In a bid to increase cable penetration and reduce losses to direct-broadcast satellite, Charter Communications Inc. has begun a partial conversion to digital signal distribution in 141 smaller systems.
The Small Systems Digital Service, which the St. Louis-based MSO will implement to a combined 178,000 subscribers, requires the operator to furnish digital set-top boxes to customers who previously didn't need a converter.
The plan presents Charter with both engineering and marketing challenges that few operators have tackled to any degree.
"We targeted smaller systems, with between 300 to 3,000 subscribers," said vice president of digital services Powell Bedgood. "We wanted to make sure they weren't targeted for rebuild or upgrade in three to five years, or [were] to be clustered in the next three to five years, and that were bandwidth-locked [in the 300-, 330- or 450-megahertz range] at the present time."
In the partial conversion, Charter would reclaim six to eight channels of analog spectrum for digital use. And in the case of nearly every system, the networks that occupy those analog channels will remain within an expanded-basic package.
The only change: They'll be delivered to the headend in digital form.
Charter decided which networks should continue to be received and distributed on an analog basis based on a series of engineering and program-licensing criteria, executives said.
1000 S on the move
Charter will deploy Motorola Inc. DCT-1000 set-top boxes in up to three TV sets per home. The number of boxes will match the number of sets hooked up to cable prior to the conversion, and subscribers won't pay extra for any of the boxes.
Nonetheless, the move is a sizable capital outlay — and a marketing challenge. But the MSO hopes to earn back the cost of those set-tops, plus new digital headend gear, by increasing overall cable penetration in those markets; stemming DBS-related churn; and selling new premium and pay-per-view services now available through the digital package, Bedgood said.
Charter began the switch earlier this year, working with Liberty Livewire and PanAmSat Corp. on program distribution. The MSO signed deals to place 30 cable networks on three leased transponders on PanAmSat's G9 satellite.
Those 30 networks are being shipped to all 141 systems. They're the channels that were reclaimed by the Charter engineers to be converted to digital spectrum.
The digital conversion allows Charter to more than double the number of channels offered, including digital basic services, premium multiplexes and pay-per-view offerings. Math dictates that Charter has three to four "open" channels per market on which it can add programming.
In Mountain Grove, Mo., Charter offered a 12-channel analog broadcast basic tier and a 33-channel expanded basic package for $34.95 a month, prior to launching digital service. Subscribers received premium networks via trap.
With the conversion, Charter will offer a 13-channel analog broadcast basic tier (adding a guide channel) and a 41-channel expanded-basic offering. The 54 channels cost consumers $44.95 per month, including up to three digital set-tops, an interactive program guide and 45 Music Choice channels.
The 41 channels on expanded basic include: Lifetime Television, Travel Channel, Fox Sports Midwest, Bravo, The Weather Channel, Animal Planet, ESPN, ESPN2, Hallmark Channel, Turner Classic Movies, Speed Channel, The Golf Channel, Black Entertainment Television, Court TV, National Geographic Channel, ABC Family, Cable News Network, TV Land, Headline News, Nickelodeon, Fox News Channel, Disney Channel, CNBC, Cartoon Network, Discovery Channel, History Channel, The Learning Channel, Home & Garden Television, A&E Network, Turner Network Television, TBS Superstation, USA Network, FX, Sci Fi Channel, AMC, E! Entertainment Television, Comedy Central, VH1, TNN: The National Network and CMT: Country Music Television.
Thirty of those 41 channels make up Charter's satellite package, which is delivered to the headend in digital form. The MSO would not say which 30 channels were affected, because programmers are sensitive about possibly losing some subscribers that refuse to accept a set-top.
Mountain Grove subscribers will now have access to another 30 digital basic channels for an additional $5 per month, including multiplex services from Discovery Networks and MTV Networks. Another 21 premium multiplex channels are available from Home Box Office, Showtime Networks Inc. and Starz Encore Group LLC, along with six pay-per-view channels from In Demand and three adult PPV channels.
"The first thing we had to do was get deals in place with uplink and transport providers and get program deals in place," said Bedgood.
Charter is deploying Motorola headend equipment and DigiCipher 2 technology, along with the DCT-1000 set-tops (an average of 2.5 boxes per home), he said.
"We're deploying with 17 channels per headend," Bedgood said. Charter's primary equipment costs stem from uplinks, transport, headend gear and set-tops.
"We didn't have to do anything with the plant," Bedgood said. "Everything is at 64 QAM [quadrature amplitude modulation]. There are no system implications other than recouping bandwidth."
The conversion will occur in two phases, said Bedgood. The first part involves the installation of the DCT-1000s in all affected homes.
In phase two, the transponder and transport system will be activated in each market.
Bedgood estimates about 75 percent of all affected subscribers in its smaller systems are now in phase two.
Historically, cable operators have found it difficult to get converter penetration past 40 percent, whether those set-tops are analog, addressable analog or digital boxes. Many of these smaller systems have basic-cable penetration rates of just 30 to 35 percent to begin with.
Nonetheless, Charter director of digital marketing Brad Elbers said the MSO has met little resistance to the set-top installation.
For one thing, subscribers aren't charged for the set-top, Elbers noted. And they're receiving a host of new expanded-basic and premium services for their trouble.
Prior to the switch-out, subscribers had to use traps to get even one channel of any premium service, he noted. Now, multiplexed services are available.
"We're anticipating growth in these markets because of these new services and to recoup a decline in the customer base," Bedgood said. "Erosion in these systems was greater than we wanted to experience."
Explaining to subs
But Charter employees and customers must be educated about the switch, since many networks will switch channels.
"The goal was to overcommunicate the message," said Mike Hoffey, director of marketing for Charter's outer Missouri group. Hoffey's systems had 36-channel lineups with no analog set-tops.
"It was a big education process," Hoffey said. All subscribers were sent a direct-mail piece that explained the features and benefits of the digital conversion. That was followed up with a more detailed newsletter about the new channels and products that would be available, plus a phone number to call for information.
The systems also left messages on telephone answering machines and placed print ads in newspapers.
Two weeks later, digital-deployment specialists began installing boxes, along with a welcome kit and a newsletter. Because subscribers were receiving more expanded basic channels, Charter instituted a rate increase, Hoffey said. The MSO made sure consumers knew the increase was tied to the expanded channel lineup they would receive.
Consumers who didn't want any equipment in their home could still take a broadcast-basic analog tier.
"We had a small percentage that were initially frustrated," Hoffey said. "For the most part, we had a resounding amount of support. People were interested in testing it."
Installers were required to follow a line-by-line checklist to make sure customers knew how to use the box.
Many of the communities have a high concentration of elderly residents, said Hoffey. That required installers to spend extra time making sure they understood how to use the new technology.
"Once they understand what we're doing and why we're adding channels, it clicked," Hoffey said.
Customer-service agents also were trained to help subscribers through any problems they had, Hoffey said.
"We made sure we had a constant feedback loop with customer service," he said.
Charter lost a very small percentage of subscribers, said Hoffey. "The goal is to recapture whoever we lost.
"We were really happy that we figured out a workable solution that was capital friendly," Hoffey said. Although each extra box per home raised the capital-expenditure stakes, "it was an investment we were willing to make not only to cement them, but to be able to drive incremental revenue per household."
And pay-channel penetration has now hit the 20 percent range, providing Charter with some digital upside, he added.