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DBS Is Getting Warmer

Direct-broadcast satellite will continue to challenge wired cable, but, in at least one area. the threat will not impede cable's rapid growth: advertising revenue in local markets.

"DBS is certainly something we are keeping an eye on, but we're not hemorrhaging or in a state of panic," says Tom Feary, corporate director of marketing at Adelphia Media Services. "It's healthy competition at this point."

According to the Cabletelevision Advertising Bureau (CAB), $5.3 billion will be spent on local cable spot this year, and that number is expected to grow about 5.6% annually through 2007. That compares with a projected 4.3 % annual growth rate for local broadcast, which will reach an estimated $29 billion by then.

"There is definitely going to be an increase in local cable advertising due to an increase in real estate," says Shapiro, noting improvements in interconnects and the sheer number of channels. "In the past 10 years, cable systems have upgraded their ability to insert local advertising. And you also have the expansion of digital multiplexing by the major programmers, meaning there is more inventory to sell to local advertisers."

DBS, still growing and very much on the attack, will not deliver the deadly blow to local cable systems that some analysts were predicting only a few years ago.

That's not to say it's not having an impact. But DBS isn't about to bring local cable to its knees. In fact, while the number of homes with DBS services such as DirecTV is expected to grow from about 24 million this year to more than 29 million by 2007, wired cable will grow from roughly 71 million to about 74 million in the same period. That's according to Veronis Suhler Stevenson.

Moreover, while wired cable's penetration will stagnate at roughly 66% penetration—and might dip a bit, as it has in recent months—the declines will be modest and have little impact on advertising revenue.

"I think the good thing about DBS is that it's forcing the cablers to continue implementing upgrades and offer additional services to consumers and to offer them at competitive rates," says Denise Shapiro, the managing director of PricewaterhouseCoopers' entertainment and media practice. "Any time you add new technologies and leverage the competitive environment, you [stem] migration that you might have going to another technology."

Such services as digital cable are expected to take off. In 2007, when digital is projected to be in 31 million households, that will be just about 3 million fewer subscribers than non-digital cable users, according to PricewaterhouseCoopers.

Other technologies, including video-on-demand, will also help cable retain subscribers. Consumer spending on VOD, which allows subscribers to watch programs on TV with the functionality of a DVD player, will nearly double by 2007, to a relatively modest $1.2 billion per year.

Cable's biggest driver may be TiVo-like personal video recorders. Shapiro says, "It is exciting to start adding that after prognosticating about it for many years."