HD: A Mixed Bag For The Holidays

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This year’s holiday season looks to be a mixed bag for high-definition TV. The slumping economy is likely to have a chilling effect on HDTV set sales, but the stakes for operators promoting their high-def offerings remain high — and the opportunities still loom large.

According to two recent studies, HDTVs are now in about one-third of all homes, making it increasingly important for pay TV operators to deploy a strong high-definition offering if they wish to retain current customers. And the Consumer Electronics Association predicts that some 27.7 million new HD sets will be sold in 2009.

“About 42% of all households will be engaged in some sort of HD content transaction in the next 12 months,” said Maryann Baldwin, vice president of Magid Media Futures at Frank N. Magid Associates, which recently released an extensive study of the HD market.

That figure includes households who plan to buy an HDTV set over the next year, high-definition homes that plan to purchase a second set and homes with an HDTV that have yet to sign up for HD services from a cable or satellite provider, she said.

“It is a pretty exciting opportunity for operators, if they can connect with consumers in the right way with the right messaging and offering,” said Baldwin.

For Comcast, that means promoting its growing offering of high-definition on-demand content, which now tops 1,000 HD titles, as well as the 35 to 50 linear HD channels available on most of its systems.

In one ad, which depicts a mock intervention, Comcast takes on satellite-TV competitor DirecTV directly.

“We are worried because we want to get you off DirecTV,” a young man tells DirecTV customer Mike Sweeney in the spot. “You are not getting the most HD from DirecTV. You think you are, but you are not. You are HD delusional.”

When Sweeney relents and agrees to switch to Comcast, his family stands arm in arm, apparently united in their joy over finding the best possible HD package.

“When you sit down on the sofa with your wife, she doesn’t ask you, 'How many channels do we have?’ She asks, 'What’s on?’ ” said Comcast general manager and senior vice president of video services Derek Harrar. “The simple fact is, we’ve got what’s on. We have more choice than anyone else.”

Not so, countered DirecTV senior vice president of advertising and public relations Jon Gieselman. “The cable guys talk about HD VOD and all this nonsense about HD options because they don’t have anything else to talk about. They can’t talk about linear channels because they don’t have the capacity to compete.

“What matters is how many channels you have in HD,” he said. “We still have a pretty significant competitive advantage over all the other providers, with the biggest advantage over the cable guys. We have over 130 HD channels, three times more HD channels than the average cable system.”

Meanwhile, the telephone companies are also claiming to have won the HD numbers game.

After adding more than 30 HD channels in early November, AT&T vice president of video products Jeff Weber said the telco’s U-verse TV is now ahead of cable in linear channel counts, with over 75 HD linear channels, and that its Internet-protocol network allows it to offer interactive and other advanced features that will be increasingly important to HD homes in upcoming months.

“With all the homes that have HD sets and all those consumers that are planning to purchase one, HD is an important part of the decision-making process for deciding on a multichannel provider,” Weber said. “Being a leader in HD is a critical piece of the discussion and puts us in a great competitive place.”

Even more impressive numbers can be found in Verizon Communications’ holiday claims. “You will see some companies counting channels and some counting HD choices,” said executive director of FiOS TV marketing Benigno Gonzalez. “Either way you count it, we are the leader, with 100 HD channels and up to 1000 HD VOD titles.”

ECONOMY A WORRY

But as operators eye the prospect of adding new HD customers — or potentially losing subscribers to providers with better high-definition packages and marketing — they face some major questions over the impact of the slumping economy and the realities of an intensely competitive landscape.

Despite the growing penetration of HDTVs, some researchers worried that set sales could slow this holiday season.

DisplaySearch, which tracks manufacturers’ shipments of sets to retailers, is predicting a 1% to 2% decline in sales during the fourth quarter. “That is pretty significant,” said Paul Gagnon, the company’s director of North America TV market research. “It would be the first year-over-year decline for flat-panel shipments ever.”

Gagnon also expects heavy discounting, in the mid- to high teens.

“The No. 1 question is whether the discounts will even matter,” he said. “You may not be able to do enough discounting to get the shell-shocked consumer in the store.”

