Is it prime time for HDTV? Operators begin to see potential windfall, but bandwidth and revenue issues persist

Cable World, Feb 25, 2002 by Staci D. Kramer, Shirley Brady, K.C. Neel, Richard Cole, Andrea Figler

What if the cable industry took the initiative in delivery of high-definition television and made it available to consumers ahead of the curve instead of waiting for some arbitrary level of demand? Cut deals with PBS to show sincerity? Grabbed an advantage from DBS? Moved high-definition cable programming beyond the premium channel? Listened hard to FCC Chairman Michael Powell's suggestions in public and private that cable has everything to gain by moving forward?

And what if it found a way to make money doing so?

It might--just might--be able to score points in Washington and with consumers at the same time. The revenue question is tougher, but there are those both inside and outside the industry who believe that if cable began offering existing HDTV signals now, it would be able to ride the demand curve for HD sets, which nearly everyone believes is on a long-term upslope, and thereby boost demand for new, digital services.

Don't be surprised if that's exactly what happens in the months to come. Time Warner Cable and Comcast Cable have already added HDTV to their menus in a significant number of systems. This spring look for Comcast to show up the cherry blossoms by offering the splendor of HDTV to customers in Washington and Baltimore, which not too coincidentally would also make the service available via cable to a large number of lawmakers. If Comcast times it right, it could even upstage the National Association of Broadcasters' designation of the District as one of its digital zones.

As one insider explains, it's a matter of seeing high definition as more than a business: "Not only do we prevent our cream from getting skimmed by satellite, which is not a bad thing--and it might be a potential revenue stream from doing this--but we also resolve our public policy issues."

The timing could hardly be better as customer demand for HDTV is increasing. The Consumer Electronics Association reports that factory-to-dealer sales of digital televisions in 2001 totaled about 1.5 million units, representing more than $2.6 billion. Of those, 100,000 units were equipped with integrated tuners and 200,000 standalone set-top digital tuners were sold to dealers. Add in sets sold since the category was introduced in 1998 and that would leave approximately 2.46 million sets that can display HDTV pictures, but won't until someone connects them to a tuner--or an HD-equipped cable box.

Demand is being driven by three factors: falling price points for HD sets backed up with zero or low-interest financing; an increase in content, including the Winter Olympics; and the renewed interest in home entertainment following the events of Sept. 11.

Unlike NAB, now in the midst of a seven-figure high-definition campaign with the CEA, the National Cable and Telecommunications Association isn't likely to launch a massive public relations initiative. Instead, look for a series of events intended to underscore the industry's commitment at all levels.

"They need to be able to show they're part of the solution, not the problem," says Mike Goodman, an analyst with the Yankee Group.

Until now--with the exception of HBO and Showtime--cable programmers have shied away from high definition, citing the lack of a significant audience as the rationale. Cable operators have held back, in part because without much content there isn't a reason to push the service. But with more and more programming on the broadcast networks being offered in HD, in addition to what is already being offered on channels such as HBO and Showtime, consumers are beginning to look at HDTV and are liking what they see.

"Who did cable lose to DBS in the early days?" asks Goodman. "The really early adopters. The high-end subscribers, the premium customers. I think that's where Comcast's offer comes in."

There is still much resistance to HD and its ravenous appetite for bandwidth, and there are as a result many industry watchers--and operators--who believe it is much too soon to be rolling out HDTV service. "If I were cable, I wouldn't even worry about it today. It's too early. It's way too early," says independent analyst Bruce Leichtman. Likewise, Mike Paxton, an analyst with In-Stat, believes, "Cable is taking it very slow--like they do most everything--when it comes to HDTV services. They realize that it's something they want to be involved in. They don't want to be passed by."

Yet the prices of sets are falling, people who bought DVD players over the holidays are realizing they can't view the letterbox picture in its entirety on their 27-inch TV sets and those aforementioned early adopters are having people over to see their new HDTV sets. There may be a window of opportunity for cable operators as demand for the sets builds. No one wants to put up an antenna to receive over-the-air signals. And the satellite providers do not have the capacity to pick up and retransmit local network affiliates in HDTV.

"I will concede caution," says NCTA spokesman Marc O. Smith. "It doesn't make sense for the cable industry to invest in $300 to $500 set-top boxes ubiquitously for something that does not yet have compelling consumer demand."