

Bruce Leichtman of Leichtman Research Group feels that by staging the battle in the HD arena Malone might be biting off more than he can chew. The problem, Leichtman feels, is that DirecTV has been touting its technical superiority over cable so long that it’s starting to believe its own hype. "To win the HD war DBS will need a distinct advantage," says Leichtman. "A press release, however well written and well distributed, is not an advantage."

He continues: "Look at the two platforms. Since the beginning of 2006, cable has had a better HD product than DirecTV, plain and simple." Leichtman contends that during the past 12 months cable has offered more linear HD channels, offered local programming and sports in HD — which DirecTV did not have for quite some time — and charged no fees to upgrade to an HD box or, in many cases, an HD tier of programming, unlike DirecTV.

"Cable was in a position of power," says Leichtman, "and if it made a mistake at all it was not promoting the HD product even more than it did." Of DirecTV’s base of 15.6 million customers, 1.5 million subscribe to its HD tier. The tier, which includes virtually all the national HD networks, retails for $10.99 a month, following a Feb. 6 rate increase by the DBS provider.

The emergence of HD will prove to be pivotal for DBS. Leichtman contends that when DBS providers pirated many of cable’s best customers a decade or so ago they did so because they clearly had a better product. Leichtman says that’s no longer the case. "This war over HD is not about acquisition. It’s about retention. DBS, particularly DirecTV, cannot afford to lose the customers they got 10 years ago from cable. That’s their core audience and they desperately need to hold on to them."

Wave’s Weed agrees, explaining that while his company’s research had at one time indicated those 10-year DBS customers would never switch back to cable — something he calls "the cold, dead fingers phenomenon" — cable has been given a second bite at the apple. He says that with DBS customers required to make a new buying decision to purchase HD, and with DirecTV requiring them to secure a new box, perhaps a new dish and a new package of programming, they represent a rare re-acquisition target for cable operators. Says Weed, "This is clearly the point at which we need to strike."

Additional reporting by Chad Heiges.

Preemptive HD Strikes Against Malone

The News: Despite DirecTV’s brilliant and fiercely determined new owner, Dr. John Malone, and DBS’ claim of being the superior platform for HD, cable operators like Comcast and Wave Broadband are openly challenging Malone and his company’s claim of hi-def superiority.

The Background: As HD sets continue to fly off the shelf, MSOs have found new ways to increase their hi-def options, which means that, despite its ballyhooed 100-channel HD tier, DirecTV finds itself staring down a cable industry armed with a renewed sense of confidence.

What’s at Stake: For the first time in more than a decade, DBS may be threatened with losing the high-end customers it pirated from cable — conspicuous video consumers who represent the very core of its business.


Is DBS Still Ahead at the Retail Space?

One of the long-held beliefs among analysts and other industry observers is that DBS has a greater presence than cable at the retail level, which gives providers like DirecTV a competitive edge. And while it may be true that DBS has traditionally had a greater retail presence than cable, a recent study by CTAM, the cable industry’s marketing organization, indicates such a presence may not be as advantageous as it was once believed (see chart below).

The December ’06 CTAM report, "Drivers of HD Loyalty and Adoption," says just 31% of consumers receives HD programming information from retail sales clerks. In addition, only 52% of HDTV owners actually subscribe to an HD service. Those two facts indicate that, at the retail level, educating buyers about programming and HD providers takes a backseat to moving product. Bruce Leichtman of Leichtman Research says that’s understandable. "Retail clerks have far more incentive to sell a warranty, a surge protector or a monster cable than they do to sell programming," he says.

CTAM president Char Beales wonders if the disparity between sets sold and actual HD subscriptions isn’t something that might have been addressed with a simple change in terminology. "I can’t help but feel the industry made a mistake calling it ‘HD service,’" Beales says. "And I wonder what would have happened if they called it something like an HD programming package." MCA


HD Roll Call

Lists of HD networks are works in progress, as seemingly overnight another new channel or two announces plans to launch in HD. On the drawing board currently are HD versions of such basic cable standard-bearers as TBS and CNN, as well as both a face-lift and name change (Mojo) for the MSO-owned INHD.

At press time, the roster of national HD nets available to cable operators includes:

Genre: Premium movies
Contact: Steve Davidson, EVP

Genre: Science and nature
Contact: Jennifer Dangar, VP, new media distribution

Genre: Sports
Contact: ESPN Affiliate Sales & Marketing

Genre: Sports
Contact: ESPN Affiliate Sales & Marketing

Genre: Lifestyle
Contact: John Baird, EVP, affiliate sales & marketing

Genre: Premium movies, series, sports
Contact: Steve Davidson, EVP

Genre: Entertainment, news, sports, lifestyle
Contact: Bill Padalino, managing director, affiliate sales

Genre: Movies
Contact: Bill Padalino, managing director, affiliate sales

Genre: Lifestyle
Contact: John Baird, EVP, affiliate sales & marketing

Genre: Entertainment, lifestyle, sports
Contact: Valerie Barkan, regional VP, affiliate relations

Genre: Performances, music videos, interviews
Contact: Rachel Gerhls, manager of affiliate sales & marketing, MTV Networks

Genre: Science, natural history
Contact: Lindsay Gardner, president, affiliate sales & marketing, Fox Cable

Genre: Sports
Contact: Jody Shapiro, VP, business development

Genre: Sports
Contact: Adam Shaw, SVP, distribution

Genre: Outdoor sports
Contact: Amy Hendrickson, SVP, affiliate sales & marketing

Genre: Adult
Contact: Gary Rosenson, SVP, sales & affiliate marketing

Genre: Premium movies, series
Contact: Laura Palmer, VP, distributor marketing

Genre: Premium movies, entertainment
Contact: Ed Huguez, EVP, affiliate sales & marketing

Genre: Premium movies
Contact: Laura Palmer, VP, distributor marketing

Genre: Entertainment, movies
Contact: Turner Network Sales

Genre: Premium movies, entertainment
Contact: Rob Harding, regional director, affiliate sales

Genre: A suite of 15 networks; sports, news, lifestyle, movies, more
Contact: Robert Broussard, president, network sales

Genre: Lifestyle
Contact: Charles Herring, president & co-founder

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