Things have changed. With the perception that HD sets are flying off shelves and will be in 75% of homes by 2010, many operators are reconsidering HD’s role. Bruce Leichtman of Leichtman Research Group says of cable’s former wait-and-see attitude, “Many operators have started to realize that’s a bad strategy.”

In the opinion of some, high-definition television is moving so rapidly into mainstream consumer consciousness that it’s only a matter of time before HD becomes for operators like a college diploma or good personal hygiene—having it won’t necessarily open many doors, but not having it will kill you.

“The joke internally used to be, ‘How many spots on a bug do you really need to see?’ a former Adelphia exec says. “But over the past couple of years we developed a respect for HD and its potential as a core component of our video product.”

But while cable operators have become more bullish on HD, cable continues to find itself in a dilemma, whose parameters are encapsulated in the thinking of Suddenlink SVP of programming Patty McCaskill. Suddenlink has long been a believer in HD, but balks at its strategic challenges. “We’re wrestling with it like everyone else,” McCaskill says. “Sure, it’s a bandwidth hog. But by the same token, if you have HD at home, as I do, you become a big believer in it.” The issue for McCaskill, like many cable operators who cite the age-old chicken-and-egg analogy, is how to justify that much bandwidth allocation when you’re hard-pressed to name more than two dozen quality HD channels.

“We’ve been very careful about launching HD channels because we want to make sure we’re only rolling out quality content,” McCaskill says. “Something that will add value to our lineup and not just something that gets launched because it happens to be in high definition.”

LEICHTMAN: HD USERS ARE HIGH-END CUSTOMERS

Besides strong retail sales, a major driver of HD’s surge among cable MSOs is the makeup of the typical HD customer. MSOs realize that the highest-end customers—those most likely to use VOD and DVRs, and the best targets for cable’s bundle of voice, video and high-speed data—are the same consumers demanding more and better HD channels.

“They’ve realized that the HD customer is the highest of high-end customers, and they need to lock those people up now,” researcher Leichtman says of cable operators.

Leichtman’s been tracking HD for four years. Among his 2006 findings were that HD penetration is indeed income-based. Just 6% of households with an annual income of less than $30,000 have an HD set. In households with an annual income of over $75,000, penetration jumps to 32% (see chart, below).

A HI-DEF DIVIDE

Interestingly, Leichtman rejects the popular belief that HD well be in more than 75% of households by the decade’s end. In fact, he calls such penetration projections “ludicrous.” As the rise in gated communities in America signifies a widening class divide, so too is the country beginning to witness a technological divide. “To hear the Consumer Electronics Association tell it, there are millions of HD sets being sold in America—though even they’ve started to back off their numbers,” Leichtman says. “But what they and others don’t seem to understand is that a lot of those sets are being purchased by existing HD users, who are going back for a second or third set. My sense is by the end of the decade—or even by the end of the year—there are not going to be nearly as many households out there with HD as some people claim,” he says.

A DIGITAL DILEMMA ALL OVER AGAIN?

What is clear to Leichtman and others, however, is that HD penetration in the market’s most desirable homes is on the rise. That’s why the challenge to operators is only partly technical, Suddenlink’s McCaskill says. The war being waged with DBS is one of public perception, and the battleground is not so much a system’s head-end or its network control center as it is the hearts and minds of the American consumer.

McCaskill claims DBS got ahead of cable and presented itself as a superior platform for digital television, a positioning that cost cable many of its best customers. Some MSOs now are only starting to recover. The same scenario could play out with HD. “We have to be cognizant of the fact that DBS—especially Dish Network—has more content than we do. Now, it may not all be valuable or quality content, but the perception is that they have more content. We have to be careful not to let DBS preempt our messages and have the cycle repeat itself, like it did in digital.”

