Pay Execs: DBS Outmarkets Cable


Atlanta -- The impacts of direct-broadcast satellite
services and digital-cable tiers emerged as the hot buttons of a wide-ranging debate
between top premium-network executives at last week's National Show here on the state
of pay channels on cable television.

John Billock, president of Home Box Office's U.S.
Network Group, and Matthew Blank, chairman and CEO of Showtime Networks Inc., both
emphatically agreed at a session on premium services that cable's stagnant pay
numbers have been attributable to DBS' growth, which, both executives said, has
exceeded their expectations.

The executives praised the DBS companies' aggressive
marketing of premium networks and the channel space that they have made available for
multiplexed tiers, noting the high subscriber-growth rate and ratings that they have
experienced on the services.

"We've had our highest ratings in the
'noisiest' environment -- DBS," Billock said. "We're flourishing
in the 100-channel-plus environment."

Blank added that Showtime's DBS-penetration rate is
"two times that of cable."

The executives urged cable operators to emulate the DBS
competition, to add as many channels as they can and to market as aggressively as they

Blank noted that the DBS services launched as national
services, "and they knew that they were in the marketing business from day one."
He contrasted DBS' approach with that of cable operators, questioning whether their
commitment to marketing is there yet.

But the pay executives did praise cable's rollout of
digital tiers. Billock said digital capacity offered "tremendous upside" for
cable operators, and John Sie, chairman, president and CEO of Encore Media Group, called
it the industry's "killer application."

Sie -- who reported that Encore's internal research
showed that basic-only subscribers rent as many movies from video stores as premium
subscribers do -- said properly promoted digital tiers offered cable operators the
opportunity to win over a substantial number of video-store customers.

What's more, he added, digital tiers made it possible
for operators to "go on the offensive, instead of being defensive" against DBS
services, and to "win back pay customers."

But Blank was more skeptical, warning operators that they
need state-of-the-art marketing, as well as added channel capacity. Consumers, he said,
didn't really care much about "spectrum size."

The new product needs to be launched with the same kind of
aggressiveness demonstrated by DBS, he said, because consumers "like another guy down
the block coming in and giving them a choice and good service."

In fact, Blank said, Showtime had "dramatically higher
penetration in overbuild situations."

Sie also had cautionary advice for MSOs, asserting that
"promotional discounting" was killing the pay category.

Blank said competition may force operators to accept
"lower cash flow at the margin." He conceded that this possibility was
unappealing, but he warned that it was preferable to the alternative of losing customers

Billock said HBO found that the difference between mediocre
and above-average cable systems in the pay category was "consistent packaging and
pricing, day in and day out."