A Nov. 8 survey by the Consumer Electronics Association found that consumers were planning to cut their holiday spending by 14%, to about $1,437.

Still, the CEA remained relatively bullish on the prospects for HDTV sales this year and next.

“We had a pretty phenomenal year for sales of HDTVs” in 2008, said senior director of market research Tim Herbert. “For flat-panel displays, we are up over 40% year on year.”

Overall, the CEA is holding to its prediction that manufacturer-to-retailer unit shipments of HDTVs will hit 25.1 million in 2008, up from 20.7 million last year, and that some 27.7 million HDTVs will be shipped in 2009.

Other recent studies of high-definition television conducted since the financial-market meltdown began in September also found that prospects for HD-set sales remain relatively bright.

In a survey released in November, Leichtman Research Group found that about 22% of all households bought an HDTV set in the last 12 months and that 34% of all homes now have an HDTV set, double the penetration only two years ago, according to LRG’s president and principal analyst Bruce Leichtman.

Another HD study conducted by Frank N. Magid Associates also found strong consumer interest in acquiring new HD sets, with 20% planning to buy a set in the next year.

“The survey was fielded when some of the realities of the economic situation were coming to light and the government was considering the rescue plan, so we were somewhat surprised with the strength,” said Baldwin.

Both studies also highlighted the opportunities created by growing HD penetration and downplay some of the dangers they face in losing subscribers.

One major opportunity is simply signing up all the high-definition homes for service. Only 42% of HDTV owners were told how to receive high-definition programming when they purchased their set and many owners remain confused about what they need to do to actually watch HD programming, said Bruce Leichtman.

About 35% of homes with HD sets are not getting the necessary signals, over the air or via multichannel-TV providers, he added.

Large numbers of confused HD-set owners also popped up in the Magid survey.

“The proportion of homes with HDTVs with either a cable or satellite HD service actually declined this year,” said Baldwin. “It has been pretty steady at 70%, but this year it dropped to 64% and, among recent purchases of HD sets, it was an even lower rate of about 58%.”

Similar data comes from the CEA research, which found about 40% of all HD sets are not hooked up to high-definition packages from cable or satellite, according to Herbert.

One major problem is the ongoing confusion over the Feb. 9, 2009 switchoff of over-the-air analog TV stations. Many consumers erroneously believe that as part of the digital transition, all programming will become high-def, Baldwin said.

Convincing those homes to upgrade to an HD tier presents a major opportunity for cable and satellite providers, said Frank N. Magid Associates senior vice president Jill Rosengard Hill.

“Cable needs to articulate the reasons and benefits for upgrading to HD services,” she said.

Both the Magid and LRG studies also downplayed some of the risks that operators face from competing marketing claims.

Leichtman noted that only about 9% of HD owners switched providers when they purchased an HD set and that most subscribers seem happy with their current providers.

“People in the industry see all those ads and think that subscribers know who has the most HD channels and who doesn’t,” Leichtman said. “The cable operators get all worried and think they are going to lose subscribers to satellite. That isn’t necessarily true. When we asked cable subscribers who has the most channels, they say cable more often than DBS,” even though this generally isn’t true.

Leichtman also noted the growing importance of the bundle.

“They are generally choosing the same kind of provider for HD services that they already have,” he said. “If you have a double or triple play with a cable company, a few more HD channels is not going to get them to dump all their other services.”

Rosengard Hill agrees. “We asked viewers who are newer to HD if they had changed providers and very, very few had actually switched to a new video provider,” she said.

While many people don’t seem to be swayed by competing marketing claims, operators are still working overtime to put the best face on their offers.

Much of Comcast’s effort is tied to video on demand, which now gets about 300 million views a month, and intensive research on viewing patterns, Harrar said.

As part of Project Infinity, announced last year at CES, the Philadelphia-based MSO has boosted its number of HD VOD titles to over 1,000, focusing on the most popular kinds of content.

Movies, on-demand’s most popular genre, comprise about 200 titles, followed by about 200 TV shows in high-def, including three of the top six Nielsen Media Research-rated shows.

