Ops' HD Query: Can We Levy Fee?

11/24/2002 7:00 PM Eastern

MSOs have just over a month to fulfill their promise to federal officials to voluntarily speed up the transition to high-definition television, and Comcast Corp. and Cox Communications Inc. have been among the most aggressive in terms of rollouts.

Back in May, 10 cable operators pledged their support of HDTV and digital television to Federal Communications Commission chairman Michael Powell. The MSOs voluntarily agreed to take steps and hit certain benchmarks by Jan. 1 of next year to spur the transition of digital television.

Cable One Inc., part of the group, this week is slated to announce its HD rollout. It will make HD available to all of its digital systems, or roughly 98 percent of its homes, president Tom Might said. Initially, Cable One will be just offering Home Box Office in HD, adding services like Showtime and broadcasters later on. The MSO will charge its digital subscribers an additional $5 a month, or $9.95, to lease HD set-tops, Might said.

Like other operators, Comcast and Cox see HDTV as a retention tool for premium subscribers, a driver for digital service, and as a way to carve out a space in consumer electronics stores. But the two MSOs are taking different approaches to the pricing, packaging and marketing of HDTV.

Officials from both operators said they are still in experimenting to find the best way to sell the fledgling service.

Option: One fee

For example, Comcast — which to date essentially has been offering HDTV at no extra cost to its digital subscribers — is studying a possible one-time fee to help recoup the added cost of the integrated HD-digital set-tops customers need for the state-of-the-art service.

"We're looking at — on a one-time basis — a way of offsetting the extra expense," Comcast executive vice president of sales, marketing and customer service Dave Watson said. "These boxes cost more, in the neighborhood of $100 more on a per-box basis, so we're evaluating ways — whether it's an installation fee, whether it's through other one-time reasonable fees — looking to offset that charge. But we haven't completely pinned that down yet."

Comcast's eyeing of a one-time HDTV fee follows a decision by its new acquisition, AT&T Broadband, late last month to back down and not charge a controversial $75 HDTV access fee to subscribers in Seattle.

Watson, of course, was aware of AT&T killing its planned HD access fee. Stressing that the issue is still under study at Comcast, Watson said he doesn't think some kind of one-time fee will necessarily turn off would-be HD subscribers.

"But again, we are evaluating between the installation charge and the one-time fee and we haven't really resolved that yet," Watson said.

Impact questioned

While Comcast and Cox and other cable operators make their HDTV moves, some MSOs privately questioned the importance of HDTV, at this early juncture, to the cable industry. These operator officials, though not wanting to waver publicly from the party line on HD, claim there's not enough high-definition content, consumer interest or HDTV sets out in U.S. homes to warrant them aggressively hawking HD service.

One source claimed that some MSOs are worried that Comcast's unbridled enthusiasm for HDTV could boost the price for some of the programming, such as Mark Cuban's HDNet.

In the next few months, Cuban plans to launch three new channels, covering sports, entertainment and movies. Comcast has indicated it might be willing to pay $2 to $3 a month per subscriber for such HD offerings, according to the source.

"Comcast is very, very eager to do [HDTV]," the source said. "There are other major cable operators who are perplexed by this, who really think that Comcast is too early and that what Comcast is offering to pay [for HD program services] is too much, too aggressive. They're concerned that [Comcast senior vice president of programming Tom] Hurley is going to set a precedent that other distributors will have to live with. So there is some conflict now."

Comcast officials confirmed they are talking to HD programming providers — not only Cuban, but Discovery HD Theater as well. But they declined to comment any further.

So far Cox, Charter Communications Inc. and AT&T Broadband are offering Discovery HD Theater in scattered markets, while EchoStar Communications Inc.'s Dish Nertwork carries it nationally.

In contrast to any closet naysayers, Comcast and Charter are on the same page as to why HDTV is strategically important to them right now.

Sidecar start

In October 2001, Comcast debuted HDTV service in its first market, the Philadelphia DMA, using sidecars for its digital boxes.

"No. 1, it's a product that customers want and so we recognized this relatively early on," Watson said. "We also saw that there are some pretty fast-moving activities within the manufacturing community to drive down the price of the TV sets and would make it more affordable. So we went out in Philadelphia with a sidecar solution to the customer and had an unbelievable response to that."

Cox debuted its HD service three years ago in Omaha, Neb., also deploying the only technical solution available at that time: a sidecar.

"The strategic play is that customers who have the best relationship with their television set need to understand that the best way to get service delivered to that television set is through Cox," said Lynne Elander, Cox's vice president of video product development.

"So the people who have the most emotional connection, the people willing to spend the early-adopter kind of dollars that it takes to get into HD — $2,000, $3,000, $4,000 — those people need to understand that cable is going to deliver a better HD solution than any of our competitors," she continued. "That's because we can integrate the local broadcast signals into the package of HD signals that we're carrying. We will have the ability to carry more, because we don't have that national footprint. And it comes bundled with the service that you've come to expect from Cox and all the advantages of getting multiple services from Cox."

Neither Comcast nor Cox will say how many HD subscribers they have. But according to Comcast, its HD service is in front of more than 2 million subscribers, with a goal of 9 million homes by the end of the year.

In addition to the Philadelphia area, Comcast is now offering HD in northern and central New Jersey; central Pennsylvania; Alexandria and Arlington, Va.; part of metro Washington; the Baltimore area; and Detroit.

Rollouts in Indianapolis will take place by the end of the year.

"We went through the early criteria in terms of rolling it out, but this is a phased approach," Watson said. "We're committed to making sure we hit the FCC mandate."

Comcast will also gain HD subscribers in Chicago and Seattle via its acquisition of AT&T Broadband.

