Rainbow DBS Chases HDTV Trend

Jericho, N.Y.-based Rainbow DBS, the direct broadcast satellite (DBS) venture of Bethpage, New York-based Cablevision Systems [NYSE: CVC], revealed last week that its fledgling service envisions high-definition television (HDTV) and other premium programming as its proverbial “pot of gold.”

But the DBS venture is considered high risk by Wall Street analysts because it is attempting to enter a satellite TV market already dominated by two established service providers – Hughes Electronics’ [NYSE: GMH] DirecTV unit and EchoStar Communications [Nasdaq: DISH]. However, Rainbow DBS’ belated entrance into the market allows the startup to tap new technology and transition to compression-friendly MPEG-4 next year. A big plus is that the Motorola-built [NYSE: MOT] set-top box receiver that will be used by consumers when the service begins Oct. 15 will not need to be replaced when the system’s initial MPEG-2 technology is upgraded to MPEG-4 in fourth quarter 2004, company officials said.

Rainbow DBS’ capacity will roughly double to more than 200 channels, including at least 39 HDTV signals, when the transition to MPEG-4 technology occurs. Those 39 HDTV channels also will be available to subscribers of Rainbow DBS’ new VOOM service when it launches this month.

Cablevision’s programming unit Rainbow Media will provide 21 of those HDTV channels. To date, rival U.S. satellite and cable services have offered no more than seven HDTV channels, company officials said.

“Almost 6 million consumers have bought HDTV sets and other home theater equipment, only to find that the high-definition programming they are looking for simply doesn’t exist,” said Mickey Alpert, a satellite TV entrepreneur who was named Rainbow DBS’ senior executive vice president and chief operating officer. Rainbow DBS plans to fill that gap by launching its own package of HDTV channels built around the interests of high-end consumers, while pulling together additional HDTV programming from other sources. Aside from the HDTV channels, an additional 88 standard-definition channels will be offered when the service rolls out this month, he added.

The company also would offer an assortment of other channels through premium packages and local digital over-the-air programming, Alpert said. The new service may serve as a stimulus to those who are interested in buying HDTV sets, but are waiting for the content, he added.

The optimism of Alpert, who will report directly to Cablevision Chairman Charles F. Dolan, is not fully shared by Wall Street and industry analysts.

Thomas Eagan, a subscription TV analyst on Wall Street with Oppenheimer, mentioned in a Sept. 29 research report that he does not have high hopes for Rainbow DBS. His reasons include:

• Increased satellite TV competition in 2004 from several large cable operators, such as Adelphia [PNK: ADELQ], Charter [Nasdaq: CHTR] and Comcast [Nasdaq: CMCSK];
• Consumer equipment that is expected to cost more than $700, at least $200 above the current $499 charged by DirecTV for its HDTV unit;
• Rainbow DBS’ satellite, which doesn’t have full continental U.S. (CONUS) coverage, possibly resulting in a weak or non-existent signal on the West Coast.

Rainbow DBS officials are expected to offer technical solutions that would allow people in that part of the country to use the new service. However, the company provided no such details last week.

Tom Watts, a satellite analyst with SG Cowen, anticipates strong HDTV growth. The big challenge for Rainbow DBS is to become one of the companies that will prosper from this trend.

With an estimated 42 million U.S. TV households expected to have HDTV capability by 2007, the VOOM service that Rainbow DBS plans to offer could find a large market, despite high initial prices, Watts told his clients in a Sept. 26 research note.

VOOM also should be helped as the availability of HDTV programming expands and the federal government’s 2007 deadline for phasing out analog TV approaches, Watts explained.

While Rainbow DBS’ VOOM service would offer the most extensive HDTV programming available from any provider, its standard-definition cable channels would give subscribers a “narrower set” of choices, Watts said. Mainstream cable channels, such as CNN and ESPN, are likely to be among those offered, limiting the opportunity for VOOM to differentiate itself from rivals DirecTV and EchoStar, he added.

In addition, DirecTV recently committed to offering 200 to 300 national HDTV channels, plus local signals to all 210 designated metropolitan areas (DMAs) at a cost of more than $1 billion, Watts told his clients.

Consumers should benefit from a new entrant in the market, since the heightened competition is likely to spur DirecTV and EchoStar to add HDTV channels to their existing lineups faster than planned, Watts wrote.

D.K. Sachdev, a satellite engineer who heads the Vienna, Va.-based SpaceTel Consultancy, said Rainbow DBS’ plan to spearhead the U.S. rollout of HDTV services supports a belief shared by many that such programming could become a growth engine for the satellite industry (SN, Sept. 29).

“Cablevision has obviously a well-thought out strategy and may be [able] to compensate for the disadvantages encountered by a late entrant in the marketplace,” Sachdev said. “The ability of the consumer equipment to upgrade from MPEG-2 to MPEG-4 without replacement responds to the long-recognized issue of compression technique obsolescence during the lifetime of television and radio broadcasting satellites. And of course, the selection of highly experienced Mickey Alpert to head this venture is an excellent choice since he brings to his job first-hand knowledge of strategy, system and marketing aspects of DBS.”

Alpert previously headed his own Washington, D.C.-based consulting firm, Alpert & Associates, where he focused on the communications and entertainment industries. He catered to a clientele of major U.S. and Canadian DBS companies. Alpert also previously served as a senior officer of Comsat, where he spearheaded the development of the first U.S. DBS initiative.

Steve Blum, a satellite-broadcasting consultant who heads Marina, Calif.-based Tellus Venture Associates, said that “exclusive programming” would be the key to success for Rainbow DBS.

“If it can offer compelling programming that can’t be found elsewhere, it can draw in new subscribers who haven’t been attracted by EchoStar’s or DirecTV’s offerings, as well as appeal to existing DBS subscribers,” Blum said. “Rainbow is in a position to create and deliver exclusive, high definition programming including, potentially, localized content that will be completely unlike the choices currently available to most Americans.”

Steve Effros, a Fairfax, Va.-based cable industry consultant who heads Effros Communications, said too few details are known about Rainbow DBS’ plans to assess whether its HDTV-focused business might become a financial success.

“There’s no question that HDTV services will be of interest to a segment of the viewing audience, but that segment is very small right now and not likely to reach ‘mass market’ significance for several years,” Effros said. “By then, lots of HDTV is going to be offered in many different ways.”

–Paul Dykewicz

(Kim Kerns, Cablevision, 516-803-2351; Thomas Eagan, Oppenheimer, 212/668-5769; Tom Watts, SG Cowen, 212/278-4260; D.K. Sachdev, SpaceTel Consultancy, 703/757-5880; Steve Blum, Tellus Venture Associates, 831/582-0700; Steve Effros, Effros Communications, 703/631-2099)