As the digital world churns

For all cable operators' boasts about the success of digital cable, many consumers are subscribing and canceling the new services at a high rate.

Cable operators report that they are seeing churn rates of around 5% a month, meaning that 60% of digital customers will disconnect service within a year.

That's about the churn rate seen for years by pay services Home Box Office and Showtime. But it's higher than cable executives had expected when they started launching fat packages of digital services, and it has remained stubbornly high.

Digital cable is one of cable's chief weapons against direct-broadcast-satellite services and their ability to offer 200-plus channels.

By digitally compressing seven to 10 channels into the 6 MHz space soaked up by a conventional analog-TV signal, cable operators can add a few dozen extra "basic" and pay-movie channels, plus 30 or more pay-per-view channels for an extra $15 to $20 in monthly revenue.

About 16% of all cable homes now also subscribe to digital packages.

But wary DBS executives are gloating at the rate of digital cable churn, with Eddy Hartenstein, senior vice president of DirecTV parent Hughes Electronics, noting that DBS churn is still just 1.5% monthly.

Reviewing Cox Communications' digital churn rates at UBS Warburg's media-investment conference in New York last week, Cox CFO Jimmy Hayes said that when systems initially introduce digital, churn runs 7% to 8% monthly, or 84% to 96% annually. That means the systems' entire digital-customer base would turn over within a year. But it generally settles down to a more manageable 4% to 5% after several months and initial aggressive marketing campaigns fade somewhat.

Hayes said that the high rate comes from heavy initial marketing, "I don't want to say forcing the sell, but pushing it," Hayes said. That drives heavier sampling but also heavier churn.

Comcast and Charter are seeing digital churn around 5% as well. AT&T Broadband Chairman Dan Somers would not detail his digital churn, saying it runs about the same rate as the cable division's basic churn. But an AT&T executive said the digital churn is running about 5%.

Churn is nasty business for cable operators because, to maintain growth, they need to first replace all the customers they've lost, then find new ones. For years, basic-cable churn has averaged around 25% annually. Some of the churn is easily explainable: People move. Every time a cable customer gets a new house or apartment, he or she disconnects cable in one place and connects it in another.

The rest is from lost customers, often to DBS service, bad debt or people who simply drop out.

Pay-TV churn has typically run far higher, as systems entice new basic subscribers with cheap HBO or Showtime deals. They often disconnect as soon as the cheap price expires. The pay services spend hundreds of millions of dollars on marketing, particularly in support to cable operators, to maintain their subscriber base.

UBS Warburg cable analyst Tom Eagan says he's not alarmed at the rate of digital churn, but he'd like to see improvement. Pay-TV networks have built multibillion-dollar companies despite their high churn rates. The major difference is that cable systems need to recover pricey $300 digital converters from a canceled subscriber's house.

"Digital churn costs more," Eagan said.

Adelphia Communications Treasurer Jim Brown said that churn levels vary depending on how advanced a system was to begin with. His company's churn rate is running just 2.5%, but that's because digital has been rolled out largely in low-capacity systems where customers were hungry for more channels.

"When you already have 75 to 80 channels," Brown said, "companies are seeing higher turnover."