Premium Services Could Be Top Driver

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Chicago -- The cable industry could be returning to a
mid-1970s scenario, with premium services like Home Box Office representing the main
engine of growth, according to a panel discussion at the National Show here last week.

"I think we're going back to 1976, when [premium
services] were driving the business," Morgan Stanley Dean Witter & Co. principal
Rich Bilotti said. "Video-on-demand is a true killer application. If HBO comes out
with a version that is $15 to $18 [per month], and it's multiplexed, that's a
devastating product."

Bilotti expects Time Warner Inc., Cox Communications Inc.
and Comcast Corp. to roll out VOD services next year, taking advantage of the burgeoning
market. "These are all dogs that are going to start barking because they all want the
same dog food," he said.

But VOD isn't the only new service that could drive
growth. Cox senior vice president of development Dave Woodrow said his company is making
major inroads in residential telephony and digital services. Commercial telephony also
holds great promise for future revenue.

"Four years ago, we couldn't spell telephony,
digital or Internet," Woodrow said. "What we have is an incredibly robust
network and a huge presence in the marketplace. This is a fairly substantial paradigm
shift."

Woodrow added that there are about 400,000 businesses in
Cox markets, and "my mission is to go off and fully exploit what is happening in the
commercial world."

Cox is already seeing substantial growth in its residential
telephony market -- the company has eight digital switches serving roughly 40,000
subscribers, and revenue per customer is about $60 per month.

The MSO's average penetration rates for telephony are
about 20 percent of homes passed, with 40 percent-penetration of served nodes in Omaha,
Neb., Woodrow said.

Comcast Cable Communications president Steve Burke said
that while his company is rolling out other services -- it is a partner in Excite@Home,
and it has most-favored-terms status for a future telephony agreement with AT&T Corp.
-- digital television is top priority.

Burke added that Comcast has about 80,000 Comcast@Home
customers, and it is signing on an average of 1,500 new customers per week. But aside from
the image enhancement that being able to offer high-speed Internet brings, it is not a
moneymaker for the company yet, he said.

That will change, however, as new technology is introduced
-- like Data Over Cable Service Interface Specification modems and cable-ready personal
computers -- and the costs of providing service are lowered.

"We're getting it out as much to the early
adapters," Burke said. "We're going 55 to 60 miles per hour, but it's
going to get easier and the costs are going to come down. All of these things are breaking
in our direction. In 12 to 24 months, you will see us push on the accelerator and get a
little more aggressive with @Home."

Comcast, however, has been very aggressive with its
digital-television rollout. The company expects to have between 350,000 and 400,000
digital set-top boxes installed by the end of the year, which is ahead of what Wall
Streeters had projected.

Bilotti added that Wall Street's perception of the
cable business, and cable valuations, will be driven by how each company executes on its
respective advanced-services plan.

"If there's no technology risk and the regulatory
risk is pretty much controlled, the only variable that can muck up the business is
execution," Bilotti said. "Launching in two years is not good enough. It has to
be here and now."

But advanced services are not expected to make money for
cable operators for quite some time, given the substantial infrastructure investments
needed to make them available. Bilotti said this wouldn't be a problem as long as the
core cable business remains strong.

"Investors expect to see 12 percent to 13 percent
sustainable cash-flow growth," he said. "I understand what is being said about
losses, and investors are smarter than that: They won't react badly if operators
explain the losses clearly. But they have to see revenue growth -- proof that the top line
is growing."

He added, "If cable were to come in and investors
think they're only going to have 10 percent sustainable [cash-flow] growth, then
valuations would contract by 25 percent."

Bilotti appeared unconcerned about the recent U.S. District
Court ruling in Portland, Ore., upholding that city's right to require the local
cable system to open its high-speed Internet network to competition.

Although the ruling caused a substantial drop in the prices
of cable stocks, he did not believe it would last for long.

"Under some business models, [open access] works out
to be an advantage," Bilotti said. "The greatest thing [operators] do is basic
cable. There is a wealth of programming developed by different parties, and some of that
will happen with broadband. If multiple parties develop [high-speed Internet] content and
are willing to pay a fair price for access, that's fine."

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