Premium Nets: More Screens Mean More Value

Forget about those revolutionary experiments with sheep:
The premium networks have been in the cloning business for quite some time now,
reproducing themselves via all varieties of spinoff-channel permutations and multiplying
their time-zone feeds like so many inbred offspring.

Unfortunately, Home Box Office, Showtime Networks Inc. and
Encore Media Group have yet to figure out a similarly effective way to clone subscribers,
to the great frustration of cable operators, which have watched the growth of their
premium businesses slow to a crawl in an environment beset by serious churn and heavy
competition from direct-broadcast satellite services.

Digital multiplexing has clearly been both a blessing and a
curse for MSOs. It operates on the theory that if providing one HBO is good, then
providing six is significantly more terrific -- particularly if subscribers don't
need to pay extra for the privilege of enjoying those five additional offshoots. But in
the rush to divide and conquer, cable has run up against a formidable foe in DBS.

"One of the problems that cable has is that
multiplexing is viewed as more of an enhancement, or as an upgrade, whereas on DBS,
subscribers are seeing only packages from the get-go. The good news is that once people
get digital cable, their interest in DBS virtually disappears," said Larry Gerbrandt,
senior analyst with Carmel, Calif.-based Paul Kagan Associates Inc.

This, however, gets somewhat ahead of the real story, which
is that pay services have fully embraced the multiplex philosophy as their best chance to
goose stagnant -- and, in some cases, eroding -- subscriber levels as analog gives way to

Taking it company by company, here is how the ever-shifting
multiplex-channel branding, programming and marketing strategy currently stands:


HBO threw down the self-duplication gauntlet this past
spring, when it announced a major makeover of its previous, mostly generic multiplexing
approach with the creation of distinctive mega-brand packages for both HBO and Cinemax,
under the titles, "HBO The Works" and "MultiMAX."

The first wave in the evolution took effect Oct. 1, when
HBO2 and HBO3 became "HBO Plus" and "HBO Signature," respectively. The
next to arrive will be the revamped "HBO Family" service Feb. 1, fresh from an
estimated $18 million expansion into channel-exclusive original programming.

Another pair of channels -- "HBO Comedy" and
"HBO Zone" -- is scheduled to launch during the second or third quarter of 1999.

On the Cinemax side, "MoreMAX" replaced Cinemax2
earlier this year, with the genre-specific "ActionMAX" and
"ThrillerMAX" further expanding the Cinemax presence for parent company Time
Warner Inc.

The various East, West and Mountain time zone feeds for
each of the services give HBO/Cinemax a massive 20 individual channel feeds, which will
expand to 24 once the East Coast and West Coast feeds of HBO Comedy and HBO Zone join the

To accurately describe what HBO has done in joining the
clone wars, the proper term could be "spin-on" services, rather than

Maybe HBO should amend its slogan, perhaps something akin
to, "It's not TV. It's a cloning experiment." The danger of
self-cannibalization would appear to be great, even if every screen and every feed belongs
to the same programmer. But John Billock, president of HBO's U.S. Network Group,
expressed little concern that multiplying at a rabbitlike pace will fractionalize its
audience into oblivion.

"It's all about making the subscription more
valuable in the home," Billock said. "We don't worry about cannibalizing
the original HBO service, because for us and the distributors, the name of the game is
keeping people satisfied and keeping the churn low. The bottom line is, the more of our
screens in the home, the more aggregate HBO and Cinemax viewership."

"Our goal is to evolve each network so that it has its
own distinct programming and interstitial style that complements the primary network from
which it was spawned, but that is clearly unique in personality and approach,"
Billock said.


Not to be outdone, SNI is on its way toward having 20
separate screens and feeds itself between the various offshoots of Showtime, The Movie
Channel, Flix and Sundance Channel, although its current total is a mere 17. It operates
under the "Showtime Premium Pak" umbrella.

The latest entrant in the multiplex arena was
"Showtime Extreme," which was added with dual feeds this past March as a 24-hour
action-adventure alternative. It joined an assortment of additional time-shifted
Showtimes, a pair of TMCs, oldies-film outlet Flix and independent-film-purveyor Sundance.

