Digital cable packages are tough sell

Rollout pace slackens earlier than expected

NEW YORK — The cable industry is being driven up the wall by all those customers who either turn up their nose at new programming services or buy them for two or three months and then get rid of them.

The pied pipers of cable became convinced a couple of years ago that dozens of pay-per-view movies and batches of HBO, Showtime and Starz multiplex channels would act like a powerful drug on subscribers. The cable operators would mesmerize their subscribers into happily shelling out extra bucks for the advanced, digital set-top boxes that would funnel these services into living rooms across America.

OK, so some people are indeed signing up for the new boxes. But “the pace of digital rollouts is slowing dramatically for most cable operators,” says a recent report from Merrill Lynch, reflecting the opinion of a number of industry analysts.

Tom Wolzien, a media analyst for Sanford Bernstein & Co., says that even when a cable system does get people to buy the boxes, a startling 60% of the buyers cancel within the year.

“It’s all of those get-three-months-free special offers that are causing at least some of the churn,” says Jim Stroud, senior analyst for The Carmel Group. When the bills start arriving in month four, he continues, people who’ve splurged on pay-per-view movies and events “wind up with an advanced case of sticker shock.”

For the subscribers who don’t buy the boxes in the first place, Wolzien places some of the blame at the door of operators who balk at laying out the money required to market and advertise the new services.

These are the same operators who have continued to gouge their customers by hiking the basic rates an average of 36% in the past five years while the overall cost of living was going up about 13%.

Stroud says these bloated increases make it easy for some operators “to divert their attention from rolling out the digital boxes.” The attitude is: Why wait for fresh revenue streams to flow from digital rollouts at some future date when you can simply jack up existing rates and watch the money pour in right away.

But that attitude has also allowed the satellite distributors DirecTV and EchoStar to continue their successful assault on cable, signing up more digital subscribers in an average month than the entire cable industry chalks up in a full year, Stroud says.

The biggest cable operators, fully aware of their satellite competitors, have not fallen asleep in their quest to extract more money from subscribers by selling them new services, says Michael J. Wolf, head of global media for McKinsey & Co.

And mergers among cable operators over the next couple of years, Wolf says, will “give these companies deeper pockets from which to pull more dollars to market the new technologies to their subscribers.”

According to Wolf, large operators like Charter, Cox, Adelphia and Cablevision Systems are likely candidates for merger because they’ve become dwarfed by the Comcast buyout of AT&T (a linkup now under regulatory scrutiny) and by Time Warner Cable. Comcast/AT&T will control more than 22 million subscribers and TW has about 13 million, whereas Charter, Cox and Adelphia are between 5 and 6 million and Cablevision reaches about 3 million.

The big operators are rebuilding their cable systems at a rapid pace, opening their doors to cable network entrepreneurs like MTV’s Tom Freston and USA’s Barry Diller to supply them with more basic-cable network spinoffs of existing channels.

MTV Networks has just come up with four more clones — MTV Hits, MTV Jams, Nicktoons TV and VH1 Mega Hits — and USA is planning a hard-edged male-oriented network modeled on Maxim magazine and a 24-hour music channel.

One of the goals of these networks is to give operators more selling points than PPV movies and multiplexed pay channels to pull subscribers into signing up for digital cable.

But, Stroud says, unless the overall economy climbs out of the doldrums, all these digital-cable strategies may come to naught.

“If people don’t have enough money to pay their monthly bills,” he says, “digital cable is not going to take off.”

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