News

AT&Ts HITS Starts to Suffer Misses

12/12/1999 7:00 PM Eastern

A shakeout is happening in digital-cable distribution, with
many programmers opting for platforms other than Headend in the Sky to reach MSOs.

HITS was the only game in town for cable operators hoping
to launch digital -- and for programmers looking to deliver new networks to MSOs -- when
Tele-Communications Inc. launched the platform in 1997.

While HITS remains an important platform for programmers
seeking spots on AT&T Broadband & Internet Services' industry-leading
digital-cable platform and on other systems that buy programming through HITS, many
networks have banded together to lease their own satellite transponders and bypass HITS.

With digital-cable penetration increasing and more MSOs
defining their digital-basic strategies, programmers said, the market has grown to the
point where it makes sense to deliver digital-cable channels on multiple platforms.

And several MSOs, including Charter Communications Inc.,
are telling networks they don't want to use HITS, some programmers said.

"Charter is trying to make a point to HITS that you
can't charge transport fees to non-AT&T affiliates if you're not going to listen to
their needs as equally as you will AT&T's," said one programming executive who
asked not to be identified.

Charter vice president of programming Patty McCaskill said
she has encouraged programmers to get their own transponders and not rely solely on HITS.
But she insisted that she's not forcing networks to do so.

"We have encouraged program networks that are looking
for distribution on Charter to band together and build a transponder together so we have
another alternative," she said.

McCaskill said Charter has struck deals to buy digital
programming directly from four programmers using their own transponders, two of which (E!
Networks and A&E Television Networks) are also leasing transponder space to other
networks.

In addition to A&E and E!, Charter buys programming
directly from Viacom Inc., which distributes 10 digital networks under MTV Networks' The
Suite, using its own transponder, and from Discovery Communications Inc., which
distributes its own seven digital networks.

Charter does use HITS to deliver programming to cable
systems that haven't been upgraded to 750 megahertz, McCaskill said.

A&E's transponder includes History Channel
International, The Biography Channel, Do It Yourself, CNBC Business 24, ZDTV, The
Independent Film Channel, Lifetime Movie Network and MuchMusic USA.

E!'s transponder includes its Style digi-net, Romance
Classics, Country Music Television, ESPNews, ESPN Classic, Bloomberg Television, Toon
Disney and SoapNet, Multichannel News reported in November.

Fox Family Worldwide Inc. is forming its own transponder to
deliver its boyzChannel and girlzChannel. And NBC Cable, which would like to be available
on multiple transponders, is talking with Fox Family about joining its digital
transponder, president David Zaslav said.

"Ultimately, I think the MSOs' primary focus of
providing the most valuable product to their subscribers and pleasing those subscribers is
going to drive a shakeout," Zaslav predicted. "The MSO will look at every
[transponder] so they can pick and choose the best. Or the quality digital services will
overcome the encumbrance of not being available to other MSOs by paying the cost of being
available on each of the platforms."

Ocean Communications, which wants to launch some shopping
services, is also looking to buy a transponder and lease space to other networks, a source
said.

Several networks are vying for slots on the new
transponders, including Ovation - The Arts Network, Comedy Central, National Geographic
Channel, Wisdom Television, Newsworld International (NWI), Fanfare: The Classical Music
Channel, Trio, GoodLife Television Network, America's Voice and BET on Jazz, sources said.

It will cost each network $25,000 to $30,000 per month to
lease space on each transponder. That cost hasn't changed much in the past few years,
according to Ovation vice president of media sales and affiliate relations Ed Burakowski.
"The economics are quite difficult to make work, especially for independents,"
he said.

Programmers that own their own transponders also gain some
leverage in negotiations with HITS, Discovery senior vice president of sales and marketing
Bill Goodwyn said. "If you have your own transponder, and operators are interested in
getting you direct, you have leverage. You can ultimately tell HITS, 'People want to make
me direct,'" he added.

HITS doesn't view the digital networks being sold through
other transponders as a threat. Rather, the company thinks it's "healthy" for
the industry," HITS senior vice president Rich Fickle said.

"If you look at a picture bigger than HITS, the master
plan is not to fragment the industry in terms of how digital gets deployed, but to provide
some coalescence," Fickle said. "The way to do that is to not put barriers in
place to prevent a programmer from using HITS, or doing something on their own, or using a
competing service."

While Trio and NWI are both carried on HITS, both networks,
and many others that are carried on HITS, are shopping for space on one of the new
transponders.

"In today's environment, digital networks are required
to have multiple transponders, because HITS -- although it does provide digitally
compressed services to the entire industry -- serves AT&T primarily," said
Catherine Rasenberger, whose company, Rasenberger Media, handles affiliate sales for NWI,
Trio and Fanfare. "Large MSOs that may not have the same needs want different
combinations of services."

Indeed, some MSOs said they would only use HITS to deliver
digital-basic channels to systems that haven't been upgraded. Others have no plans to use
HITS or Time Warner Cable's AthenaTV if the latter is offered to non-Time Warner systems.

"It looks like we're not going with Athena or
HITS," one executive from a top-10 MSO said. "We're leaning heavily against it.
We don't need a middleman because our systems are clustered," the executive added,
explaining that it's more efficient to go directly to individual transponders in markets
with large clusters.

Insight Communications Co. Inc. uses HITS in some markets,
but president Michael Willner said he was considering buying programming directly from
some programmers.

"We continue to search for the most efficient way to
deliver the most robust digital product that we can," Willner said. "If there's
a group that makes more sense for the type of packaging [Insight wants], we may go that
route."

Some MSOs, such as Cox Communications Inc., are buying
programming from HITS and individual transponders and using Terayon Communication Systems
Inc.'s "CherryPicker" products to build their digital lineups while the digital
signals are still compressed.

"We typically will pull directly from the programmer
whenever possible," Cox marketing director Lynne Elander said, noting that
programmers don't charge transport fees, while HITS does for most networks. "HITS
isn't necessarily programmed optimally for the Cox lineup. In a lot of cases, it's more
efficient to take directly from the programmer, from a bandwidth perspective."

Since Cable One Inc.'s digital package doesn't include a
digital-basic tier, the MSO plans to mostly buy programming directly from programmers, CEO
Tom Might said.

"It's more like what Comcast [Corp.] did initially
[with digital] -- pay-per-view, sports PPV and music," Might added, describing Cable
One's digital offering.

Cable One also plans to buy CherryPickers or a similar
product from V-Bits Inc. that Cisco Systems Inc. is testing with cable operators, he said.

Terayon said it is seeing much more demand for the
CherryPicker, which costs $17,500 to $40,000 per unit, depending upon features.
"We're starting to do more quotes for anywhere from 50 to 400 units per MSO,"
said Stephen King, senior vice president and general manager of Terayon's video-business
unit.

Meanwhile, Time Warner still hasn't decided whether it will
make the digital channels offered in its AthenaTV platform available to other MSOs, which
would make it a competitor to HITS, spokesman Mike Luftman said.

The MSO -- which expects to count 400,000 digital-cable
subscribers by the end of 1999 -- wants to focus on launching digital cable to its systems
before it pursues selling AthenaTV to other MSOs, he added.

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