Ops Try to Prove That Premium Still Pays


Cable operators are trying to rejuvenate a stagnating
premium-network business, beset by an erosion of pay subscribers, heavy churn and
defections to satellite services.

One method that's shown some promise is an update on
the packaging theme: Several MSOs have been experimenting with selling premium networks
along with upper tiers (such as new-product tiers) and discounting the latter.

Paul Kagan & Associates Inc. estimated that the total
number of premium-cable subscribers held steady at 46 million last year -- the first time
in years that the category didn't grow by at least several percentage points. And
cable systems lost more than 100,000 pay customers from the third quarter to the fourth
quarter of last year, according to Kagan. Further, analyst Bill Marchetti expected the
trend to continue in the first quarter of 1998.

Cable operators said they've been losing as many as 3
percent to 5 percent of their pay subscribers over the last year, but they noted that some
of the decline came from the conversion of Disney Channel and various regional-sports
networks to basic channels. Tele-Communications Inc.'s 1997 pay slump also
contributed to the sluggish figures, but that MSO has begun to turn its situation around.

Nonetheless, cable operators are extremely concerned, and
they are looking for ways to stem the tide.

"The declining trend in pay units is very, very
troubling," said Julie Berg, executive vice president and chief marketing officer for

While premium networks are doubling subscriptions on
direct-broadcast satellite services, they're either holding steady or losing units in
the cable universe. Kagan estimated that Home Box Office -- by far the category leader --
had 19.5 million cable subscribers last year, compared with 19.4 million in 1996, while
Showtime fell to 7.6 million cable subscribers in 1997, compared with 8 million the year

Starz!, Liberty Media Group's four-year-old entry into
the field, added 1.2 million cable subscribers last year, boosting its total to 4 million,
according to Kagan, but it had the advantage of being available on TCI systems as a result
of a blanket deal with its sister company. Moreover, as a relatively new service, Starz!
had more subscriber upside than the established networks, which are almost fully
penetrated among cable systems.

A stagnant pay base is no small matter. Pay revenues
account for as much as 15 percent of an MSO's gross revenues, and pay is also an
important acquisition-and-retention tool. To bolster pay, cable operators said they need
to evaluate such issues as price flexibility in license-fee negotiations, discounting
during promotional campaigns, packaging and marketing support with premium networks.

Premium-network executives acknowledged that last year was
a difficult one for cable systems in the pay category. But they attributed the stagnant
numbers to internal difficulties at several key MSOs during the last half of 1996 and
early 1997, and they expressed confidence that cable would continue to provide growth for
pay services.

Jeffrey Wade, executive vice president of sales and
marketing for Showtime Networks Inc., ascribed last year's disappointing numbers in
cable to reorganizations and consolidation at major MSOs, which resulted in a "lack
of focus at the local-system level."

Wade said the number of pay-cable subscribers picked up in
the second half of last year, once internal problems began to get sorted out, and he
expects continued improvement.

"The way to do it is to focus on business," he
said, "and that means paying attention to marketing, pricing and packaging every day
at the point of sale."

HBO officials also said they believe that large MSOs are
back on track after a "challenging" year. "We expect to see continued
growth in cable for years to come," a company spokesman said.


MSO executives added that they must also look more closely
at their own marketing strategy for pay networks, including package configurations,
channel lineups and the frequency and methodology of promotional campaigns.

The good news, according to cable operators, has been the
additional channel space on analog and new digital tiers in upgraded systems, which allows
MSOs to offer a slew of multiplexed channels at no extra cost to subscribers who already
receive those services.

The most recent -- and vivid -- example is HBO's new
package of six HBO and four Cinemax channels, individually branded under a
"mega" umbrella (see sidebar).

But exactly how did cable find itself with a premium
problem in the first place?

Most industry experts pointed to DBS, which has clearly
stolen away many of cable's best customers by offering a wide variety of
digital-multiplex pay channels. Cable's basic tiers continue to grow at about 2
percent, but that's due to customers who downgrade to broadcast basic in order to
receive off-air channels.

Recent rate hikes are also to blame, cable executives said.

"Every time that we increase basic rates," one
MSO marketer said, " we see a decrease in premiums. You can count on it."

And cable marketers with experience in packaged goods think
that cable systems have been too reliant on big acquisition campaigns with heavy
discounting, and that they have not been consistent enough in marketing pay networks and

"In packaged goods, you're used to hammering
away, and not just making a big push a few times a year," said Virginia Gray, Cox
Communications Inc.'s newly named vice president of marketing, who has worked for
Procter & Gamble Co. and General Foods.

"We haven't cracked the code yet," Berg
admitted. "Otherwise, you would see more willingness to buy."


But MediaOne and MSOs around the country are trying to turn
things around.

By September, MediaOne -- which is shunning digital tiers
in favor of advanced-analog set-tops -- will begin marketing a relaunch of its offerings
of pay TV networks and packages. In systems that have been rebuilt or upgraded to 750
megahertz, the operator will package premium channels with a combination of NPTs, impulse
pay-per-view channels and new interactive programming, according to Janet Flesch, director
of video-product marketing for the MSO.

In older systems, MediaOne will take a "portfolio
approach," Flesch said, offering customers more choice based on a low-, medium- or
high-priced package.

Falcon Cable TV Corp. has also begun to package premium
channels and NPTs in rebuilt systems, said Skip Harris, its vice president of marketing. A
tier with several new channels that would normally sell for about $6 per month, he
explained, is being sold at one-half that price or less when bundled with an
$11.95-per-month HBO offering.

Systems that have launched the new package are reporting 30
percent to 40 percent penetration, Harris said.

"It's encouraging," he added, "because
it addresses the churn issue and it creates a disincentive to disconnect."

Two midsized MSOs -- Cable One and Harron Communications
Corp. -- have freed up channel space in the middle of their analog spectrum, and they are
"trapping" premium channels there so that subscribers don't need converter

In Cable One systems, channels 14 through 22 are reserved
for HBO and Showtime. Five channels of the HBO multiplex sell for $15.95 per month; four
channels of Showtime sell for $12.95; and all nine channels are packaged for $24.95

Jerry McKenna, vice president of strategic marketing at
Cable One, attributed the success of the "midband-trapping" scheme to its

"It's right in front of you, and it's easy
and simple. Customers love it," McKenna said.



Many operators said they're trying to get away from
the traditional promotional discounting of premium networks that has resulted in churn
rates of as high as 50 percent to 60 percent.

David Intrator, vice president of programming and marketing
at Marcus Cable Co. L.P., said some Marcus systems have begun offering 30-day money-back
guarantees for premium packages, instead of discounting.

Gray said she's "not a big believer in discounts
upfront. I'd rather sell [subscribers] on pay by talking to them about why they
really want this product."

As a result, Gray and other MSO marketers -- most notably
Geof Rochester, senior vice president of sales and marketing for Comcast Corp.'s
Comcast Cable Communications -- advocated the need for a closer ongoing partnership with
the premium networks that goes beyond several big acquisition and discounting campaigns
per year.

"I don't believe that this is a mature
business," Gray said, "but you can't just have a big push and go away. The
pay message has to be ongoing, telling people what's unique and what's coming

Rochester added, "Pay churn is a major issue. Instead
of being hugely dependent on promotions to drive sales, we need constant messaging that
reinforces the benefits of pay."

Premium channels are "so integral" to a cable
operator's business, Rochester said, that he believes that systems should begin
allocating "some portion" of their cross-channel spot inventory to the category.

"The old model, where we hold our hands out, has to
become more collaborative," he added.