Policy

The Digital Race

3/30/2007 8:07 PM Eastern

Washington— Going all-digital can happen in a hurry. And proof isn’t far away.

It’s in Puerto Rico. The Caribbean island’s second largest cable operator, Liberty Cablevision, last year finished converting all of its 111,000 subscribers to entirely digital video services in a rapid-fire, $10 million program that led to the shut down of traditional analog service in roughly four months.

The benefits of an all-digital platform are easy to tout. By converting scores of analog channels into digital ones, cable companies can recapture as much as two-thirds of the bandwidth on their networks. With the newfound capacity, operators can offer an array of revenue-gushing products, including more high-definition TV channels, faster high-speed data connections, additional video-on-demand services and pay-per-view offerings. An all-digital plant is also less vulnerable to piracy, a $4.8 billion-a-year problem for operators.

Snapshot
Liberty Cablevision of Puerto Rico
Managing director: Jose Alegría
Subscribers: 111,000
Digital penetration, before conversion: 45%
All-digital conversion began: Feb. 1, 2006
Conversion completed: May 31, 2006
Key tactics: Short-term digital simulcast; no basic tier rate increase; more channels and services for same price; customer installs set-top; disconnect holdouts.
Owner: Liberty Global, Denver

But there are plenty of risks, too. Chief among them: the costly and delicate task of coaxing millions of subscribers into paying fees to attach a digital set-top box to every analog TV set in their homes. According to the National Cable & Telecommunications Association, cable households have 134 million analog TVs not connected to a set-top box that can convert digital signals into analog waves their sets can display.

By and large, U.S. cable operators want digital set-top penetration, now at about 50% nationally, to soar much higher before they even consider a forced migration to all-digital.

Comcast, the nation’s largest cable operator, has not put a firm date on when it will convert all 26.2 million subscribers to digital service. That is not likely to happen until sometime in the next decade. It’s at 52% today.

“The question is, when do we get to the point where it is both cost effective and competitively reasonable to make the shift?” Comcast senior vice president of strategic planning Mark Coblitz said March 12 at the Association of Cable Communicators Forum in Washington, D.C.

LIBERATING TV

Liberty Cablevision had different ideas. It decided to slam on the accelerator and reclaim the analog shelf space almost at once.

Starting in February 2006, the company finished the job in about 120 days, and it did so in a place known more for sandy shores than rich demographics. Puerto Rico, population 3.9 million, has an annual median income of $13,000, compared with $46,000 for the U.S.

Jose Alegría, Liberty Cablevision managing director and architect of the company’s digital-TV transition, flirted with free programming offers to mollify any annoyed customers. But in the end, he decided that a rate freeze, combined with all the qualitative improvements that consumers would immediately experience with a digital-only platform, was sufficient to effect a smooth transition.

“We had a very limited number of upset people,” Alegría said.

Liberty Cablevision is an indirect wholly owned subsidiary of Liberty Global. With 24.1% voting power, chairman John Malone has effective control of the company. Malone, also chairman of Liberty Media, is seeking federal approval for that company to take control of direct-broadcast satellite TV provider DirecTV from News Corp. in an $11 billion deal.

EchoStar Communications, DirecTV’s largest satellite rival, recently asked the Federal Communications Commission to force Malone to divest Liberty Cablevision to keep pay TV competition a three-way race in Puerto Rico, a U.S. territory under FCC jurisdiction.

In completing the digital transition in a hurry and with few hassles, Liberty Cablevision defied conventional wisdom. For years, U.S. cable-industry leaders have been insisting that the reclamation of analog capacity was an extended process in which consumers would set the pace.

“It’s gradual, rather than sudden,” Insight Communications CEO Michael Willner said at the ACC Forum. “We’ve tried to force converter boxes on people in the past, and there are just a group of people out there who don’t want to have anything to do with it.”

Pali Research cable analyst Richard Greenfield disagreed with Willner’s contention, arguing that cable should make the conversion sooner than later.

Why? Competition. DirecTV and EchoStar’s Dish Network have been digital from the start. AT&T and Verizon are invading cable markets with all-digital video lineups.

“I just think it’s money well spent. I think it’s a business that’s more than capable of going all-digital if it wanted to,” Greenfield said. “The ability to free up bandwidth to deliver an absolutely best-in-class service with no question is a very compelling consumer proposition.”

Slow Motion
Measuring the big cable operators' distance from analog:
Percent of Digital Customers
Comcast 52%
Time Warner Cable 54%
Cox 52%
Charter 51%
Cablevision 76%
Source: Multichannel News research, companies.

WAIVERING AT THE START

Liberty Cablevision’s DTV transition began with a little-remembered FCC ruling in August 2000 by then-Cable Services Bureau chief Deborah Lathen. Under the Cable Television Consumer Protection and Competition Act of 1992, cable operators were prohibited from scrambling or otherwise encrypting the basic programming tier, which includes local TV signals and is a mandatory purchase.