For its part, Cox is now offering HDTV in Phoenix, Northern Virginia, Las Vegas, San Diego and Omaha, Neb.

"We have HD signals in front of a third of our homes passed," Elander said. "We are actively working on rollouts in the rest of our markets, negotiating with local broadcasters as per the Powell plan. We are committed to meeting the obligations [Cox CEO] Jim Robbins signed up for in the letter to Powell."

In the letter, the 10 Top MSOs promised Powell that they would "offer to carry," not actually launch, up to five HDTV signals — cable or broadcast — by Jan. 1, 2003 in their largest-capacity systems.

"The industry goal is to get these content discussions under way with an eye to having a fare amount of product to launch in the second half of 2003," National Cable & Telecommunications Association senior vice president of public relations Rob Stoddard said.

The NCTA is optimistic that the 10 cable operators can meet their voluntary commitments.

"It's our understanding that they are all working hard to fulfill the commitment that they made under the Powell plan and we are consulting with all of them regularly trying to understand at what stage of deployment they are and how they are bringing their markets online," Stoddard said.

But some questioned whether embattled Adelphia Communications Inc., which signed the pledge, will be able to abide because of its problems. An Adelphia spokesman said the company expects to adhere to the commitments.

Comcast, while weighing a one-time HD fee, currently is not charging its digital subscribers any incremental charge for HDTV service. It is simply replacing those subscribers' boxes with an integrated set-top, which includes an HD tuner.

Varying by market, Cox's HD subscribers get a combination of broadcast feeds, HBO and Showtime.
Asked if Comcast is considering an HD tier, Watson said, "It depends on our programming deals down the road. Certainly, we'll evaluate all HD opportunities and programming, and that [an HD tier] could happen if there's additional product. Right now, with our current slate, there's not going to be an additional tier."

Comcast's HD lineup in several markets also will include Comcast SportsNet, which will offer more than 200 events in HD next year.

"We think it's going to be terrific," Watson said. "Clearly, we think sports are a driver in HD in terms of content. And we're in a position where we are able to provide the service in a couple of our markets where SportsNet provides coverage."

Unlike Comcast, Cox is charging incrementally for HDTV, but it is experimenting with two pricing models: leasing and sale.

Subscribers can lease an HD digital set-top from Cox in Las Vegas, San Diego and northern Virginia, while in Phoenix they must buy their own HD set-top for $500 from the MSO or a consumer electronics retailer.

In Omaha, HD subscribers must buy their sidecar from Nebraska Furniture Mart, owned by Warren Buffett.

Under Cox's HDTV lease scenario, the equipment rental averages $10 a month, or about $7 more than a traditional digital set-top, according to Elander.

"Once you get that equipment you have access to certain levels of service," she said. "The off-air broadcast signals you get at no incremental charge to your digital cable subscription. We carry HBO and Showtime HD feeds, which you get at no incremental charge to your existing HBO subscription. And in several markets we have launched Discovery HD Theater, which carries with it a $5 to $7 charge. We're doing a little bit of testing on that price point."

Cox also has an explanation as to why it's exploring the "sale" model, where subscribers have to purchase their HD digital set-top.

"It's a very expensive technology," Elander said. "Rather than burden the entire customer base with the costs of deploying HD, we think it's more appropriate at this point of the life cycle of the product — when it really is an early-adopter product, fewer than 1 percent of households have an HD set — we think it's an appropriate decision to focus those costs in those households that are getting the benefit of the product."

Retail wedge

Comcast and Cox officials also said that HDTV gives them an entrée — and shelf space — with electronics retailers that direct-broadcast satellite providers already enjoy.

Comcast, for example, has created an HD-starter kit that looks like a software package, which stores can stack by HDTV sets. It includes a basic installation coupon and free premium and digital service. The kit is valued at $200, but is being sold for $79, with consumers getting a rebate once the services are activated.

In a trial, Comcast is providing the HD kit to Best Buy, Circuit City and Tweeter in Philadelphia. "They're using this to sell high-end televisions," Watson said.

HDTV can put cable on a level-playing field with DBS on the retail level, according to Elander.

"It's very important for us, and frankly important for the retailers, to get this product out there and get it right so that a customer walking in to Circuit City understands if they're about to spend $2,000 on a cool HD set, they can get signals from cable," Elander said. "HD is really the first opportunity for us to go into the retail marketplace with something that we can really help them and they can help us."

Cable's HDTV Rollout
The progress made by some of cable's biggest operators in introducing high-definition television, as of October 2002:
MSO Launch Locations
Source: National Cable & Telecommunications Association
AT&T BroadbandBegan a limited launch of HD in Chicago in late summer 2002.
A broader launch planned for later this year.
Charter Launched in five markets in May 2002:
Alhambra/Pasadena, Calif.
Glendale/Burbank, Calif.
University Park/ Highland Park, Texas
Miami Beach, Florida
Birmingham, Alabama
Additional launched of HD planned for November 2002 in Kalamazoo, Mich, and St. Louis.
ComcastLaunched HD service in the Philadelphia in late 2001
Launched HD service to 120,000 in Alexandria and Arlington, Va., in October 2002.
Last week launched HD in metro Detroit.
Additional launches planned:
Montgomery, Charles and Prince George's counties, Md. (by the end of October 2002)
Washington (in 2003)
Cox Began offering HD in Omaha, Nebraska, in 2000.
HD services were launched in Las Vegas in July 2002.
HD services were launched in Phoenix in September 2002.
Additional launches are planned for late October 2002 in Northern Virginia and San Diego.
Cox is evaluating additional launches by year-end.
Time Warner Cable HD available to nearly every region in TWC's footprint. TWC estimates it has from 75,000 to 80,000 HD customers.

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