Report: Digital Dings DBS

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Digital-cable service from the nation's major MSOs
poses a significant threat to direct-broadcast satellite, according to a recent survey.

Although "pricier" than DBS, digital programming
has improved cable's analog package, making it possible for some operators to match
— and occasionally beat — satellite offerings, a study by The Carmel Group said.

The survey's results were published in the latest
edition of DBS Investor.

"Digital cable is giving satellite a run for its
money," said Carmel Group chairman and CEO Jimmy Schaeffler. "It's
competitive with satellite, and that's coming from a satellite guy."

The study compared prices and content offered by the two
major DBS players, DirecTV Inc. and EchoStar Communications Corp., to offerings available
in small and large-sized markets served by AT&T Broadband & Internet Services,
Charter Communications Inc., Comcast Corp., Cox Communications Inc. and Time Warner Cable.

It divided their offerings into three tiers — basic,
medium and premium — and then factored in up-front charges related to obtaining the
service, such as equipment and installation costs.

In tier three, which looked at premium services reserved
for well-heeled consumers, satellite remained a strong competitor, delivering an average
of 132 channels compared to 116 channels on the digital-cable systems surveyed.

It was also on par with digital from a cost-per-channel
perspective, with both priced at 6 cents per channel.

DBS was the more expensive option in absolute dollars,
costing $882 a year in the second year of a tier-three subscription, or $59 a year more
than digital cable.

In tier two, DBS also posted strong numbers, with an
average annual cost of $350 compared with $431 for analog cable and $640 for digital
cable.

But digital cable won in terms of programming provided,
offering an average of 108 channels compared with 93 channels on satellite. Its price of 5
cents per channel was within hailing distance of satellite's 3 cents per-channel.

In tier one, satellite costs the first year averaged $175
for a dish and set-top box, plus another $100 for installation. That was $79 less than
digital cable during the first year of service.

Schaeffler said cable is obviously taking the DBS threat
seriously, based on per-channel cost figures, where operators are holding the line in
order to compete with satellite.

"Quite frankly, we were surprised," he said.
"We didn't think they would price it as competitively as they have."

Evidence that some cable operators "get it" is
shown in the way some are using their digital offerings to beat DBS at its own game, he
said.

For example, the survey showed that DirecTV's Total
Choice Platinum package sells for $80.99 a month, or $971.88 a year, not including $149
for hardware and $100 for installation.

In return, the subscriber receives 151 channels of
programming (120 video, including 32 movie channels and 31 music channels).

By comparison, Cox is marketing a $73.70-per-month combined
analog/digital package of 157 channels (117 video and 40 music) to its Phoenix customers.
That amounts to $884.40 a year, or almost $90 a year less than DirecTV. It includes an
installation cost of only $24.96.

Cox pulled out all the stops at its Aliso Viejo, Calif.,
system, where it is selling its 155-channel Digital TV Deluxe package for $45.94, or
$35.05 less than DirecTV and $18.04 below EchoStar's retail price.

Cox's digital push has resulted in some 200,000
subscribers signing up for the service since it was first introduced in Orange County,
California, in 1997. In some of the 14 markets where it's offering digital, 50
percent of new customers subscribe to the service, said Joe Rooney, vice president of
marketing.

"I don't see digital as a threat to DBS, as much
I see it as a win for the cable industry in keeping our best customers," Rooney said.
"We're getting closer to a level playing field. The best customer you have is
the customer you have today. And if they're paying you $40 a month, and you can
enhance their cable experience for $7 or $8 a month, you're going to make them
rethink why they should go anywhere else."

Still, Schaeffler said Cox has created the model of the
future in Phoenix and Aliso Viejo.

"It's going to be digital's way of saying,
We want you for a customer. And we're going to give you a great deal to keep you from
going over to satellite," he said.

Predictably, members of the DBS industry were ready to
shoot holes in the theory that cable's digital offering posed a threat to their
livelihood.

At DirecTV, vice president of business development and
strategic planning Teresa Ferguson noted that 70 percent of the company's new
subscribers in 1999 were former cable customers who either disconnected or downgraded
their service.

She theorized that digital cable would not be enough to
keep some subscribers on the books, since it's still only a supplement to an
operator's traditional basic and expanded-basic analog offerings.

"With satellite, you can get everything under the sun,
and it's digital," Ferguson said. "If they want to compete with DBS,
they're going to have to provide all-digital cable. And that's something that
cable hasn't even promised yet, let alone offered."

Ferguson also said that digital cable is constrained by its
limited availability and an "analog legacy" that requires customers to subscribe
to basic and expanded packages before they can add digital service.

"Cable is a tiered world where you have to have their
highest (analog) tiers before you're allowed to move up to the next step," she
said.

Ferguson expects that newly signed satellite legislation,
which allows satellite operators to blanket the nation's 50 largest markets with
local programming, will put even more distance between DBS and cable operators.

More importantly, she said, those markets will represent 50
percent of all U.S. television households.

EchoStar spokesman Mark Lumpkin agreed that
quality-conscious consumers would still prefer DBS' all-digital package to a
combination of analog and digital programming.

"They're going to prefer a 100 percent digital
cable product, rather than the 60-40 percent split which is typical with cable,"
Lumpkin said. "So, from our point of view, the more they see of digital cable, the
more they're going to want to shift to satellite."

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