The law was designed to ensure that any cable subscriber could receive local TV signals without a set-top box.

Lathen granted a waiver after Liberty Cablevision demonstrated that it had been plagued by a serious signal theft problem — about 20% of homes passed were receiving cable service illegally.

Armed with the FCC waiver, Liberty Cablevision scrambled its channels, a move that forced every customer to have an analog set-top box for every TV set, paying $3.50 per box, per month.

A year later, Liberty Cablevision launched a digital-video tier, which included new channels provided by Discovery Communications, MTV Networks, ESPN Classic, and CNN en Español. The tier reached about 45% penetration by October 2005.

Late 2005 was also the period when Alegría’s team began to think seriously about going forward with analog bandwidth recovery, in part because consumer access to black-market analog boxes had perpetuated the signal-theft problem. An all-digital platform would cut signal theft way down.

On the company side, Liberty Cablevision put about 95,000 digital set-top boxes in a warehouse ahead of the conversion and prepared the plant to deliver, on a short-term basis, a simultaneous digital telecast of the analog programming tiers.

On the consumer side, Alegría’s plan had a mix of rewards and penalties. Customers were notified by letter that they had to trade in their analog boxes for digital units in order to retain service. They were reminded again during commercial TV breaks and company-transmitted on-screen messages.

“We basically used our own media,” Alegría said. “We did this on a staggered rollout basis by geographic areas. We divided the entire footprint into four or five regions.”

The transition was financially painless for customers. For instance, the $3.50 monthly analog set-top box fee remained the same for the newly issued Motorola DCT-700 digital units.

One inconvenience: Customers had to visit one of nine regional offices to make the box swap. But no customer was more than 15 or 20 minutes by car from an office. Self-service avoided a $25.00 truck roll fee.

Before the transition, basic customers paid $42.77 per month for 63 channels. For the same price afterwards, they received not only the same number of channels but also 45 music channels; an interactive program guide; 6 local radio stations; free video-on-demand services, including Rainbow Media’s Sportskool instructional videos, and pay video-on-demand services; and access to 48 linear pay-per-view channels.

“There was no rate increase for customers,” Alegría said.

Within four weeks, 80% of Liberty Cablevision subscribers had made the switch.

The effort to act with haste did have a downside: long consumer lines.

“Your waiting times at the lobby were really long. People would wait for an hour,” said Alegría, who made sure free coffee was on hand.

What about the hard cases, the customers who wouldn’t or couldn’t cooperate? Six weeks into the campaign, Liberty Cablevision got more aggressive by cutting off service, except for one channel that contained the digital-TV conversion notification.

“We did cut them off,” Alegría said. “They would call in and we’d basically turn the service back on, on the promise that they would come in during the next week or so.”

Then there were the really, really tough cases — the handful of people who were irate or who were too old or infirm to deal with the change.

“In some cases, in the end, we basically did a truck roll for free,” Alegría said.

When it was all over, Liberty Cablevision got back 340 Megahertz of analog spectrum; signal thieves were cut off and many were converted to paying customers; and labor costs associated with maintenance of an analog platform declined.

“Because you have a digital platform out there, you don’t need to disconnect or reconnect. You can do it all from your central office and those salaries associated with field auditors decreased,” Alegría said.

Another result in the plus column: “We basically doubled the amount of per-per-view revenue after digitization, which was pretty significant,” said Alegría, who expects to recoup the $10 million digital conversion investment by mid-2008.

Whether Liberty Cablevision’s transition is a model for big multiple-system operators is a complicated question. In addition to digital simulcasts, Comcast and Time Warner plan to conserve bandwidth by using switched digital video technology. With switching, a cable operator only sends out a channel when at least one customer in a neighborhood requests it.

“It allows you to put more channels in the same space,” Comcast’s Coblitz said.

And continued reliance on analog technology to appease customers highly allergic to set-tops might work to cable’s advantage after local TV stations are forced by law to cease analog transmission on Feb. 17, 2009. Except for cable, every TV station and every pay-TV provider in the U.S. will require consumers with analog equipment to obtain set-top boxes.

“I think the cable industry still likes the benefit of not having to force customers to have a box in every room,” Pali’s Greenfield said.

PROBLEMS POSSIBLE

But cable’s decision to maintain analog service could encounter problems at the FCC.

FCC chairman Kevin Martin has hinted that it is an open regulatory question whether cable operators may downconvert digital broadcast-TV signals to analog at the headend after the Feb. 17, 2009 deadline for over-the-air stations to cease analog transmission.

A downconversion ban would mean forcing tens of millions of cable subscribers with analog reception equipment to lease set-tops to view local TV stations.

NCTA president Kyle McSlarrow told reporters March 15 that he didn’t think the FCC had legal authority to prohibit headend-initiated downconversion.

But if Martin forces the issue, that could change the pace of conversion by cable operators, small and big.

“That’s a huge issue. If you can’t downconvert, obviously then you’re going to have to move to all digital boxes at a much faster rate,” Greenfield said.

March