Adelphia Communications Corp. faces a digital dilemma. In an attempt to combat subscriber defections to direct-broadcast satellite, the top-six MSO has crafted a quick-fix plan that would temporarily expand channel lineups at its smaller systems, pending rebuilds.
But the plan can't go forward unless some programmers agree to give up their coveted analog slots on those systems.
Although many of the proposal's details are still sketchy, Adelphia would make room for dozens of new digitally compressed channels by shifting a group of programming services from their current analog slots on non-rebuilt systems-including basic networks such as American Movie Classics and Fox Family Channel-to digital.
Those programmers must provide Adelphia with special affiliation-contract waivers in order to give up their analog berths, even temporarily. That's a sensitive issue for the networks, who fear a drop in penetration.
If Adelphia does get that go-ahead, it would then offer subscribers to non-rebuilt systems free digital set-tops and increase the number of channels those customers can receive on expanded basic to 120 or 130, a level comparable to DBS. At present, such customers receive about 30 basic channels.
The MSO is considering the plan as an interim solution-a temporary upgrade-for non-rebuilt facilities at 350- to 400-megahertz capacity. Those systems are being clobbered, losing customers to DBS. About 800,000 to 1 million of Adelphia's more than 5 million subscribers would be affected. Their channel lineups would grow to include additional basic, premium and pay-per-view channels, as well as digital-music services. The plan would both help to ward off DBS and drive Adelphia's digital set-top distribution.
Unlike the digital packages offered by MSOs such as AT & T Broadband and Cox Communications Inc., Adelphia would not sell the added networks as a separate digital tier for an extra monthly fee. Instead, the new services and the digital set-top would be part of Adelphia's expanded-basic service, and priced accordingly, said Tim Rigas, Adelphia's chief financial officer.
"We'd just refer to it as our standard basic service," Rigas said. "Ultimately, all these systems will be 860-megahertz with a robust analog offering, and this is just an interim step to allow more programming to be distributed more quickly."
He said Adelphia would raise rates for expanded basic at these systems, but the price increase would be similar to those at any rebuilt system.
"We have a desire to allow all of our consumers to have what we consider our standard basic package, which typically includes 70 channels," Rigas said. "One of the easiest ways for areas that won't be rebuilt for a year or so is to basically use decompression technology to allow us to add 30, 40, 50 new channels.
"So this is a way to allow people to enjoy that without having to pay a lot of additional monies for equipment and digital boxes."
For now, Adelphia intends to not only provide the digital boxes free to subscribers, but to make the equipment part of its standard monthly fee.
"We're looking at it as just enhanced equipment to deliver the signal, just like you would spend to rebuild a system," Rigas said. "You're spending $250, $300 to get the box in the consumer's hand. So, we think it makes sense, given the demand for the new programming."
Adelphia could add 10 to 12 digitally compressed channels for each analog slot it recaptures, as the MSO will use a 12-to-1 compression ratio.
The operator plans to free up bandwidth by using six to eight analog slots to carry digital channels. Those berths would include basic networks and such premium services as Home Box Office, which would also migrate to digital.
Adelphia might also keep an analog feed of the premium services, so subscribers that don't opt for digital boxes can still see those networks without being inconvenienced.
The MSO is talking with about 10 cable networks and asking them to agree to the plan-"rotating the pain" of moving off analog, as one programmer put it.
One source said that the selected networks would switch to digital for perhaps four months, then be returned to analog and replaced by a different network, making the process less onerous for all programmers involved.
But another programming executive said that isn't how it would work. Participating networks would be switched to digital for the full interim period until a given system rebuilds, the executive said.
Even though their networks would be carried on what amounts to a digitally delivered expanded-basic service, programming executives are unsure how many subscribers will follow through on Adelphia's offer of a free digital box. The networks, meanwhile, would lose penetration in the homes of subscribers that don't opt for the free set-tops.
The MSO reportedly expects an 80 percent conversion rate, but some programmers are less optimistic, predicting a rate of about 40 percent.
WHAT NETS WOULD GET
Adelphia is trying to work closely with programmers, who could benefit over the long term by partnering with the MSO on this project, Rigas contended.
For example, sources said, in exchange for agreeing to temporary digital berths at the 30-channel systems in question, a programmer could gain launches on other Adelphia systems. Adelphia may also grant distribution increases their sister programming services as part of a deal.
"The idea would be to craft something so that the programmers would see an incentive to embrace this, because they would be getting incremental distribution elsewhere, in our systems," Rigas said. "So we're trying to create a win-win situation here, [so] that everybody feels good when they walk away from it. So it shouldn't be threatening to anybody."
Fox Family is currently negotiating a contract renewal with cable operators and seeking a license-fee increase. The programmer is in the midst of talks with Adelphia, and the digital-migration proposal is part of the discussion.
John Burns, Fox Family's president of distribution, said Adelphia's plan makes sense from the MSO's standpoint.
"As we consider it, it might benefit all the people that are involved," Burns said. "If the facts are as presented, this could be a good opportunity for everyone-consumers, operators and programmers."
Cable networks should see this as an opportunity, Rigas said, because Adelphia "viewers are going to be able to see more programming."
At some small systems, Adelphia's plan might benefit Fox Family, according to Burns. The network essentially has full distribution, with its only remaining holes on some tiny systems with small channel capacity-the kind of systems Adelphia has targeted for this plan. Those systems could represent new launches for Fox Family, albeit on digital.
Burns and other programmers are now waiting for Adelphia to provide the exact scope of the plan, including the precise number of systems and subscribers involved.
AMC officials declined to comment.
Rigas said Adelphia is ironing out details and would test the plan at some small systems before moving forward at the rest of its unimproved facilities. Many of those are acquisitions, including some from FrontierVision Partners L.P.
Adelphia also had to determine exactly how to market the free digital boxes to subscribers and drive them into homes.
"There are a lot of logistics involved, a lot that needs to be worked out," Rigas said. "We'll probably be doing some smaller tests to see which is the best way, to get some experience, how to get the word out."
He added: "Whatever we do will be started in small scale to make sure it's going to be successful on a larger scale. You have to be very careful because this will generate phone calls. It will generate excitement.
"It will generate a lot of traffic, and with that, we should be able to sell some other services," said Rigas. "We don't want to miss that opportunity, so we're making sure that we have this very well planned."
Among the other services Adelphia will sell while getting the free digital boxes to consumers are premium channels, high-speed Internet service and video-on-demand subscriptions.
Asked if Adelphia would charge subscribers equipment fees for the digital boxes once a system is rebuilt, Rigas said: "We would think there'd be other services that are supporting the boxes, that people would be using them, so that once we migrated things back to an analog basis, we would probably expect that they would continue to use those other services. If not, there would probably be a charge for the box at that point in time."
Adelphia expects to have 85 percent of its systems rebuilt by the end of 2001, and the rest by 2002, Rigas said.