HDTV: HD's Quiet Revolution

Cable World, Oct 23, 2006

It's not whole hog yet, but cable operators are embracing HD in a way they haven't before. By M.C. Antil, CableWorld Magazine

Things have changed. With the perception that HD sets are flying off shelves and will be in 75% of homes by 2010, many operators are reconsidering HD's role. Bruce Leichtman of Leichtman Research Group says of cable's former wait-and-see attitude, "Many operators have started to realize that's a bad strategy."

In the opinion of some, high-definition television is moving so rapidly into mainstream consumer consciousness that it's only a matter of time before HD becomes for operators like a college diploma or good personal hygiene--having it won't necessarily open many doors, but not having it will kill you.

"The joke internally used to be, 'How many spots on a bug do you really need to see?' a former Adelphia exec says. "But over the past couple of years we developed a respect for HD and its potential as a core component of our video product."

But while cable operators have become more bullish on HD, cable continues to find itself in a dilemma, whose parameters are encapsulated in the thinking of Suddenlink SVP of programming Patty McCaskill. Suddenlink has long been a believer in HD, but balks at its strategic challenges. "We're wrestling with it like everyone else," McCaskill says. "Sure, it's a bandwidth hog. But by the same token, if you have HD at home, as I do, you become a big believer in it."

The issue for McCaskill, like many cable operators who cite the age-old chicken-and-egg analogy, is how to justify that much bandwidth allocation when you're hard-pressed to name more than two dozen quality HD channels.

"We've been very careful about launching HD channels because we want to make sure we're only rolling out quality content," McCaskill says. "Something that will add value to our lineup and not just something that gets launched because it happens to be in high definition."

LEICHTMAN: HD USERS ARE HIGH-END CUSTOMERS

Besides strong retail sales, a major driver of HD's surge among cable MSOs is the makeup of the typical HD customer. MSOs realize that the highest-end customers--those most likely to use VOD and DVRs, and the best targets for cable's bundle of voice, video and high-speed data--are the same consumers demanding more and better HD channels.

"They've realized that the HD customer is the highest of high-end customers, and they need to lock those people up now," researcher Leichtman says of cable operators.

Leichtman's been tracking HD for four years. Among his 2006 findings were that HD penetration is indeed income-based. Just 6% of households with an annual income of less than $30,000 have an HD set. In households with an annual income of over $75,000, penetration jumps to 32% (see chart, below).

A HI-DEF DIVIDE

Interestingly, Leichtman rejects the popular belief that HD well be in more than 75% of households by the decade's end. In fact, he calls such penetration projections "ludicrous." As the rise in gated communities in America signifies a widening class divide, so too is the country beginning to witness a technological divide. "To hear the Consumer Electronics Association tell it, there are millions of HD sets being sold in America--though even they've started to back off their numbers," Leichtman says. "But what they and others don't seem to understand is that a lot of those sets are being purchased by existing HD users, who are going back for a second or third set. My sense is by the end of the decade--or even by the end of the year--there are not going to be nearly as many households out there with HD as some people claim," he says.

A DIGITAL DILEMMA ALL OVER AGAIN?

What is clear to Leichtman and others, however, is that HD penetration in the market's most desirable homes is on the rise. That's why the challenge to operators is only partly technical, Suddenlink's McCaskill says. The war being waged with DBS is one of public perception, and the battleground is not so much a system's head-end or its network control center as it is the hearts and minds of the American consumer.

McCaskill claims DBS got ahead of cable and presented itself as a superior platform for digital television, a positioning that cost cable many of its best customers. Some MSOs now are only starting to recover. The same scenario could play out with HD. "We have to be cognizant of the fact that DBS-- especially Dish Network--has more content than we do. Now, it may not all be valuable or quality content, but the perception is that they have more content. We have to be careful not to let DBS preempt our messages and have the cycle repeat itself, like it did in digital."

FEBRUARY 2009: HOLD THAT DATE

The waiting game is key, however. For many MSOs, the percolating demand for HD is one they hope they can ride out until February 2009, when the digital standard adopted by the FCC becomes law and they will no longer be forced to simulcast analog and digital signals of the same networks. At that time considerable bandwidth will be freed, making an extensive lineup of HD signals a far more practical consideration. Until then, many hope to build a temporary bridge through bandwidth reallocation, HD VOD and other measures.