DirecTv Courts Small Operators

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The walls between the direct-broadcast-satellite andcable-television industries came down last week, if only a little, when DirecTv Inc. saidthat it had signed marketing, sales and distribution agreements with three small cableoperators.

Starting in October, the operators -- Austin, Texas-basedClassic Cable, Chicago-based Anderson-Eliason Cable Group and Sikeston, Mo.-based GalaxyTelecom -- will offer a few of their smallest systems in the Midwest and Southeast as betasites to test the viability of joint analog-cable/digital-DBS basic-programming packages.

The move is designed to help cable systems that are toosmall to invest in digital headend upgrades to stay competitive by allowing them to marketmore robust channel packages. And it helps DirecTv to increase its presence in ruralAmerica by strengthening its local-market-service image.

Rural subscribers would gain access to many moreprogramming options than are typically available on small cable systems, such as the NFLSunday Ticket out-of-market National Football League package and more than 50 channels ofpay-per-view movies. Although DirecTv is already available through retail, the cablearrangement allows consumers to subscribe to the service without the cost of installationor maintenance.

In many cases, the most basic DirecTv service won't bea tier added on to a package of national cable networks, but a replacement for them.Subscribers within the given system would need to have the cable operator install dishes,or they would lose basic channels like ESPN and Cable News Network.

But Steven Seach, president of Classic, said the operatorhas no plans to do away with its analog-cable service.

"We view this as a complementary product," hesaid.

As long as subscribers of the cable systems involved in thetests buy any DirecTv package from "Select Choice" ($19.99 per month) on up,DirecTv will subsidize the cost of the hardware and installation for one integratedreceiver/decoder, said John McKee, senior vice president of special markets for DirecTv.

The free hardware, however, holds strong appeal for smalloperators. Other options that would allow systems to offer digital programming typicallyrequire hefty upfront investments.

Yet some of the same cable operators that have chosenDirecTv for their smallest services use alternatives for larger ones.

"We're very bullish on HITS," Seach said,adding that Classic is using Tele-Communications Inc.'s Headend in the Sky service onsystems with 3,000 subscribers and above. The operator will also deploy TVN EntertainmentCorp.'s service in some areas, he added.

"This doesn't replace anything," Seach said."It allows operators to deploy technology in an opportunistic way."

Other DBS companies plan to get in the game, as well. Aspokesman for EchoStar Communications Corp. said the company was looking at similar deals.

Dan O'Brien, president and chief operating officer ofPrimeStar Inc., noted the irony in DirecTv's and EchoStar's attempts to courtcable, saying that both companies have attacked cable in their advertising.

Because of its cable heritage, PrimeStar may be in a betterposition to relate to operators, O'Brien said. But PrimeStar's two-year-oldplans to offer operators a high-power digital feed have been stymied by its lack of ahigh-power signal.

Tom Gleason, chairman of Galaxy, said he had planned totest the PrimeStar service this month until he learned that the product was not yetavailable.

In the DirecTv model, DirecTv keeps control of the customerfor any of its own programming in exchange for a one-time activation fee and revenuesplits on its monthly packages. At least initially, DirecTv will bill for its ownservices, and the cable operator will charge for the local analog package.

In most cases, the cost of the new basic package is likelyto rise. Ken Anderson, chairman of Anderson-Eliason, said it will charge $29.95 per monthfor a basic tier that includes DirecTv's Select Choice, plus an analog basic tiercomposed mainly of broadcast stations. In some systems, that might cost up to $7 per monthover current prices, Anderson said, but it would provide up to triple the number ofchannels.

The idea has some limitations for operators.

For one thing, the deal is only possible in areas whereDirecTv has not already sold off its rights to members of the National RuralTelecommunications Cooperative. And the product won't work unless a dish has a goodline of sight to orbiting satellites.

Moreover, DirecTv is not giving operators a cut of its PPVrevenues, a spokesman said.

One of the biggest wild cards in all of this may bepremium-movie services. The cable operators hope to use much of their newfound analogbandwidth to beef up their multiplex-premium services.

U.S. Satellite Broadcasting, which shares the DigitalSatellite System platform with DirecTv, has not signed agreements with any small cableoperators. But president and CEO Stanley E. Hubbard said the company can still make itsfree month of USSB programming available to the cable operators' new digitalsubscribers, just as it does for any new DirecTv customer.

Once consumers see the digital-quality picture and sound,they may opt to buy the services directly from USSB.

"We're not worried about cannibalization of thepremium product," Seach said, because the cable operator will own the receiver, butnot the subscriber. He declined to elaborate how that would keep subscribers from beingable to deal directly with USSB.

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