CABLE LEADERS BULLISH ON HDTV, VoD, DATA, PVRs

“Right now we're more enthusiastic about the future than at any point in the past,” Comcast Pres. Steve Burke said. He said such new products as digital video, high-speed data and cable telephony were “really driving the growth” of the company, accounting for “well over half of our cash flow growth” in 2002. He also affirmed that Comcast aimed to keep bringing out a major new cable product every 12 to 18 months.

Indicating Comcast’s enthusiasm, Burke said the MSO would spend $4 billion over the next 12 months to upgrade the aging cable systems that it inherited from AT&T and introduce more new services on the systems it already owned. “We're doing that, with complete confidence that we'll get payback on our investment,” he said. Plans call for upgrading 90% of the old AT&T plant and 97% of the old Comcast plant by the end of 2003 and then finishing the job next year. “We're rebuilding at a pace we've never rebuilt at before,” Burke said, and said the MSO planned to upgrade 46,000 plant miles this year.

In particular, the major MSOs are pouring money into their new video services. Executives said they were doing that partly because of surprisingly strong consumer demand for the services and partly because of satellite TV’s continuing robust growth. They're striving to eliminate the perceived competitive edge that satellite TV still has among most consumers, especially with high-tech services such as PVRs.

“Those are the ways we are going to go from playing defense to playing offense,” Burke said, saying cable had been playing defense against satellite for the last 5 years. In a year or 2, he said, “I think we'll have a more competitive product than satellite has.”

The big cable operators also are investing heavily in new video services because they have been stung by flat subscriber growth and, in some cases, new customer losses. In the most unsettling example for the industry, the old AT&T Broadband, now part of the new Comcast, lost hundreds of thousands of subscribers last year. As a result, Burke said Comcast executives would spend the next 18 months “fixing” the former AT&T unit.

HDTV, video-on-demand (VoD) and personal video recorders (PVRs) head the list of new services that are being promoted. At Time Warner, Mike Hayashi, senior vp-advanced engineering & subscriber technology, said all 3 advanced services were showing strong early results for his company. For instance, Time Warner is approaching 100,000 subscribers nationwide for its cable-HDTV service, which typically offers a package of up to 10 broadcast and cable stations for an extra charge each month. “It’s not a big number yet but it’s growing rapidly,” he said. Time Warner also has signed up 50,000 subscribers for its new cable-PVR service, which it started distributing last fall for an additional $5-$10 monthly fee. “It’s great,” Hayashi said. “For me, it’s the 2nd coming of the remote.”

Comcast primarily is promoting its free video-on-demand (FVoD) and HDTV offerings. The MSO, which now has 10 million digital cable boxes in 6.5 million subscriber homes, is seeking to offer both services to at least half of its customers by the end of the year. Currently, each service is available in just a few major markets. Burke said Comcast’s cable-HDTV offering, which began in its Philadelphia home market 12-18 months ago, is picking up momentum. The company has installed 50,000 set-top boxes in subscriber homes for the service, which is similar to Time Warner’s but with a stronger emphasis on local sports programs produced in the HDTV format. “I think high-definition television is starting to surprise us,” he said.

At the same time, Burke said Comcast’s new FVoD service, introduced in Philadelphia 3 months ago, already has been used by 48% of its 600,000 digital cable customers in that market. Seeing it as a key competitive advantage for cable in its duel with satellite, he said he was striving to boost that percentage rapidly. “What we really want to do is drive that number into the 50s, 60s and 70s,” he said.

But hurdles remain for wide-scale introduction of such new video services. On the PVR side, for instance, Hayashi said hard-disc drives generally broke down about 10 times more often than cable set-top boxes and fragile PVRs didn’t always survive the bumpy ride in a cable installer’s truck to a subscriber’s home. “Have you ever ridden in the back of our truck?” he asked: “It’s pretty nasty.”

The Big 3 MSOs also are more optimistic than ever about high-speed data, which they once saw as a mere niche market. With their customer penetration rates surging to 15% and higher and their cable modem costs falling below $50 apiece, they think the data business still has plenty of room to grow. Jay Rolls, Cox vp-data engineering, said his company now was signing up 10,000 new customers a week for cable modems. He said 79% of new subscribers were buying their modems and 34% were installing the devices themselves. Cox closed 2002 with 1.4 million data subscribers.

Burke said Comcast, which now has 3.6 million data customers thanks in part to its buyout of AT&T Broadband, seeks to end 2003 with 5 million subscribers. “We're still somewhat in a land-grab mentality with DSL,” he said. He said that number would make Comcast the 3rd-largest ISP in the U.S. and probably the largest broadband ISP in the world. With the average data customer now paying Comcast about $500 a year, he said, it also would mean that the company’s broadband business would be generating $2.5 billion in annual revenue.