Cable Operators

Sharper Vision For Local Ambitions

5/22/2005 8:00 PM Eastern

For years the direct-broadcast satellite industry said it was impossible to deliver local high-definition broadcast channels in every U.S. market. But thanks to advances in compression technology, new Ka-band satellites, corporate vision and competitive pressures from cable, DirecTV plans to deliver local HDTV signals to every DMA, starting with 12 cities in September.

With the successful launch of its first Spaceway satellite last month, DirecTV will be able to deliver HD broadcast channels to New York, Los Angeles, Chicago, Philadelphia, Boston, San Francisco, Dallas, Washington, Atlanta, Detroit, Houston and Tampa, Fla.

Industry analysts say DirecTV must offer local HD to remain competitive with cable operators already offering the service. National HD channels aren’t enough.

“Local is still about 50% of the viewing,” Tellus Venture Associates president Steve Blum says.

DirecTV president and CEO Chase Carey calls the local HD strategy “very important,” noting it would become part of the platform’s core entertainment experience. Carey adds that even as viewing becomes more fragmented, “the biggest and most heavily watched shows are still on network TV.”

According to Josh Bernoff, vice president of Forrester Research Inc., HD is moving from early adopters to the mainstream. Forrester surveys found more than 10% of U.S. households own an HDTV set, and another third say their next TV purchase will be HD.

“If DirecTV wants to continue growing its subscriber base, there’s no alternative but to deliver locals in HD,” Bernoff says.

A HIGH COST TO FLY

DirecTV’s commitment doesn’t come cheap: Spaceway 1 cost more than $1.5 billion. The steep price tag was due to the satellite’s original design to handle broadband service. Subsequent satellites for local HD will cost less to design and build. That’s not counting consumer marketing and equipment costs.

“It’s a shame they have to do it in order to keep up,” says Carmel Group chairman Jimmy Schaeffler, “but I’m impressed they’re willing to bite the bullet and do it now.”

Timing is everything, analysts say, because it’s important to have a clear offer in place before large numbers of consumers enter the HD market.

Satellite companies already integrate digital-broadcast tuners into their HD receivers, but that option requires subscribers to use an off-air antenna for their local channels.

Antennas were seen as a sales barrier in the 1990s before DBS companies began offering local-to-local analog service.

Ghosting is no longer an issue in the digital world when an over-the-air signal starts to drop off. “The signal just goes out,” Bernoff says, “and that’s not cool to somebody who just spent $3,000 for a TV set.”

Cable exploited DirecTV’s lack of local channels in the early years of DBS.

But Leichtman Research Group president Bruce Leichtman says that cable operators aren’t doing enough to exploit that edge when it comes to local HD.

“They’ve got to understand they have a brief window,” Leichtman says. He adds that HD lets cable recover high-value customers that are likely to want cable modems as well as video.

Once DirecTV offers local HD, cable could still take advantage of consumer confusion about equipment swap-outs. Even DirecTV subscribers who already watch national HD programming will need new dishes and receivers using MPEG-4 (Moving Picture Expert Group) compression technology to receive local HD signals.

A BIGGER HD DISH

DirecTV chief technology officer Romulo Pontual says local HD subscribers would need a slightly larger DBS dish. Because DirecTV will use Ka-band frequencies at the 99 degrees and 103 degrees west orbital locations for its local HD service (just two degrees in either direction from its core satellite at 101 degrees), Pontual says current customers shouldn’t have line-of-sight problems with the new dishes.

Bernoff says that while consumers will consider adjusting their set-top boxes as they upgrade to HD, “you don’t want to force consumers to make a choice” between DirecTV and cable.

DirecTV will feel competing pressures from subscribers and Wall Street to see who bears the cost of the new MPEG4 receivers.

“DirecTV’s biggest challenge is to execute its HD strategy in a cost-effective manner and to do it successfully,” Lehman Brothers Inc. analyst Vijay Jayant says.

Phil Swann, president of TVPredictions.com, says he’s had “tons of emails” from DirecTV HD subscribers who want to know how the company plans to swap out hardware. That’s a concern for customers who have paid nearly $1,000 for HD-compatible digital video recorders, which won’t be able to record DirecTV’s local HD signals.

Swann says the uncertainty surrounding DirecTV’s HD swap-outs has led to hesitancy surrounding new purchases.

Earlier this month, Carey said in a first-quarter earnings call that DirecTV had about 600,000 HD subscribers. He predicted most of the cost to convert those subscribers to new MPEG4 equipment would come in 2006.

DBS competitor EchoStar Communications Corp. has not committed to local HD for every U.S. market. CEO Charlie Ergen said in an earnings call this month that the company might deliver only 20 markets in local HD starting in 2006. Ergen wants to fill in with national HD broadcast feeds to smaller markets that have not yet committed to digital broadcasts.

The National Association of Broadcasters has issues with that plan, says spokesman Dennis Wharton, who applauds DirecTV’s commitment to deliver local HD signals across the country.

Not that DirecTV is entirely on the NAB’s good side. The trade group also wants DBS companies, and not just cable operators, to deliver broadcasters’ digital multicast signals. How that struggle will play out remains to be seen.

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