NEW YORK – One of the toughest challenges media executives face is deciding how to deal with people such as Kelly Cunningham.
The 30-year-old single mom, a sales manager at a portable fan company in Chicago, is content to watch just a few television channels, mostly local stations and cable news, on her 27-inch analog TV.
She's so satisfied with her budget cable service, at about $20 per month, that she was the lone "no" vote when her condominium recently took DirecTV's offer of 155 channels for $45 a month per home – if it served the entire building. (Related: Pay 99 cents and watch your show ad-free.)
Neighbors "thought I was from outer space, or living in the Dark Ages," says Cunningham. "But I don't need 10 versions of HBO and eight of Home Shopping Network."
What's wrong with that? Television companies face a bleak future if they can't persuade millions of customers to buy more or better programming, gear and services. Cable and satellite providers already serve 82% of all homes, and that's not expected to grow much in the foreseeable future.
While cable operators and others have made progress with extra-fee services, including digital cable and high-speed Internet, most of the buyers have been "early adopters" with the appetite and means to pay for the latest and greatest.
Now comes the hard part: to persuade people such as Cunningham, who find what they have good enough, to buy more. That may vex even the savviest marketer.
"Companies are pushing bigger packages, promoting digital, and not offering what consumers want most: fewer channels at a lower price," says Consumers Union's Gene Kimmelman.
To get an idea of the challenge companies face, consider this:
- Cable operators are going all out to sell extra-fee digital TV service, although only 3% of people who don't get it say they're "considering" buying it, according to a Horowitz Associates survey.
- Satellite's in a similar situation. Subscriber-acquisition costs already are up at DirecTV and EchoStar, and Horowitz finds that just 4% of non-subscribers are considering signing up for satellite.
"It's a case of 55 channels and nothing's on," says Stewart Wolpin of Points North Group, market analysts and consultants. More precisely, there's a lot on – the typical viewer receives 93 channels – but people spend 10 or more minutes a week on only 15 of them, Nielsen Media Research reports.
- The great mass of consumers aren't voting with their pocketbooks for more programming. Although premium channels such as HBO, Showtime and Starz/Encore have been around for decades, only about 42 million homes, or 36% of the country, get at least one, reports Kagan Media Research.
Betting on less for less
Figures like these have emboldened executives at a new company, U.S. Digital Television, to bet they can make a tidy profit by charging consumers less for a slimmed-down basket of programming.
The company will lease digital broadcast capacity from local TV stations and offer 30 channels – including local stations, ESPN, Fox News and The Disney Channel – over the air for about $20 a month.
"There are millions of homes that believe cable offers more than they want to watch, and they're looking for a low-cost alternative," says CEO Steve Lindsley. "This is a value proposition."
USDTV plans to announce before the holidays the cities where it will launch commercially. It got a $25.8 million investment in September from station groups including Fox, Hearst-Argyle and McGraw-Hill and has been testing in Salt Lake City, Albuquerque and Las Vegas.
The big players remain convinced, however, that eventually most people will pay more to get more. The cable industry spent $100 billion on upgrades in the past decade to offer services such as digital TV and high-speed Internet. Programmers seeking new revenue – including Disney, News Corp., Time Warner and Viacom – are beginning to funnel concerts, sports, news, kids' programming and even some traditional movies and TV shows to the Internet.
Those efforts will be for naught, however, unless most of the 67% of all homes now Internet-free or dependent upon slower dial-up connections pay to upgrade to high-speed, video-capable broadband.
Digital cable boom stalled
Digital cable got off to a strong start in the late 1990s: More than 40% of the industry's 63 million subscribers now pay an extra $12 or so a month for the service, which offers dozens of additional channels, an interactive on-screen program guide and video on demand.
But the boom is over. The penetration rate among subscribers will rise to only 47% by 2010, Morgan Stanley predicts.
"The natural level for digital has been achieved," says Leichtman Research Group President Bruce Leichtman. "Now they're pushing out the envelope."
The companies are pushing hard just to stay even: About 4% of digital cable customers drop the service each month, sometimes because they move but often because they don't see the value, says Kagan Research Senior Analyst Ian Olgeirson. By contrast, basic cable has a 2% monthly "churn" rate.
"I can't imagine that many operators expected their (digital) churn rates to remain this high," he says.
Still, operators are determined to forge ahead. The sooner they get digital decoders into people's homes, the sooner they can go all-digital and get rid of their analog transmissions. That would enable them to offer even more services; at least six digital channels fit into the bandwidth needed for one analog channel.
Bandwidth may be in even shorter supply after local TV stations go all digital. Cable operators have said they will offer analog and digital versions of those stations for five years after the federally mandated transition, which may come as early as the end of next year.
If they didn't, then 78% of the 172 million TV sets in subscriber homes – ones that are "cable-ready" analog sets or that are connected to analog cable decoders – wouldn't be able to receive programming from ABC, CBS, Fox, NBC and other broadcasters, according to the National Cable & Telecommunications Association.
Operators also see digital cable as a moneymaker. Consumers who pay the additional monthly subscription fee also are presented with opportunities to make impulse decisions to pay extra for VOD programming and games. And operators want to sell targeted ads: They can transmit different messages to different homes that have the digital decoders.
Sweetening the deal
Some companies have tried to snag fans of networks such as Sci-Fi and The Golf Channel by moving the channels from the basic package to the digital cable tier.
But now the emphasis is on sweetening their deals. Comcast, the largest operator, is bulking up on free programming for digital customers. In October it added 250 movies to the package, for a total of 800 at any time.
Time Warner, the No. 2 operator, expects to coax about two-thirds of its non-digital customers to sign up by folding digital cable into a package of services including phone and high-speed Internet.
"The remaining one-third tend to be the demographically older group, and they don't always have the most favorable impression of cable," says Chief Marketing Officer Sam Howe. "We have time to work with them, and many of them will move on."
Both cable giants also are experimenting with lower digital prices. Comcast is rolling out a digital service called "enhanced basic" that costs about $5 a month but offers fewer programming options than the standard digital package.
And Time Warner is testing a $5 digital offering in Akron, Ohio.
"This is not something we'd do everywhere," Howe says. "But it's an example of what we could do" in markets where consumers are feeling pinched.
Satellite pitches new gear
Unlike broadcast and cable, DirecTV and EchoStar's Dish Network already transmit digital signals to their customers.
Yet they also face cajoling subscribers into paying for big changes.
The problem: "They don't have the capacity to offer local station HDTV broadcasts with their current satellite fleet," says Sanford C. Bernstein's Craig Moffett.
Both plan to resolve that with technologies that enable them to bounce more HDTV signals off their satellites and, in some cases, use different satellites than the ones that handle current broadcasts.
The upshot is that many customers who want to watch local HDTV will need to get new receivers and dishes.
This winter EchoStar's Dish Network plans to offer its new receiver for local and new national HD channels. Pricing and other details will be announced later.
DirecTV already is selling in Detroit the new receivers and dishes consumers need for local HDTV. Beginning Nov. 25 it will offer the equipment in 11 other cities.
The receiver and dish cost about $200, but DirecTV is offering a 100% rebate once people activate programming on the new gear.
These are risky strategies: People often start comparison shopping when they have to make a new purchase. And people who want HDTV now tend to be big spenders.
So while all satellite subscribers eventually will have to get new equipment, "It will be gradual," says Satellite Business News Editor and Publisher Bob Scherman. "The real threat to all these companies is, you don't want to create an MCI, a Sprint or an AT&T where customers bounce around all the time."
