No Small Matter

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Midcontinent Communications, a midsized MSO, decided to launch HDTV service in July after inquiries from subscribers. One of the first to sign up was an affluent customer who had just built a new home in Rapid City, S.D.

That subscriber told Midcontinent that he needed "all these high-definition boxes," vice president of public policy Tom Simmons recalled.

Simmons informed the customer he only needed an HD set-top for his HDTV set.

"Our digital boxes are just fine on all your other sets," Simmons added. "And he says: 'Like I told you, I need high-definition boxes on all my sets.' "

It turned out the subscriber had seven HDTV sets but ultimately decided to get HD set-top boxes for only five of them — because his young kids were only watching Nickelodeon and really didn't need SpongeBob SquarePants
in HD.

Granted, that customer would be an anomaly in just about any city. But the point is that though they may still be relatively small in number, consumers with HDTV sets in smaller markets from South Dakota to South Carolina are clamoring for high-definition service, and operators who ignore those pleas do so at their peril.

Cable operators who serve those areas — many of them small and independent — have been late to the party in terms of launching HDTV, for a variety of reasons.

Rollouts have been delayed while small and midsized operators grapple with issues like bandwidth constraints, negotiating tricky retransmission-consent deals with broadcasters, recouping the high cost of HDTV set-tops and figuring out the best way to price and package high-definition services.

For operators, the issue with TV stations is that carrying one broadcaster's HD signal may open up a Pandora's box, with other TV stations then demanding their standard-definition digital feeds be carried.

"Many retransmission-consent agreements have MFNs [most-favored nation clauses] on digital signal carriage, so if you carry the NBC affiliate's signal because it offers HD, then the issue can arise whether you are obligated to carry the signal of another station that is a digital signal, but not HD," said Peter Smith, senior vice president of programming and product development for 155,000-subscriber Millennium Digital Media.

Nonetheless, this year more and more small and midsized cable operators have already deployed HDTV, or plan to launch it.

In addition to Midcontinent — the 20th largest MSO, with more than 200,000 subscribers — operators such as Blue Ridge Communications in Palmerton, Pa., Sunflower Broadband in Lawrence, Kan., Comporium Communications in Rock Hill, S.C., and Buckeye CableSystem in Toledo, Ohio, are among those now offering HDTV service.

In fact, 52,000-subscriber Comporium claims to be the first system authorized to carry, and first to debut, ESPN HD this past spring.

Others are getting ready to do HDTV. St. Louis-based Millennium plans to launch HDTV by the end of the year or early next year. Also based in St. Louis, Cequel III is seriously considering offering HDTV service to the systems it recently acquired outside Houston, and to those it is upgrading in major markets such as Dallas, a company spokesman said.

Despite the barriers, smaller operators have a big incentive to launch HDTV. As Comporium marketing product coordinator Karl Skroban puts it, the "big picture" is that small operators have two options: Launch HDTV and put money in their own pockets, or don't and put money in direct-broadcast satellite's pocket. And cable has the advantage of being able to offer local HD content.

Like the big MSOs, smaller operators see HDTV as a key tool in customer retention.

"What makes this a slam dunk for us, and needing to do this, is that these customers will go to satellite," said Patrick Knorr, the general manager of 34,000-subscriber Sunflower Broadband. "If they don't have the [HDTV] option, you're guaranteed to lose that customer."

Retaining key subs

And HDTV helps retention with the high-end subscribers, "our most profitable customers," who will otherwise go to DBS for that service, said Denton Parson, director of product development at 150,000-subscriber Buckeye.

"These folks going to the dish are the ones that are spending over $100 a month with us," he said. "They may have cable modems and they want more."

When the National Cable Television Cooperative was putting together a session on HDTV and small operators for its annual meeting last month, it had trouble rounding up panelists, since so few small systems offer HD. Ultimately, Knorr and Skroban made presentations as part of that HDTV panel.

Right now, 40 to 50 NCTC member cable systems are offering HDTV service, according to Frank Hughes, the co-op's senior vice president of programming.

The NCTC has struck carriage agreements with ESPN HD, HDNet and Discovery HD Theater, and is in talks with Bravo about its new HD network.

