Armed with $25.8 million from several major broadcasters, U.S. Digital Television Inc. said it will launch by year-end a service that will wirelessly deliver 30 channels of programming to subscribers in several markets across the country, including one of the 10 largest cities.
“We’ve now been enabled to go forward with what our vision has been, and that is to gain a foothold in the cable-TV business,” said USDTV CEO Steve Lindsley.
The backers include Fox Television Stations, Hearst-Argyle Television, McGraw-Hill Broadcasting, LIN TV, Morgan-Murphy Stations and Telcom DTV LLC.
The USDTV channels will be transmitted on the same swatch of bandwidth that Congress is turning over to local broadcasters to use for the delivery of new, free digital-television channels when they are forced to abandon the spectrum they now use for their conventional broadcast signals.
That prompted one public-interest group, the Consumer Federation of America, to contend that the broadcasters are undercutting their argument that any free channels they are planning for the new digital spectrum must be carried by cable system operators. The investment and rollout show that the broadcasters have alternate uses for that spectrum that they believe are economically viable, said CFA research director Mark Cooper.
The broadcasters’ plan to use the spectrum to deliver pay-television services is “just another reason not to give [TV stations] must-carry” rights for the “multicasting” services they say they will be rolling out for free, he said.
HAS 'CREDIBILITY’ NOW
Fox and the other broadcaster are buying a majority stake and controlling interest in USDTV, a $19.95-a-month digital wireless service that’s now being tested in Salt Lake City, Utah; Albuquerque, N.M.; and Las Vegas.
The company’s digital service includes 12 cable networks — including popular offerings like ESPN and Disney Channel.
“This investment gives us the credibility and the legitimacy now to go forward in a very meaningful way,” Lindsley said.
USDTV will have the money to rev up in terms of rolling out and marketing its service, according to Lindsley. For the past year, USDTV was forced to stop selling its service to new subscribers as it tried to find additional funding.
“We will fully commercially deploy markets, and announce new markets and deploy them, this year,” Lindsley said.
USDTV’s target customers are price-sensitive “cable nevers,” an estimated 21 million homes, plus cable and direct-broadcast satellite providers who don’t want to pay $70 anymore for those services.
“It’s been our belief, and it continues to be supported by our test markets, that there are potentially millions of homes across America that are essentially overserved by the incumbent TV providers,” he said. “They are saying they don’t want to pay for hundreds of channels they don’t watch.”
CASH FOR SERVICE UPGRADES
USDTV will also use its new financing not only for the commercial rollout but also to upgrade its offering, adding features like video on demand and digital video recording.
“Are they [USDTV] going to be a dominant supplier? No, but what I think they’re doing is they’ve created a product that will appeal to the low-end multichannel video niche … and will also attempt to cannibalize the low end of the cable spectrum, people who maybe are paying that 45 bucks but really don’t want to,” said Mike Goodman, a media analyst with The Yankee Group, who said 15% of the market today doesn’t have multichannel video.
The USDTV service, which debuted in March 2004, at present has only 4,500 to 5,000 subscribers.
USDTV leases digital spectrum from three to six TV stations, per market, in order to broadcast its service. That gives local broadcasters a new revenue stream.
USDTV subscribers receive the service through an antenna connected to a proprietary set-top, for which they pay $20. It can be purchased from USDTV or from retailers such as Wal-Mart.
Lindsley declined to specify exactly what percentage of USDTV his new broadcast investors will own. He was also circumspect about which large market he plans to roll into this year, saying those details will be released in the next few weeks.
“We’ve tested now three regional markets and each of these markets are smaller to midsized markets,” Lindsley said. “Our desire is to launch a major market. So this will be a Top 10 DMA that we will launch.”
Since USDTV has also been selling its digital set-tops at Wal-Mart stores, the locations where the service is commercially deployed will be areas where that retailer has a strong presence, he said.
The timing of the broadcasters taking control of USDTV wasn’t very good, according to media lobbyists in Washington, D.C., who asked not be quoted by name.
In recent months, the National Association of Broadcasters has been telling Congress that because digital technology allows a TV station to beam up to five or six free programming services, cable operators should be required to carry all of them. Current law requires carriage of just one service.
