The rollout of advanced video services is boosting the competitive pressures on cable and satellite TV providers.

The advanced services feature enticing high-definition television (HDTV) and digital video recorder (DVR) capabilities. Next-generation services are attracting customers to multi-channel video providers, and both satellite and cable industry representatives are touting their strengths in delivering these services.

The prize will be high-end customers who are more loyal and are willing to pay a premium for the best service (see story, pp. 4-5). However, cable and satellite TV service providers are adopting different business models as they introduce the new set-top boxes and other equipment needed to provide advanced services coveted by customers in the most lucrative markets.

Set-top boxes (STBs) are becoming the “data central” of the new networked home, said Jimmy Schaeffler, a satellite broadcasting consultant who heads The Carmel Group in Carmel- by-the-Sea, Calif. The most advanced STBs offer attractive content, such as vivid HDTV and DVRs that allow subscribers to watch recorded shows at their convenience.

Next-generation STBs have the potential to replace personal computers in homes, Schaeffler said. Neither the cable operators nor their satellite TV competitors want to be left behind in the race for higher subscription fees.

Scientific-Atlanta [NYSE: SFA] is one of the cable industry’s largest STB providers for advanced television services in North America. Scientific Atlanta networks enable approximately 66 percent of all of the HDTV cable markets and 57 percent of the video-on-demand (VOD) cable networks. With roughly 65 percent of the company’s revenues coming from cable TV subscriber products, Scientific-Atlanta wants to hold a leading position in offering the latest multi-channel video technology, said Jenifer Cistola, vice president of product marketing.

“We’ve always sought to lead the cable industry by providing the advanced products that are required to enable advanced services,” Cistola said. “The set-top box is just one piece of what enables advanced services. The entire two-way network is the key.”

Satellite TV providers do not offer a two-way service and cannot match cable’s capabilities, Cistola said. Without a two-way network in place, real-time video-on-demand cannot be supported.

“All the digital networks we have deployed are designed for two-way interaction,” Cistola said. “In my mind, there is no question that cable’s two-way capabilities give it the ability to offer the most advanced technical solutions to enable entertainment services in the home.”

VOD is important because it allows a consumer to order, pause, fast forward and rewind premium programming, Cistola said. “Most cable operators are offering video on demand already,” he said. “The nice thing is VOD works on any Scientific-Atlanta digital set-top box.”

Dueling DVRs

Another advanced-services battle is brewing between satellite and cable in the area of DVR services. Scientific-Atlanta shipped its first DVRs last summer; one of the lead customers is Time Warner Cable, a unit of AOL Time Warner [NYSE: AOL]. Scientific-Atlanta is seeing increased demand for STBs equipped with either DVR or HDTV capability, Cistola said.

Scientific-Atlanta’s DVR product is the Explorer 8000. Cable companies have been buying those units and offering them to customers at monthly fees of no more than their standard digital box rental fee, typically around $4.95 a month, Cistola said. Operators are charging between $4.95 and $9.95 a month for the DVR service. The first month of service often is provided free, she added.

“The name of the game is to get these DVR boxes in people’s homes,” Cistola said. The power of DVRs to change the viewing habits of consumers cannot be fully appreciated until someone tries the service, she added.

Thus far, Scientific-Atlanta has shipped more than 230,000 Explorer 8000s to cable operators who then lease the box to their customers.

Satellite TV providers sell DVR units to consumers for hundreds of dollars each. The leasing model used by cable operators helps to lower the barrier to entry into consumers’ homes.

“It is easier to place an Explorer 8000 in an existing digital cable subscriber’s home,” Cistola said. “In many cases, operators are shipping Explorer 8000s directly to consumers because the self-install is so simple.”

The cable industry has been trying to keep up with the advanced-services innovations, while seeking to avoid missteps.

Satellite television providers argue that consumers like the advanced services they offer. Proof comes in the form of subscriber growth, whereas many cable operators are suffering the net loss of customers, they note.

Bob Marsocci, director of communication at DirecTV, said his company’s combined DirecTV-TiVo DVR system now is priced at $200 or less, down from $400 when the product was introduced. The monthly subscription price for the service also was cut from $10 to $4.99, he added.

New satellite STBs that offer DirecTV-TiVo and HDTV will be available later this year, he said. The expectation is that DirecTV, a unit of Hughes Electronics [NYSE: GMH], will amass 1 million DVR customers by year-end, compared to between 300,000 and 400,000 now.

Marc Lumpkin, a spokesman for EchoStar Communications [Nasdaq: SPOT], said his company’s DVR units were used by 500,000 customers last year and it anticipates becoming the first multi-channel video services provider to hit the 1 million customer mark.

EchoStar already sells a HDTV satellite receiver for $499 and a DVR, named DISH PVR 508, for $299. Unlike DirecTV, EchoStar offers consumers the option of leasing DVRs for a monthly rental of $5. It also does not charge a monthly recording fee for to those who opt to buy a unit.

By late summer or early fall, EchoStar will introduce a DVR that offers HDTV and records up to 180 hours of standard definition or 25 hours of HDTV programming, Lumpkin added.

–Paul Dykewicz

(Jenifer Cistola, Scientific-Atlanta, 770/236-5151; Jimmy Schaeffler, The Carmel Group, 831/643-2222; Bob Marsocci, DirecTV, 310/662-9986)