Comcast also offers about 300 music-related titles, “because that is the No. 2 usage category,” said Harrar.

KIDS’ FARE NO DRAW

But the nation’s top cable operator has not added any children’s programming in HD-on-demand, even though kids’ fare is the third most-popular genre in standard-def video on demand.

“We could put a lot up there, but when we do, there is no usage,” Harrar said. “It isn’t relevant to our customers so we don’t have it, even though we could put a lot up and make a lot of marketing claims.”

Nor does Comcast offer much in the way of on-demand sports, because its research shows that fans prefer linear channels. “We’ve added every sports channel you’ll ever need to cover all your favorite sports,” Harrar said.

Currently, HD channel counts on Comcast systems vary from the high 20s to the low 80s, with the average system providing 35 to 50 channels.

Harrar said Comcast would expand its HD offerings next year as it reclaims analog bandwidth as part of Project Cavalry, which provides customers with digital connections for three sets and digital-tier upgrades at no additional cost.

Tru2way, the CableLabs interoperability standard for advanced video services, will also be a major 2009 initiative for the company. The rollout, which has already begun in Denver and Chicago, will provide major benefits for HD homes with Tru2way-capable sets because it will allow them to get all of Comcast’s video services without a set-top box.

The telcos are also highlighting their advanced services. AT&T has initially focused on building a bigger linear HD channel lineup for its U-verse TV service than cable because “the linear channels are more important,” noted Weber.

But Weber expects AT&T to significantly ramp up U-verse’s HD VOD offering over the next year, and to increasingly talk up the overall quality of its service and the advanced features of its IPTV platform.

“I think the numbers game starts to matter less and less,” he said, and features such as U-verse’s HD capable whole-home DVR and interactive applications will become more important. These features and the company’s overall quality of service recently helped AT&T’s U-verse rank “first in terms of quality and services against all the cable and satellite providers” in a J.D. Power & Associates survey in three of four regions of the U.S., Weber noted.

For Verizon’s part, the company’s next-generation fiber network is also playing a key role in FiOS TV marketing efforts, according to Gonzalez. “Close to two-thirds of our customers are actually HD customers,” he said. “We have an HD penetration rate that is much higher than anyone in the industry because our customers know we have a fiber network that was built for HD.”

Currently, the telco also offers its new customers free access to over 70 premium channels — including 40 HD channels — for 90 days, and has crafted bundles designed to highlight capabilities of its fiber network.

“Any customer who takes the FiOS Extreme HD package, will automatically see their data speed double to 20 Megabytes [per second],” Gonzalez said. “We want to show them that once you get the best HD package, you’ll get the best data and voice service.”

DirecTV has started to offer some HD content on-demand, but continues to hammer away at its linear-channel lead. It’s also offering deep discounts to increasingly cost-conscious consumers. The satellite provider currently offers a $23-per-month discount on certain packages and allows consumers to lock in prices until 2010.

“Our message of offering the best television experience for the best value really resonates in this economic climate,” said Gieselman.

PLUS FOR SMALLER OPS

Smaller operators have traditionally struggled to compete against satellite’s larger HD channel lineups, but some are also seeing hefty subscriber growth.

Bresnan Communications executive vice president of operations Steve Brookstein noted that his MSO now offers 45 to 50 HD channels in 90% of its footprint, which generally serves smaller communities in the Mountain West states. Analog bandwidth reclamation will allow them to boost channel counts to between 60 and 75 HD services in 2009.

“To the extent that satellite was trying to position themselves as the HD leader, we felt it was imperative to counter that,” he said.

Rather than trying to match the 100-plus channels available on satellite, however, Bresnan did extensive research on what consumers wanted and complemented those channels with an expanded HD VOD offering. In August, the company also changed its pricing so consumers were not charged extra for HD set-tops.

As a result, Bresnan has more than doubled the number of subscribers who take its HD package so far this year and has seen its overall subscriber ranks grow by about 2%.

“In the third quarter, when some of the larger cable companies were reporting subscriber losses, we grew,” Brookstein said.

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