MediaOne Signals Change of Course

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New York -- MediaOne Group Inc. plans to market themed
"clusters" of networks in its Digital NexTV offering.

The company hopes consumers will be drawn to an array of
basic options in addition to the multiplexed premium channels and enhanced pay-per-view
slates that typically attract digital subscribers.

Programming in those clusters -- lumped under categories
like kids', women's and sports -- would be "unique and different"
networks not available in analog packages, MediaOne's chief marketing officer, Julie
Dexter Berg, said last week at PaineWebber Inc.'s annual media conference here. One
reason MediaOne held off on launching digital was to wait for those new networks to
arrive, she said.

Regardless of the programming, some analysts last week were
skeptical that previously digital-averse MediaOne would put a big effort behind digital
next year. Until now, the Englewood, Colo.-based MSO vocally preferred the economics of
advanced analog service, which requires a far cheaper set-top box to generate an average
of $6 to $9 in incremental monthly revenue per subscriber. MediaOne chairman Chuck Lillis
restated that approach as recently as the National Show in May, mentioning his concerns
about digital set-top standards as well as the box costs.

"This [digital service] would be for a vast minimum of
their 5 million subscribers," predicted analyst Bruce Leichtman of The Yankee Group,
a marketing research firm in Cambridge, Mass.

Cable operators' digital deployments run the gamut
from those in test mode, like MediaOne and Cablevision Systems Corp., on up to
Tele-Communications Inc., which has more than 1 million digital customers. Some have held
back on digital rollouts, waiting for more advanced boxes.

But as MSOs look to hold basic rate increases in check next
year, operators like Cox Communications Inc. and Comcast Corp. are scoring points for
having fairly aggressive, high-margin digital TV rollouts, which could explain
MediaOne's focusing on digital at the PaineWebber conference.

Earlier this summer, MediaOne sent out a request for
digital set-top proposals from the vendor community. At press time, a selection was
"imminent," according to one MediaOne source, who requested anonymity. The
winning vendor or vendors were unclear, but were unlikely to include General Instrument
Corp. or Scientific-Atlanta Inc., because MediaOne wants to remove itself "from the
grasp of the traditional suppliers," a MediaOne source said.

Pioneer New Media Technologies, with its recently formed
partnership with DiviCom, CanalPlus, and C-Cube Microsystems, was considered a
front-runner in the selection process, as was Philips Broadband Networks, according to
sources close to the matter.

MediaOne has been marketing digital TV in just one market
-- suburban Detroit -- where it faces competition from Ameritech New Media. There it
offers a $10-per-month "starter kit" that includes an interactive guide,
multiplexed premium services, more pay-per-view channels and digital audio services.
Discovery Networks' digital services and Encore's thematic movie channels are
available in separate $2 packages.

MediaOne has deployed advanced analog service in every
region but the Chicago area, officials said. The Detroit-area digital test began this past
summer.

Broader digital deployments are planned for 1999, though.

Berg, who is also a MediaOne executive vice president, said
the retooled Digital NexTV would launch in two markets during the first half of 1999,
followed by launches in all other MediaOne markets later in the year. One industry analyst
familiar with the company said MediaOne always intended to offer digital service in its
lightly penetrated, 1.4-million-home Los Angeles market.

At the conference, Berg said MediaOne might eventually
phase out advanced analog, depending on digital's popularity.

"I think we still keep it in the product bag for now
because it's a good interim step for customers," she said. "Depending upon
the ultimate penetration of digital, we may phase it out. But for now, it stays."

She added that advanced analog "represents a great
opportunity for second, third and fourth TV sets in the house."

But Berg also said she would only issue a
"conservative" forecast of 3 percent to 5 percent digital penetration of the
company's homes passed by upgraded plant. She gave no target date. In contrast,
advanced analog has penetrated about 23 percent of markets where it's been marketed
for a while, she said.

Berg and MediaOne chief financial officer Richard Post said
the company's top priority continues to be driving high-speed data penetration, but
protecting the core video business against satellite encroachment is also a key goal.

SG Cowen Securities Corp. cable analyst Gary Farber said he
has penciled in about 55,000 digital subscribers for MediaOne by the end of next year. He
said his "guess" is that MediaOne won't have "meaningful" digital
TV numbers until 2001.

In her presentation, Berg said the "cluster"
approach seemed a good way to give consumers more choice without simply offering
everything on an a la carte basis. The current plan is to organize the digital NexTV
channels into six "clusters" of five to seven networks each.

Besides kids', women's programming and sports,
other possible themes she named were arts and education, movies and Hispanic fare.

The standard digital package would include one cluster.
Additional clusters might be available for $3.95 each, or all clusters for $7.50, Berg
said.

Including multiplexed premium channels, the digital service
could generate $10 to $60 in revenue a month on top of standard $25 analog service, Berg
said, versus $8 to $40 in incremental revenue from advanced analog.

Leichtman said that, realistically, very few consumers
would make the full leap from $25 to $65 or more. "Nobody goes from $30 to $60,"
he said.

And unless digital is offered in lieu of an upgrade --
which is TCI's approach in many smaller markets -- "the most ripe person for
digital is a multiple premium customer," Leichtman added. The ability to offer four
HBO or Showtime screens instead of one, and 30 PPV channels instead of four, is what
really sells digital, he said.

That said, thematic clusters "make sense,"
Leichtman said. In fact, the concept is fairly well established. Others that have employed
it include PrimeStar Inc. and MediaOne itself, with early advanced analog launches, he
said.

Leslie Ellis contributed to this report.

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