But the USDTV investment suggests some NAB members plan to use their excess digital capacity for pay services, undermining the trade group’s message that free multicast services were the wave of the future.
NAB spokesman Dennis Wharton declined to comment.
USDTV has been neutral on the issue of digital must-carry obligations, and Lindsley said he believes his business plan will succeed with or without must-carry. USDTV just gives broadcasters another option for their digital spectrum — in addition to HDTV, for example, he said.
USDTV provides broadcasters with a much needed new revenue stream, LIN TV chairman and CEO Gary Chapman said.
“We have, as a company, some $82 million of stranded capital,” he said, referring to LIN’s investment to upgrade for digital. “And of course, there is no revenue. This was the only plan that I ever saw that would help us monetize that investment.”
Broadcasters will get a per-subscriber fee and a stake in any pay-per-view revenue rom USDTV, according to Chapman.
“We are providing a service that is not provided in America, and that is a low-cost alternative,” he said. “You buy a box for $20, you get those 12 channels, which are really the most popular ones … and all the digital television stations in the markets. You get all that for $19.95. Nobody offers that value proposition.”
While the multicast must-carry issue was boiling at the Federal Communications Commission a year ago, Hearst-Argyle executive vice president Terry Macklin urged the agency to require multicast must-carry, claiming the mandate would help NBC affiliates roll out a new weather service.
One broadcasting source said the USDTV investment wouldn’t hurt NAB’s multicast must-carry lobbying because “I didn’t think they are going to get multicast must-carry no matter how hard they try.”
Fox’s involvement struck some as odd because it pits News Corp.’s TV stations against satellite-TV provider DirecTV Inc., in which the media giant has a controlling interest.
Jimmy Schaeffler, a media analyst with the Carmel Group, said it appeared News Corp. chairman Rupert Murdoch was simply spreading his bets.
“I guess what it says is that Rupert is putting more oars in the water, and if one oar fails or doesn’t dig deep enough, then he’s got another one that can stand in for it,” Schaeffler said. “I think it’s a very smart strategy. It just kind of hurts the DirecTV guys.”
Fox TV Stations couldn’t be reached for comment, but Lindsley contended USDTV isn’t really targeting DirecTV’s high-end customers.
DirecTV spokesman Bob Marsocci said he wasn’t familiar with USDTV.
“We feel we can continue to compete strongly against cable or any emerging service,” Marsocci said, adding, “I can’t speak for News Corp., but they are obviously firmly committed to DirecTV.”
By losing automatic access to cable, TV stations would need to find alternative uses for the digital spectrum, the Consumer Federation’s Cooper said, adding that USDTV is poised to inject more competition into the cable-dominated pay-TV distribution market.
But the incumbent cable operators in Las Vegas and Salt Lake City, Cox Communications Inc. and Comcast Corp., respectively, haven’t been overwhelmed by USDTV’s threat in those pilot markets.
“We haven’t seen any significant consumer defection to that service,” Cox spokesman David Grabert said. “Of course, we continue to take all sources of competition very seriously, but so far they haven’t really impacted us with much significance.”
Utah is a highly competitive market, penetrated by DBS and home to several overbuilders, according to Ray Child, Comcast’s spokesman in Utah.
“The way we look at it, competition keeps us on our toes and as a result, it makes us better,” he said. “We don’t think of one competitor over another. We’re aware of all our competitors, but we feel that by offering the best products and services we can and the best value we can, our customers will be the winners and they’ll choose to stay with us and choose to come to us.”
OPS COUNTER WITH VoIP
Both Cox and Comcast will be rolling out Voice-over-Internet protocol, or VoIP, phone service in Utah and Las Vegas, which will become part of a bundle that could help convince subscribers to stick with cable, according to the spokesmen for both MSOs.
Broadcaster Emmis Communications Corp. proposed creating a wireless-cable service similar to USDTV more than a year ago. But that plan is “on the back burner” now that the company is selling its TV stations, an Emmis spokeswoman said.
When TV stations venture into the pay-TV field, they’ll need to become acquainted with new regulations. Under federal rules, TV stations that derive subscription revenue from their DTV spectrum are required to contribute 5% of revenue to the U.S. Treasury.