FEBRUARY 2009: HOLD THAT DATE

The waiting game is key, however. For many MSOs, the percolating demand for HD is one they hope they can ride out until February 2009, when the digital standard adopted by the FCC becomes law and they will no longer be forced to simulcast analog and digital signals of the same networks. At that time considerable bandwidth will be freed, making an extensive lineup of HD signals a far more practical consideration. Until then, many hope to build a temporary bridge through bandwidth reallocation, HD VOD and other measures.

Says a former cable operator, “[Waiting for the digital transition] reminds me a little of the things we used to have our service people tell customers during our upgrades in anticipation of digital. Things like ‘satellite providers don’t offer local signals.’ We knew they’d get them sooner or later, but in the meantime it was an effective stopgap and a good counterpunch—at least until our rebuilds were completed.”

HD DIVIDING LARGE AND SMALLER OPS

Like many technical issues, HDTV is dividing cable into haves and have-nots. Whereas most large operators see HD as essential, many small ones don’t.

Cox director of new video services Bob Nocera says Cox recently has become more aggressive than usual in its marketing. “This is an entirely market-driven phenomenon, fueled in large part by the price point of HD sets having dropped to around $1,000,” he says. “We’ve made it our mission to educate people that to get the maximum benefit from your set you really need an HD signal.”

Cox has launched a comprehensive campaign to educate new purchasers of HD sets, complete with video spots, print messages and an online interactive tutorial. “We now consider HD a mass market,” Nocera says. “In fact, we’re under the assumption that every one of our customers is a potential HD customer.”

Comcast recently purchased rights to a limited number of Hollywood hits in HD, such as The Chronicles of Narnia, which it plans to offer directly to consumers as VOD fare.

And Time Warner Cable, which has been at the vanguard of switched digital rollouts, appears as bullish on HD as any operator in the industry. “What we’ve seen is that HD is becoming a true force rather than a niche audience,” says Julie Simon, VP of video product management. Using switched digital, her company is planning on adding in excess of 20 new HD channels in 2007.

Even certain small operators have been aggressive with HD. In addition to Patrick Knorr’s Sunflower Broadband, Steve Weed’s Wave Broadband has had HD at the very core of its business model since the company’s inception three years ago. By the end of this summer, Wave’s HD DVR box had become the company’s fastest-growing product. “What’s shocking is that, thanks in part to HD, we’re experiencing growth in our core video business, which we never expected to happen when we got back into the industry,” Weed says.

Due to bandwidth limitations, however, other small operators—particularly those whose systems are at less than 750 MHz—find themselves behind the eight ball. Matt Polka of the American Cable Association claims that many small operators have been forced by a combination of factors to try to find ways to offer HD, despite its bandwidth demands. Says Polka, “There are things from a policy standpoint that have been pushing our members in that direction [of HD], but even without those, the marketplace has a lot of small operators now saying there are things we can do as short term fixes—but we can’t ignore this thing forever.”

To Tier or Not to Tier

Many cable operators bundle the broadcast networks in HD with their advanced set top-box, and charge extra for cable networks in HD. That strategy, says Bruce Leichtman, president and principal analyst of Leichtman Research Group, might be short-sighted.

Is it foolish for operators to tier HD?

Leichtman: That’s your word, not mine. But I don’t think it’s a good business decision.

Why not?

Leichtman: We saw the precedent with premium on demand. Operators were torn between charging for premium on demand or bundling it in. And basically every MSO in the industry, save one, opted for the latter. And it’s worked. By bundling premium on demand in, MSOs were able to both raise their rates and add value. From a consumer perspective, the companies weren’t forcing their customers to make yet another decision to buy. And any CSR will tell you it’s easier to sell a product when it’s bundled in.

And that same principle applies to HD?

Leichtman: Same deal. Don’t force the consumer into another buying decision, one that they’ll have to make month after month. Tiering is nothing more than cost-based pricing. It’s classic internal thinking. It’s not consumer-based pricing and, in the end, I’m convinced tiering will work against the company that decides to apply the concept to HD.   —M.C.A.

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