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Insertion Vendors: Color Their World Green

Like Dorothy segueing from her black-and-white existence
into the Technicolor world of Oz, more and more cable operators have moved into the
lucrative world of digital ad insertion.

And as vendors have cut their equipment prices, smaller
MSOs and operators have followed that yellow brick road, as well.

Even among nontechie operator management people who don't
know a video server from a wastebasket, insertion gear's role as a revenue enhancer is a
concept that they readily understand.

Various MSOs and operators agreed that digital ad-insertion
technology has lived up to its hype and enabled them to improve their bottom lines by
either allowing them to start inserting local ads on popular networks or to expand their
existing lists of insertable networks.

The latter route has been particularly attractive to MSOs,
which have been unable to persuade cable networks to hand over more local avails in this
boom ad-sales period.

"[The insertion] part of the business is really
working well," said Filemon Lopez, senior vice president of ad sales at Comcast
Corp.'s Comcast Cable Communications Inc.

A year ago, MSOs and operators cited lower-priced insertion
equipment as a Western Show trend -- one that enabled smaller MSOs and operators to
bolster their local sales like their larger, well-heeled brethren.

That trend seemed destined to continue well into 1999,
according to the top three insertion vendors.


In assessing the market leaders, operators agreed with Jack
Olson, vice president of Media Partners, Adelphia Communications Corp.'s ad-sales unit,
that SeaChange International Inc. still commands "the lion's share" of the
digital insertion business. SkyConnect Inc. and Channelmatic/LIMT Inc. are next in line.

SeaChange alone added 1,600 digital insertion channels
during the third quarter, raising its tally to 17,000, the bulk of which are in the United
States, said James Kelso, the vendor's director of advertising systems. Estimating that
the digital insertion marketplace's total number of channels is 25,000, Kelso pegged
SeaChange's insertion market share at roughly 75 percent. SeaChange has estimated that it
inserts 1 million spots per day via 1,000 headends.

SkyConnect president Michael Pohl said the company now
inserts on 5,000 channels, with its 300th headend due by year's end. That, he added, puts
it well ahead of No. 3 vendor Channelmatic.

Mike Canizaro, director of sales and marketing for
Channelmatic, said only that his company ranks third in digital insertion, without going
into specific numbers. Its biggest sales have involved the three National Cable
Communications-managed digital interconnects, in Chicago, Detroit and Washington, D.C., he

Although each supplier has its own crop of promising new
products, that rank order isn't expected to change in the foreseeable future.


In the most dramatic new insertion-product news, SeaChange
and SkyConnect both demonstrated digital-stream-insertion technology at last week's
Western Show -- technology that the major MSOs have expressed interest in as the
digital-cable era approaches.

Prior to the show, Pat Esser, Cox Communications Inc.'s
vice president of ad sales, said the next challenge as digital set-top boxes roll out in
more significant numbers will be that "we will need to insert digital commercials
into digital streams."

Ed Dunbar, vice president of ad sales at MediaOne, agreed
that his wish list of products that he would like to see includes those that will handle
"digital into digital."

For SeaChange at Anaheim, "The big splash [was] on
digital-stream insertion," Kelso said, noting that its product demonstration was done
in association with Imedia Corp.

SeaChange's digital-stream-insertion equipment -- which, he
said, can handle Tele-Communications Inc.'s Headend in the Sky, for example -- will enable
operators to "unwrap their [digital tier] bundle of 10 or so networks, stick
commercials into a program and then rewrap that bundle."

Noting that digital-stream video servers will be compatible
with analog systems, Kelso said their pricing would be comparable with that of analog
systems, as well. The added attraction is that "operators don't have to get rid of
anything. This fits what they have and shares all of the same [computer] codes."

Pohl said SkyConnect unveiled its own
digital-stream-insertion capability at the Western Show, demonstrated via General
Instrument Corp. and Scientific-Atlanta Inc. set-top boxes.

Canizaro said Channelmatic wasn't ready for a similar
product announcement, pointing out that his company has a patent pending on its own
digital-stream technology.

