HITS Eyes DTH Overlay for Smaller Ops

Headend in the Sky is talking with small cable operators
about offering a direct-to-home satellite service, dubbed "Sky Cable," which
systems could add onto their traditional cable packages to dramatically expand their
channel lineups.

HITS, a unit of AT&T Corp.'s National Digital
Television Center, is trying to gauge whether there is enough operator interest to go
forward with the satellite-overlay service, according to Rich Fickle, senior vice
president of HITS.

Sky Cable would enable small cable systems to offer
subscribers 100 to 150 channels -- without investing in costly plant or headend upgrades
-- so that they could compete with direct-broadcast satellite's program packages.

Sky Cable would be going head-to-head against a similar
service that DirecTV Inc. has been offering to three small cable operators since last

Both DTH services are aimed at cable systems with 3,000
subscribers or fewer. The Sky Cable and DirecTV satellite overlays allow operators to
cost-effectively deliver digital programming to homes by bypassing the headend.

But HITS contended that unlike DirecTV's DTH service,
with Sky Cable, small operators can tailor their own program packages and brand them with
their system's name.

In the case of HITS and its Sky Cable, cable subscribers
would continue to receive their analog cable service. But in addition, small cable systems
would install medium-power dishes -- reportedly about the size of PrimeStar Inc.'s
dish, or 24 to 34 inches in diameter -- at subscriber homes to receive digital programming
from HITS satellite transponders.

So these Sky Cable subscribers would get program packages
including their old analog-cable lineup, overlaid with the additional HITS digital
programming, which could include pay-per-view, premium multiplexes, digital music, an
interactive program guide and digital basic networks.

"It's the HITS package [direct] to the
home," said Steven Seach, president of Classic Cable, which has been testing
DirecTV's DTH overlay.

More than 1.5 million subscribers -- mainly those at
AT&T Broadband & Internet Services (formerly Tele-Communications Inc.) systems --
currently receive HITS digital programming, which is delivered directly by satellite to

The HITS digital platform, which has been offered to
operators since fall 1997, was created as a way for small and midsized systems to expand
their lineups without paying for pricey plant upgrades.

But HITS, while less costly than a plant upgrade, still
doesn't make economic sense for systems with fewer than 2,000 or 3,000 subscribers,
since it entails the installation of headend gear that costs between $60,000 and $100,000,
sources said.

Several small operators last week expressed eager interest
in Sky Cable, which will allow them to carry any of the 12 transponders of programming
that current HITS affiliates are now getting delivered by satellite to their headends
under the traditional HITS service.

"I'm very cautiously optimistic [about Sky
Cable]," said Matt Polka, president of the Small Cable Business Association. "I
hope that it goes like wildfire. It's what small operators have needed for some time.
You'll see some true competition now."

General Instrument Corp. is manufacturing the equipment for
Sky Cable, including the integrated receiver/decoder that will have to be installed in
homes, along with the dish.

One source said GI is creating a special hybrid cable
set-top/satellite receiver for Sky Cable. GI declined to comment, although it acknowledged
that it was involved in the project.

The GI equipment will incorporate an interactive guide that
will seamlessly list programming from both Sky Cable and the analog channels that
subscribers are getting.

Officials from GI met last week with the National Cable
Television Cooperative, which represents small and midsized operators, about the Sky Cable

"It seems to be that finally, the right parties are
doing this," said Frank Hughes, the co-op's senior vice president of
programming. "This promises to be a terrific package."

HITS also expects to bring up Sky Cable this week in a
meeting in Denver with cable operators.

"We've got a handful of small operators that are
championing the [Sky Cable] effort," Fickle said. "We've agreed with them
on some specifications for it."

HITS will probably decide in a month or so whether to
launch Sky Cable. "We need a critical mass in terms of commitment," Fickle said.
The threshold that HITS wants is for 300,000 actual subscribers to sign up for Sky Cable
within the next several years, he added.

Hughes said he thinks that number is reachable. He pointed
out that the NCTC alone has 5,300 member systems with fewer than 5,000 subscribers each,
representing 3.3 million total homes.

Fickle claimed that Sky Cable has several advantages over
DirecTV's DTH overlay for cable systems, which uses a high-power 18-inch dish, as
well as an IRD, in cable homes.

He noted that the DirecTV service isn't just added on
to the package of national networks that an operator is carrying on analog cable. In
effect, DirecTV's satellite overlay replaces that traditional cable package with one
of its own, from "Select Choice" on up. The operator then sells subscribers a
broadcast-basic tier to go with DirecTV's branded program package.

And unlike DirecTV's product, with HITS' Sky
Cable, operators could choose exactly which of HITS' one-dozen transponders -- and
which programming -- they want to overlay on their analog-cable service, configuring their
own packages, Fickle said.

Operators have no such flexibility with DirecTV: They must
just use one of its existing program packages.

In addition, these small cable systems can brand Sky Cable
with their own names, instead of having DirecTV's moniker all over their service,
Fickle said. Some small MSOs have felt ill at ease offering their subscribers a program
package that showcases a DBS brand, sources said.

With Sky Cable, "operators have control of their
programming choices and package," Fickle said, "and they will do their own

Polka said DirecTV's satellite-overlay product
"turns a cable system into an agent for them ... And they don't allow the
operator to brand the product."

DirecTV responded that its satellite overlay is the better
deal for small operators, since DirecTV subsidizes the cost of the equipment. "And
DirecTV has brand-name recognition, which also makes us different from HITS," a
DirecTV spokesman said.

As the Sky Cable plan stands now, cable operators would pay
HITS transport fees for the digitized programming, while GI would probably handle signal
authorization, as well as manufacturing the hardware. The dish and IRD would cost
operators about $350.

Last year, DirecTV signed up Classic, Galaxy Cablevision
and Anderson-Eliason Cable Group to do a beta-test of its satellite-overlay service, but
the DBS provider doesn't know how many subscribers have signed up for that service.

Classic has four beta-test sites in Texas, Oklahoma and
Kansas -- all systems with fewer than 500 subscribers per headend, Seach said. At those
test sites, Classic has increased its cash flow, and its penetration is up by 4 percent,
he added. So Seach is very interested in Sky Cable and in what HITS has to offer.

"We are very bullish on a digital overlay," Seach
said. "We know that it works. It allows us to use technology in an adaptive way in
some of the systems where we can't justify a rebuild."

Before DirecTV acquired PrimeStar, the latter planned to
offer cable operators a satellite overlay that was called "Digital Advantage."
But that project never got off the ground.

Buford Television, which had planned to test
PrimeStar's Digital Advantage, will look at Sky Cable, according to chief operating
officer Ron Martin.

"The issue is working through an economic model that
will work for us," he said.