Since the cable industry made its first commercialdeployments of digital systems in late 1996, broadband operators have been closelyexamining the business of deploying digital. The incremental costs, as well as the widearray of services available for this platform, raise a number of questions, such as: Arethere financial benefits to digital technology beyond the ability to stave offcompetition? Can I generate the incremental revenues required to make the business casefor digital deployment, even if I'm not yet ready to launch advanced interactiveservices?
The answer to both of these questions is, "Yes."Digital technology opens the door to a host of new opportunities, from expanding a cablesystem's current offering to providing entirely new revenue-generating services. Asthe personal computer, television, Internet and cable continue to converge, digital-cabletechnology stands at the forefront as the pre-eminent system for delivering the latestprogramming and services into consumers' homes. In fact, many operators that begandeploying their digital systems last year are already poised to roll out advanced digitalservices such as high-speed Internet access, video-on-demand, community networking andmore over their digital-cable platforms -- making this the year when digital begins toachieve its full revenue-generating potential.
While these advanced applications are sure to open newrevenue opportunities for the cable industry, digital technology also enables theexpansion of more basic services, like premium channels and pay-per-view. These coreservices, often overlooked when planning digital rollouts, represent a cableoperator's key unregulated revenue streams and high profit margins (45 percent and 60percent, respectively). Digital technology can help to make these services morecompetitive and attractive to customers, thereby maximizing their incrementalcontributions to a system's bottom line.
Competing digital services such as direct-broadcastsatellite have successfully exploited the advantages of using digital technology on thesecore services. For example, with less than one-tenth of the cable industry'ssubscriber base, DBS services have nearly matched the cable industry's combined PPVrevenues, according to The Yankee Group. But the opportunity for the cable industry is somuch greater. The industry is now in a position not only to achieve the revenue benefitsfrom these core services, but to move far beyond them with new interactive applicationsthat are not possible with one-way delivery mechanisms.
Premium-channel multiplexes can make premium services muchmore attractive to the customer. A digital system's expanded channel capacity givesoperators the flexibility to augment their channel lineups with multiplexed versions ofpremium channels. Customers get more for their entertainment dollar, and they respond byspending more of their dollars on cable products and services.
Competing digital services recognize this in packagingtheir premium-channel offerings. The Digital Satellite System, for example, offersmultiplexed versions of its most popular premium channels, achieving higher premiumbuy-rates. DSS premium-channel penetration is more than 33 percent above that of theaverage cable system, and DSS' average premium customers buy over 11 percent morepremium subscriptions than their cable-system counterparts, according to The Yankee Group.While a customer may think twice about spending $10 monthly for Home Box Office, thatoffer becomes much more attractive when he or she is receiving five channels of HBOinstead of just one. Buying patterns for digital-premium services reflect the inherentattractiveness of the multiplexed premium.
PPV services have been a long-maligned component of anoperator's overall service offering. This is probably because PPV has traditionallyfailed to live up to its promise of replacing the video-rental store as the primary sourcefor home viewing of hit movies. Nevertheless, the significant size of the market, coupledwith the attractive margins on these movies (typically around 45 percent to 50 percent),demonstrate PPV's potential as a significant revenue opportunity.
Why, then, has PPV been underutilized? Most current PPVofferings have been crippled by two factors: a difficult, often-confusing orderingmechanism and limited movie selections. The combination has turned off consumers andlimited the value of PPV as a high-margin revenue-generator.
To successfully drive PPV buy-rates, operators must have ameans for effectively promoting their PPV offerings. In addition, customers must haveready access to the crucial programming information, such as scheduled times and titles,that facilitates their purchase decision. This is where digital technology comes intoplay. Electronic program guides highlight PPV-programming selections and provide easyaccess to scheduled start times of movies and events. This continual advertising, coupledwith a digital system's impulse-purchase technology, spotlights the PPV offering andhelps to further drive buy-rates.
Providing compelling programming content is equallyimportant to increase buy-rates. The typical cable system offers customers four to fivePPV channels. After subtracting the one or two channels that offer adult programming, onlythree or four channels remain to deliver PPV movies. Compare this to the offerings of yourcompetitors, the video stores. These stores offer hundreds of titles, available wheneveryour customers choose to watch them. In contrast to traditional cable systems,today's DBS systems offer customers greatly expanded PPV lineups with multiple starttimes for popular titles, making these offerings more convenient and accessible for theircustomers. Operators using DBS technology have taken full advantage of the expandedchannel capacity to offer a far more powerful PPV service, and their customers haveresponded with increased movie purchases. The average DSS subscriber purchases almosteight times as many PPV hit movies as the average addressable cable customer, according toThe Yankee Group. By leveraging the potential of digital technology, these operators havesuccessfully transformed PPV into both a prime revenue generator and a key element intheir marketing strategy to attract new customers.
The transformation of PPV is not an accident. It is theresult of planning, designing and marketing more customer-friendly, more compellingprogramming content. DSS utilizes its digital-enabled PPV system to offer customers morethan 55 channels, an EPG and an impulse-ordering mechanism to facilitate PPV purchases.Consumer perceptions have begun to change for the better, and they are increasinglychoosing PPV over video rental.
Digital PPV presents an even greater opportunity for cableoperators. Digital compression makes it possible to deploy an extremely competitive PPVoffering, with minimal channel capacity. Using a 12-to-1 compression ratio, operators canturn three analog channels into 35 digital PPV channels, translating into a comprehensiveselection of nine hit movies (up to two hours each) starting every half-hour. Compare thatto the current offering on most cable systems. Couple this offering with the strongembedded base that cable systems have over the competition, and you have a very powerfuloffering.
Digital technology offers more than just additionalchannels: It can also deliver on a host of new, advanced services. These services,designed to generate additional revenue and to make your overall service offering morecompetitive, include applications for low-cost Internet access, VOD, community networking,electronic commerce and enhanced digital programming.
To deploy these services, however, your system must havethe appropriate network and the infrastructure. How can you justify the financialinvestment required to implement a digital system? Leveraging a digital network'scapabilities to help generate increased premium and PPV revenues gives you a substantiallead in developing a financial justification for your system. Once the digital system isdeployed, additional services serve as incremental enhancements to the system. Theygenerate incremental revenue and drive further digital penetration.
The case for digital deployment is simple. Look first tothe services that you are already deploying on your current infrastructure. Digitaltechnology can have a substantial impact on the revenues generated by your high-margin,unregulated services such as premium and PPV. If the costs of moving your system todigital can be justified based solely on these services, you will have the luxury ofexperimenting with additional digital services to make the case for digital even moreattractive.
David M. Fritch is senior manager of marketing and strategy for digital-networksystems at General Instrument Corp.