Many independent operators maintain that, unlike large MSOs such as Comcast Corp., they can't afford not to charge subscribers for HDTV programming or to just levy very small equipment charges for the HDTV set-tops, which cost around $450.

"Small operators are always having to look at the economics of new technologies and sometimes wait until they become rational and affordable, just based on your size," Smith said. "I don't think there's a small operator or medium-sized operator in the country that doesn't recognize the importance of HDTV. It really just a matter of timing, packaging and pricing."

He added that he hopes the larger MSOs can do "some of the R&D" to see which model works.

"If the model is to buy a lot expensive programming from the networks and give it away for free to consumers, then my concern: Is that a model that works long-term for the smaller operator, or do we have to find our own model separate from the rest of the industry?" he asked.

The HDTV set-top price is the killer. To equip a headend for HDTV only costs in the $40,000 to $50,000 range, according to several small operators. That includes purchases of 256 QAM (quadrature amplitude modulation) modulators and groomers — which permit operators to carry from two to three HD signals on 6 Megahertz of bandwidth, instead of just one signal — as well as satellite receivers.

But the cost of set-tops for Comporium's 300 initial HDTV subscribers, for instance, was more than $120,000.

Pricing Strategies

Despite cost-recovery issues, operators as small as 1,650-subscriber Clear Creek Telephone and Television in Oregon are launching HDTV.

Small operators deploying HDTV have taken a variety of approaches in terms of pricing and packaging.

The common ground is that in most cases, they are offering the broadcast HD signals for free, and Home Box Office and Showtime for free to those who subscribe to those premium channels.

Midcontinent, which debuted HDTV service on July 1, is offering its package for free until Nov. 1.

Right now its HDTV programming includes Discovery HD Theater, HDNet, HDNet Movies and limited broadcast outlets, since few TV stations in Midcontinent's markets provide HD signals, Simmons said.

Come November, subscribers will have to decide whether to lease or buy their HD set-tops, or to drop the service.

Midcontinent is considering charging a $12 monthly equipment fee for the HD set-top, and $13 for the tier of HD cable networks.

Sunflower, which has 200 HD subscribers after a soft launch Aug. 1, allows subscribers to either buy their set-top for $449 or pay a $14.95 monthly equipment fee for the HD boxes. The HD package is $9.95 for HDNet, HDNet Movies, ESPN HD and Discovery HD Theater.

Using a lease model, Comporium is charging subscribers $16.95 for what it calls its "HDTV Digital Pack," which includes the HD set-top, free delivery and installation, ESPN HD, CBS, NBC and ABC.

Buckeye, which debuted HDTV on July 21 and now has 100 subscribers, is going with a sales model, in which subscribers buy their HD set-tops rather than lease them, according to Parson.

"We do not see $450 as a huge barrier to these customers, who are buying home-theater systems and spending a significant amount of money," he said.

The charge for the HDTV package is then $10.95, and includes HDNet, HDNet Movies, ESPN HD and Discovery Theater HD.

Blue Ridge subscribers pay $7.95 a month for an HDTV set-top, and $8 for an high-definition package that includes ESPN HD, HDNet, HDNet Movies and Discovery HD Theater.

Unforseen snags

Unanticipated problems have popped up for some small operators.

Sources said HBO, trying to discourage operators from charging high equipment fees for HD set-tops, is asking for a portion of that lease revenue when that monthly fee is more than a certain amount — reportedly $5.

HBO believes those operators are essentially charging subscribers for the network's HD feed, which the programmer provides for free, and are essentially trying to camouflage it by calling it an equipment charge, sources said.

An HBO spokesman said the premium service does not expect to get any portion of any operators' equipment charge.

For their part, small operators say that even charging more than $10 for a HD set-top, it will take them two to three years to recoup their HDTV investment, particularly the set-top costs.

There have been other unforeseen glitches for operators. Sunflower ran into technical problems with HDTV, in terms of compatibility with the cable system's hardware and software, according to Knorr.

And at Comporium, when Skroban went on calls to install HD set-tops, he said in numerous cases subscribers thought they had HDTV sets, but in actuality didn't.

"They just had a flat screen" set and assumed it was an HDTV, he said.

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