FAST OUT OF THE GATE Early MSO Reports on Digital Are Promising

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In its first year, digital cable is giving a tidy financiallift to Cox Communications Inc., which is reaping between $15 and $18 in incrementalmonthly revenue from each of its digital-cable customers, according to research from theMSO.

In addition, Cox is seeing a net gain of about 25 percentin premium subscriptions among its digital-cable subscribers, Cox officials said, allayingsome fears that digital would cannibalize premiums because consumers might drop payservices when they bought digital packages.

Last week, Cox released some early operating and researchresults on "Cox Digital TV," which rolled out a year ago in its first market:Orange County, Calif. Currently, Cox has 65,000 digital-cable customers in parts of eightcable systems representing 1.6 million total subscribers.

Cox's research mirrored the rather encouraging and rosy --albeit still early -- results that both Tele-Communications Inc. and Comcast Corp.reported last week on their digital rollouts.

Digital is creating incremental revenue streams, anddigital customers aren't dropping premium services, according to TCI president and chiefoperating officer Leo J. Hindery Jr., who added that he "couldn't be morepleased" with his digital-cable rollouts.

As for Cox's digital distribution, in areas where the MSOhas marketed Cox Digital TV for 10 months or longer, it is seeing 6 percent to 15 percentpenetration among its subscribers who have access to the service. Cox is averaging about10,000 new digital customers per month, the company said.

"There's a high level of satisfaction with the[digital] product," said Lynne Elander, Cox's director of product development."More than 80 percent said they'd recommend it to their friends. We're really quitepleased with what we've seen so far."

Cox's eight digital systems include two -- Tucson andSierra Vista, Ariz. -- that launched digital cable while they were operated by TCI, andthat are being transitioned to Cox Digital TV next year. Those two systems account for6,000 of Cox's digital customers.

The $15 to $18 per subscriber that Cox is getting inincremental monthly revenue from Cox Digital TV homes includes the cost of the digitalsubscription, pay-per-view purchases and an uptick in premium subscriptions, according toElander.

Cox offers its subscribers two digital packages, with thefirst ranging from $5.95 to $8.95 per month and the second -- an all-inclusive tier ofjust over 200 video and audio channels -- priced at $10.95 to $12.95.

The incremental revenue was "a little bit of asurprise on the upside," Elander said. "We're very pleased, but we're not surehow much that reflects the early adopters."

That extra revenue "is pretty impressive," and itshows what happens when an MSO has "a robust digital offering out there," saidBruce Leichtman, director of media and entertainment strategies at The Yankee Group.

"[Cox Digital TV is] not a three-pack," Leichtmansaid, referring to TCI's digital package. "Cox is showing how you can make more moneyoff video."

Cox's first digital package includes DiscoveryCommunications Inc.'s digital networks, 40 Music Choice audio channels, premiummultiplexes, PPV channels and a choice of one of three tiers: movies, sports andinformation or variety. The second, most comprehensive digital package includes all threespecial-interest tiers.

TCI now has 1 million digital subscribers for its$10-per-month package, including 720,000 in systems that TCI will own and operate after itcloses pending joint ventures and other deals.

As with Cox, TCI's digital subscribers are spending more.Although TCI digital subscribers generated $14.25 to $14.50 per month in incrementalrevenue in the second quarter, that figure is now up to an average revenue bump of $15.46,Hindery said. Most of that rise was from PPV sales, he added.

After marketing and programming expenses, TCI's cash perdigital subscriber averages $9.79 per month, for a cash-flow margin of 63 percent, Hinderysaid.

Comcast also reported gung-ho results for its own"Digital Cable" rollout last week. It now has about 51,000 subscribers,increasing at a clip of around 4,500 per week. The MSO's goal is 70,000 digitalsubscribers by the end of the year.

Comcast charges $9.95 per month for its digital service,and the average digital customer buys one more monthly PPV event than other Comcastsubscribers do. So far, the digital service doesn't include basic-cable channels, so it'sselling on the strength of premium multiplexes, added PPV offerings and digital-musicchannels, Comcast officials said.

Of Cox's digital customers, 10 percent have dropped apremium service, while 35 percent have added one -- a 25 percent net gain. But Elanderconceded that she's not sure how long that increase in premium purchases will stick, andshe isn't building a business plan based on it.

Elander suspects that premium subscriptions have risen withdigital customers because they see a good value in paying $10 per month for a pay service,then getting eight more screens of it.

In August, Hindery told analysts and reporters that therewere indications that digital cable might "cannibalize" premium-channel sales.But TCI, like Cox, has found that this hasn't proven to be true. Hindery said about 25percent of TCI's digital subscribers increased their premium subscriptions, while some 10percent downgraded premiums.

TCI's digital penetration, which is now at 7.4 percent, ison target to hit internal goals of 15 percent after 12 months in a market and 30 percentafter 24 months, Hindery said.

With digital, Cox has seen a dramatic increase in PPVusage, with "take-rates" up by 40 percent to 80 percent, according to Elander.But Cox is actually looking to improve on that, she added.

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