Forum: Building a Compelling Digital-Service Offering

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The cable industry is on a digital roll. More than 1.5
million interactive digital set-tops are already installed in consumer households, and
there are industry commitments for millions more. We are speeding toward a digital future,
but what does this future look like?

Digital services are evolving as the industry becomes more
comfortable with the new technology and begins to explore the new services that it can
deliver. This is the year when new and interactive services will be deployed.

The same operators that were the first to install digital
in 1996 will once again lead the industry by deploying these new services over their
digital-cable infrastructure.

These new interactive services include Internet access,
electronic program guides and true video-on-demand. And even more services are being
readied for commercial rollout on digital platforms.

With digital-system deployments reaching a critical mass of
more than 29 million North American homes passed, the industry now stands ready to roll
out the new digital services and to reap the new revenue streams that they bring.

MORE CHANNELS, MORE OPPORTUNITY

Subscription television in the United States is largely a
mature business. With cable-subscriber growth leveling off, operators must look for other
ways to grow their revenues. Digital technology provides a cost-effective means of
offering customers what they want -- more high-margin premium and pay-per-view
programming.

In 1998, The Yankee Group surveyed consumers to uncover
what types of programming generated interest. Despite the popularity of other types of
programming, such as news and information, one category came out as the clear winner.

More than 42 percent of those surveyed wanted to see more
movies, and the majority (60 percent) of these consumers wanted more current titles, such
as those that are available on home video.

Fortunately for operators, this category is not only one
that consumers want, but one that they are willing to pay for. This demand for current
movie titles fits nicely with operators' digital-deployment plans.

In fact, many have already begun to cash in on it by using
digital technology to expand their channel lineups to include more high-margin premium and
PPV programming.

ELECTRONIC PROGRAM GUIDES

One of the most popular additions to digital-service
packages is the EPG. An EPG provides consumers with a fun and easy-to-use means of
navigating content. In a consumer-interest study sponsored by the Digital Applications
Consortium in the first quarter of 1998, a whopping 80 percent of digital-cable customers
reported using the EPG either every time or most of the time that they watched TV.

This study proves that by offering a simple interface to
content and giving consumers additional control of their programming choices, the EPG
provides a significant value-added service to digital consumers.

These guides enhance systems' positioning against
direct-broadcast satellite services, increase operators' perceived value to their
customers and generate additional revenues by increasing PPV/premium buy-rates.

VIDEO-ON-DEMAND

True VOD has been the driving application for many
operators' interactive-deployment plans. Shifting even a portion of the $7.5 billion
(source: The Yankee Group, 1998) that U.S. consumers spend annually on video rentals to
cable services presents a great opportunity for operators looking to expand their revenue
base.

The rapid deployment of digital interactive technology
throughout North America has rekindled interest and reshaped the business model behind
true VOD services. Previous VOD trials demonstrated both consumer interest and
revenue-generating capability, but the technology and the costs of these services made
their widespread deployment unattainable.

But now, the commercial deployments of interactive digital
platforms have brought about a change in the economics of VOD services.

The powerful interactive digital set-tops -- which are now
deployed in more than 1 million North American homes -- provide the processing and
networking capabilities to enable true VOD services. The costs of video servers and online
storage have fallen dramatically, helping to further the business case for VOD.

These factors, coupled with the ongoing migration toward
two-way cable plant, are creating a significant potential customer base for true VOD
services. This customer base gives VOD the potential to develop into a $1 billion market
by 2001 (source: The Yankee Group, 1998).

ADDING INTERACTIVE INFORMATION SERVICES

The addition of interactive information services to a
system's digital platform can yield even greater benefits. The DAC study referenced
above also yielded some interesting tips on packaging and presenting interactive
information services.

Approximately 63 percent of the households polled responded
that they were "definitely interested" or "somewhat interested" in
buying interactive information services. And almost 60 percent indicated that they would
be more likely to sign up for a digital service if an interactive information service were
also available.

According to these study results, packaging interactive
information services within a digital-cable offering helps to generate more interest in
the digital-cable service.

EDUCATING THE CONSUMER

This study also showed that consumer interest in new
information services actually increases once the consumers learn more about them,
highlighting the need for operators to actively educate consumers about these
services' advantages and what sets them apart from competing services.

For example, the term "Internet-access service"
may have many different meanings to different consumers. Some may associate it with a
cable-modem offering. Others may think that it means providing dial-up access to the
Internet through a personal computer. Most consumers have not yet been offered the type of
Internet access currently being targeted in many operators' digital rollouts.

Operators need to highlight the entire offering in order to
attract customers. Instant high-speed access, e-mail, Web browsing through the television,
no PC required -- these are all key points of an Internet-over-cable-television offering.

Outlining all of these relevant points is important in
educating consumers about these new services and in helping consumers to understand their
unique advantages.

PACKAGING INTERACTIVE SERVICES

When polled on interactive data-service pricing, 41 percent
of consumers preferred a flat monthly fee. This pricing model was chosen over a
pay-per-use model or paying on a feature-by-feature basis.

This type of pricing has benefits for the operator, as
well. By bundling interactive data services under a flat monthly price, operators can give
consumers the freedom to experiment with new services that they might not ordinarily try.
Consumers may find entirely new applications, which could end up becoming more important
to them than the initial service that first motivated them to try interactive data
services.

Digital-cable technology is the cutting-edge delivery
vehicle for a variety of new services and revenue streams. The cable plant is becoming the
premiere delivery mechanism for all types of video and data to the consumer.

Internet access, e-mail and VOD are arriving this year, and
they will quickly be followed by Internet-protocol voice and video telephony, advanced
online games and other exciting applications unmatched by other platforms.

The ultimate success of these services will depend on
operators' success and flexibility in pricing, packaging and delivery. These services
place operators in the ever-increasing role of educating consumers about the new services
and applications of this new digital technology.

Digital technology positions cable operators and their
networks as the primary enabler of new sources of entertainment, transforming the way that
consumers interact with their televisions and placing entirely new sources of information
and entertainment a remote-click away.

Denton Kanouff is vice president, marketing for General
Instrument Corp.'s Digital Network Systems unit.

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