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Initial Digital Results Please Cable Operators

Los Angeles -- Cable operators were cautiously pleased by
the initial results of their digital-tier rollouts, saying that penetration has reached 5
percent to 13 percent in less than a year.

Operators presented their findings here last week at the
CTAM Digital and Pay-Per-View Conference.

For example, Cox Communications Inc., which launched
digital five months ago in Aliso Viejo, Calif., in its Orange County cluster, said 7
percent of its 15,000 customers there have taken the new tier.

Telemarketers in the cluster reported a 20 percent to 40
percent close rate on Cox's $10.95-per-month digital offering.

Lynne Elander, Cox's director of product development,
said these "truck-chasers" were already paying $50 per month, and they were most
attracted by the prospect of 50 different movies in primetime, plus the "sexy"
on-screen guide.

Overall, in the Orange County cluster, digital has earned a
3 percent-penetration rate at prices ranging from $5.95 to $12.95 per month, with 70
percent of consumers opting for the highest price point.

Surveys are showing that subscribers have displayed a high
level of sophistication about their knowledge of digital, and Cox is leveraging off
community knowledge of the Digital Satellite System to boost penetration, Elander said.

"The majority know [about DSS], so we're playing
off that. Our ads say, 'Digital TV without the dish.' They respond to more
choice, more convenience and digital quality," she said.

Cox also launched telephony in the cluster, in Rancho Santa
Margarita, Calif., and Elander said the MSO has 20 percent-penetration in lifeline service
where it has launched.

In Tele-Communications Inc.'s markets, digital
penetration has reached 5 percent to 12 percent, said marketing senior vice president Tom
French. Further, he said, TCI is losing few customers to direct-broadcast satellite
providers because of DBS' high initial cost.

"If we fix cable's problems, they stay. Inertia
is our greatest asset," he said. They will only leave for more variety, and HITS
[Headend in the Sky, TCI's digital offering] remedies that."

But the most impressive launch numbers came from little
Buford Television Inc., in its Heath, Texas, Friendship Cable system. After six months,
the system has topped 13 percent digital penetration, with 130 customers, said Ron Martin,
Buford's president and chief operating officer.

Of the 130 Buford digital subscribers, 86 percent opted for
the all-inclusive package at $69.95 per month. Of those customers, 10 percent were
four-pay homes, 50 percent three-pay homes, 25 percent one-pays and 15 percent basic only.

While Martin noted that the package price wasn't much
of a jump for multipay households, basic-only subscribers were used to paying $28 per
month, and they bypassed $12.95 and $15.95 tier options.

Given the take rate, Martin anticipated paying for his
$492,235 digital investment (versus the $2.2 million that it would have cost to rebuild
his system to 750 megahertz) in 46 months.

Operators are already wrestling with the best ways to
market digital, but two strategies -- based on research and initial launch results --
emerged at the CTAM conference: Digital should be in the product name, and packaging is
more crucial than price.

Consumer polls presented at the conference showed a high
rate of consumer awareness of the concept of digital. A survey by Horowitz Associates Inc.
showed that three-quarters of the respondents were familiar with "digital," but
that only 20 percent of them could name a digital purveyor.

That poll, and one presented by Camille Jayne, president
and chief operating officer of Universal Electronics Inc., indicated that the market
potential for digital stands at about 23 percent.

Jayne's company polled 600 subscribers on behalf of
companies including General Instrument Corp. and HITS. The focus was actually on future
digital products beyond movies, such as interactive services, but it provided insight into
digital "hot-button" products, she said.

The research showed that no one category will drive digital
deployment, but that respondents would be willing to pay $7.78 per month for a package of
information refreshed regularly. Programming niches that scored highest for that package
included news, health information, Internet access, games and shopping.

Price points are very elastic, Jayne said. Interest
remained in the 50 percent to 60 percent range even when consumers were asked if
they'd pay $9.99 per month, as opposed to $3 or $4.

French said TCI is still wrestling with marketing strategy.

TCI has tried giving away boxes or offering two
months' free service, he noted. "When we've done that, we're seeing a
big bump," French said.

Some executives prefer stressing familiar product, followed
by a push to "supersize" it to digital. Others believe that the fullest digital
package should be the first offer, downsized from there. But there is a consensus that
digital must be complementary, and not supplementary, to analog product.

Noting that many early DBS customers cut their costs by
self-installing, TCI has experimented with self-install kits that plug into
consumers' phones, French said.

Operators had some advice for programmers, too. Newly
digitized systems don't have time for training programs on each of a potential 100
new networks.

Said Elander: Give us information to get us started, and
then "back off." And, she warned programmers, don't hold out for analog

"That road is closed," Martin agreed.

He said basic programmers need to compromise on their
profit models and settle for a possible 20 percent digital penetration, or "100
percent of nothin'" if they hold out for an analog slot in systems with no plans
to rebuild.

"My biggest surprise was that I thought that all of
the content on the [HITS] transponders was available to me, and two [networks] are
not," Martin added. He did not mention the networks by name, but executives of E.W.
Scripps Co.-owned Home & Garden Television and Food Network have stated that they are
holding out for analog carriage.