Those digital-stream-equipment demonstrations didn't catch
Larry Zipin, vice president of ad sales at Time Warner Cable, by surprise. Shortly before
the Western Show, he came away from meetings with SeaChange and SkyConnect "with the
impression that they're further along in addressing digital commercials into a digital
video stream" than previously thought.

His MSO also is exploring how to expand insertion beyond
the DMAs to cluster regions and states, along the lines of what Time Warner is currently
doing in North Carolina, he said.


SeaChange's other big new product introduction targeted
interactive advertising. That system will enable operators to, in effect, offer
"advertising-on-demand," with viewers able to find out more information about
advertised products that they are most interested in, Kelso said.

SeaChange's system will work with the Internet-linked
platforms of Microsoft Corp.'s WebTV Networks unit, WorldGate Communications Inc.'s
"Channel Hyperlinking" and Wink Communications Inc.'s system, he added.

Pohl, who said prices on SkyConnect's insertion equipment
dropped even further at this year's show, added that the company still has
Internet-related plans.

Although SkyConnect saw its $20 million acquisition by
Online System Services Inc. (which provides turnkey Internet services) fizzle in November
due to OSS' stock-price slippage, Pohl maintained that the two companies not only shared
booth space at the Western Show, but that they also share the same objectives as before.

The big difference now, he said, is that they will now
pursue those goals as independent companies, although they will work together often.

That sale would have been the second in the insertion field
since March 1997, when IndeNet Inc. sold Channelmatic to Local Insertion Media Technology
AB, a Swedish company.

For Channelmatic, the "Digital MoneyMaker" (at
$4,000 per insertable channel) continues to be part of the lower-priced insertion trend.
Indeed, its appeal has expanded beyond its original target -- small operators -- to
encompass larger operators looking for bargains, Canizaro said.

The vendor also unveiled "Performa" at the show
as a MoneyMaker add-on to handle long-form content, ranging from infomercials to
local-origination channels, Canizaro noted.


Channelmatic's most dramatic announcement this year was its
debut of Adpath Television Network -- a satellite-transmission service to sell commercial
time on small-market systems that aren't part of interconnects -- along with Communicast
Inc. and private-investment firm Anderson Pacific Corp.

But Adpath -- which announced at this past spring's
National Show that beta-testing was to begin in June -- "fell behind schedule
somewhat," while the partners corrected such technical glitches as cueing spots,
Canizaro explained.

That test, which may run anywhere from three to six months,
will involve Channelmatic's Digital MoneyMaker system, with Communicast handling traffic
and billing using CCMS Inc.'s software.

Adpath's initial costs will top $1 million, including
installation of hardware in 25 unspecified beta-test markets, the companies said earlier.

Looking two years ahead, the major vendors continued to see
strong growth opportunities among the larger operators and MSOs, even though they're
nearly fully penetrated for digital insertion, and even though the suppliers' sales
emphasis this year has been on the smaller MSOs and operators.

Next year and 2000 could be potentially lucrative years,
during which those operators will likely be replacing or upgrading their current
technology, the SeaChange and SkyConnect executives asserted.

SeaChange, which foresees no slowdown in insertion sales on
the horizon, now expects additional growth from sales of its digital-stream product during
the coming two years, Kelso said.

In reporting its third-quarter results recently -- with
revenues up 17 percent, to $17.8 million, and a net loss versus $102,000 in year-ago net
income -- SeaChange cited hotel video-on-demand as another promising product area. Sales
for its "GuestServe Network Movie System" were strong, with TCI in Chicago
buying the VOD system and Time Warner adding to its order due to hotel expansion in New

Pohl, besides predicting healthy insertion sales through
2000, expected new sales in interactive-advertising and VOD products. Although SkyConnect
didn't offer interactive-related products at the show, "We have a lot of plans
pending" on that, Pohl added.

Meanwhile, Channelmatic is developing a full automation
package that will encompass ad insertion and pay-per-view, Canizaro said.

Among the vendors below the top three, there have been few
operator announcements in the past year. Ron Pancratz, vice president of ad sales at Cable
One, said his MSO has bought insertion gear from Adtec Inc., one of the smaller companies
among the eight insertion competitors currently out there.