By Jimmy Schaeffler

A battle is brewing over which multi-channel video services provider can best deliver high-definition TV (HDTV). The competition involves virtually every U.S.-based satellite and cable TV operator. The outcome will affect market share, revenues and profits.

The stakes are enormous. Sales of HDTV set-tops, tuners and TV sets could total billions of dollars. Much of the consumer spending will go to buy high-end equipment at marked- up retail prices. Expect many additional cable operators and broadcasters to join the fray, especially as they each begin to offer digital rather than analog local signals.

Key Questions?

Uncertainties are plentiful on the HDTV battlefield. Which operators will be best positioned to manage bandwidth to carry all or most of the signals at a profit? Will operators be forced by the U.S. government to carry all local digital signals, including weak independent stations, in a new version of “must carry”? If yes, will operators in cable and satellite be able to do so without sacrificing the carriage of other channels? If tradeoffs are necessary, are technical solutions coming to accommodate the growing demand for HDTV? Will one set of operators and infrastructure have an advantage over the other and how will that affect consumer electronics (CE) sales?

Satellite’s Signals

U.S. direct broadcast satellite (DBS) service providers El Segundo, Calif.-based DirecTV and Littleton, Colo.-based EchoStar Communications [Nasdaq: DISH] are pursuing HDTV’s deployment aggressively. In fact, both are taking aim at rival cable systems. The satellite TV providers claim they are “leaders” in HDTV service. As the self- proclaimed HDTV leaders, these small-dish satellite operators are gaining a significant strategic advantage over their cable competitors. The result is that new multi-channel video service subscribers choose satellite over cable. Subscribers of advanced video services generate higher monthly revenue streams than the norm. With big bucks at stake, there is no doubt why both DirecTV and EchoStar have been plunging into the HDTV arena.

Cable’s Competence

Cable is starting to respond by aggressively deploying its HDTV solutions. Clearly, cable cannot afford to lose more customers to EchoStar and DirecTV. Moreover, cable cannot afford to lose what are typically higher-end, higher-paying customers. Although cable operators are no longer required by government mandate to begin selling their new digital set-top boxes (STBs) via retail outlets, they know the significance of digital and HDTV, as has been shown recently in their agreement to offer cable-ready TV sets through retail outlets. Yet if cable and the retailers that support it are not prepared to deploy digital cable equipment for HDTV, EchoStar and DirecTV will fill the void. The typical two-way digital cable system has greater bandwidth to carry HDTV signals than its satellite TV competitor.

Specific Satellite Services

For DirecTV, the HDTV opportunity is similar to the one presented by TiVo. HDTV offers a chance to obtain “sticky” customers who will stay with DirecTV. Stephanie Campbell, DirecTV’s senior vice president of programming, said her company has “teams” of staff people working on spectrum, bandwidth, dish combinations, satellite combinations, and similar issues to maximize the growth opportunities of HDTV. DirecTV today delivers several HDTV national signals, but has not yet been able to offer local HDTV signals. DirecTV’s current line-up of national HDTV comprises HDNet, HBO, Showtime, and a pay-per-view (PPV) HDTV movie channel.

For EchoStar, HDTV means the delivery of CBS local signals in 17 markets, and four national HDTV services (i.e., HBO, Showtime, Discovery Theatre, and a PPV movie channel). EchoStar also unveiled a prototype HDTV set of its own at the 2003 Consumer Electronics Show. However, that product is not yet priced or available at retail. Similar to rival DirecTV, EchoStar is hoping to drive the future demand for HDTV by offering HDTV sets, set-top boxes (STBs) and HDTV-compatible DVRs. EchoStar also recently offered The Masters golf tournament, the NCAA March Madness college basketball tournament and the NBA professional basketball play-offs in HDTV format at no additional charge to subscribers. The EchoStar Model 6000, an HDTV STB with two satellite dishes, is priced at $699, and EchoStar’s off-air HDTV tuner for terrestrial delivery of local signals is sold for $149.

Two-tiered Cable Carriage?

For the cable industry, HDTV means different things to different companies. Most cable companies that are members of the National Cable Telecommunications Association (NCTA) are pursuing HDTV with zeal, despite its costs and questionable return on investment (ROI). NCTA multiple-system operators (MSOs) typically have bigger, deeper pockets. They can carry HDTV to 45 million (or 40 percent) of U.S. television households (TVHHs). Specifically, NCTA members carry HDTV to a total of 103 U.S. TV markets. Among the nation’s 100- plus TV markets, NCTA members say that they provide HDTV to 73 of them. Despite this seemingly rosy HDTV rollout by the bigger cable operators, their carriage of local digital signals remains relatively small in number and percentage. This is due to technical and financial concerns, such as bandwidth management, that are shared by satellite operators.

The small cable operators, largely represented by the American Cable Association (ACA) and National Cable Television Cooperative (NCTC), have been slow to provide digital and HDTV to their 8 million or so subscribers. These companies have difficulty spending what can be several thousands of dollars per subscriber on upgrades from analog to digital and HDTV. To accommodate these concerns, rural members of the ACA and NCTC are seeking relief for the “one size fits all” mandates of the government for cable operators to upgrade to digital. They are asking for permission to wait until more consumers want HDTV, costs fall, and more programming is available. Also, for most ACA/NCTC members, the local digital signals required to carry HDTV are not yet available for retransmission.

Summing Up

The early lead in the HDTV race has been taken by satellite providers. That is because they offer unique HDTV programming on a national basis and are the only ones doing so. Despite the early lead, satellite may lose ground to cable later, particularly if cable follows through with the HDTV deployment and marketing. If that happens, cable eventually may win the HDTV race.

Jimmy Schaeffler researches, analyzes and writes this monthly report. He is a subscription TV analyst at The Carmel Group, a publisher of industry databooks and the monthly newsletters DBS Investor and Satellite Radio Investor. and a consultancy based in Carmel-by-the-Sea, CA (http://www.carmelgroup.com). The company specializes in telecommunications (e.g., cable, satellite, broadcast and wireless), as well as computers and the media. He can be reached by e-mail, jimmy@carmelgroup.com, or by telephone, 831/643 2222.