While Showtime's strategy differs from HBO's
thematic branding, Jeffrey Wade, SNI's executive vice president of sales and
affiliate marketing, maintained that the company's approach in terms of offering the
extra screens without costing more money is identical.

"A few years ago, if a consumer wanted to subscribe to
all of the premium services, you may have been talking about $40 [per month] for four
screens," Wade said. "Now, he's paying $30 for 30 screens, and he has all
of the brands. The subscriber probably gets 1,200 movies every month between all of those

"Pretty soon, your premium-multiplex package starts to
look like what some basic packages look like today. That kind of value has to make the
entire premium category more attractive," Wade added.

Showtime Extreme is the closest thing that Showtime has to
the branded-channel strategy adopted by HBO. It, like ActionMAX, is a 24-hour action-movie
channel (both originals and theatricals) designed to serve the digital universe. To date,
its distribution has been restricted to the direct-to-home market, Wade said.

"We've targeted the younger male with Extreme,
and it's been a real home run for us," he added.

In contrast, Showtime's other numbered networks remain
committed to broad appeal, Wade said, while TMC's screens remain "the party girl
of [parent company] Viacom [Inc.]. It's fun, hip and irreverent. That's how
we're going to continue positioning it."

Flix airs "the movies that the baby boomers grew up
with." Sundance, meanwhile, targets a more discriminating, highbrow niche.

Wade also noted that in spite of Showtime's plurality
of screens, there is "very little duplication" of programming among them.

"This is about adding value," he said, "not


EMG, the company that was first on the multiplex block,
continues to press ahead with its strategy (in tandem with Encore, Starz!, Starz!2 and BET
Movies/Starz!3), and it has now has found the competition embracing its once-ridiculed

EMG's "Thematic Multiplex" of channels
includes "Westerns," "Mystery," "Action," "True
Stories," "Love Stories" and kids' network "WAM!."

With some 25 screens or feeds, EMG is the undisputed leader
in sheer number of channel choices, and Greg Mills, the company's vice president for
digital strategy, maintained that the number is likely to grow in "the very near

"We poured a lot of resources into the product over
the past four years, but we're slightly ahead of the curve," Mills said.
"It's all about making digital real estate as valuable as analog real estate is.
We spent three or four years trying to understand what the consumer wants, and now, the
positions that we hold are being validated by MSOs, by marketers and by the investment


Starz! claims the greatest subscriber growth of all of the
premium services, gaining nearly 2 million subscribers between June 1997 and June 1998.
From September 1997 through June 1998, HBO rose a bit, from 19.5 million to 19.8 million,
according to Kagan numbers.

But EMG's rivals cried foul, arguing that the company
markets, prices and packages its pay services differently than HBO and Showtime do.

Without Starz!, premium growth on cable from June 1997
through June 1998 remained virtually flat: up to 47.8 million subscribers from 46.2
million. Without Starz!, in fact, the rest of the pay universe suffered a slight overall
dip from cable. Compare that with DBS, which found its premium penetration swelling by
nearly 6.5 million subscribers year-to-year in June -- to 19.6 million, from 13.2 million.

The irony of having multiplexing serve as such a tremendous
boon to DBS should not be lost, Gerbrandt said..

"The reason why people bought into DBS was not price,
because it's generally more expensive," he added. "They didn't buy DBS
for convenience, because it isn't. The reason why they bought DBS was the greater
number of channels. So here you have all of these premium channels created for the cable
industry, and they wind up being used against them."


To be sure, not every operator is looking to multiplexing
and digital tiering as the white knight destined to revitalize the premium business.

Lynne Buening, vice president of programming for Falcon
Cable TV Corp., is so skeptical about the vitality and viability of pay services that she
finds it "remarkable" that her systems have maintained their premium-subscriber
base as well as they have.

"With the quality of movies improving on the basic
services and the high price sensitivity on the part of the consumer, premium is in a
difficult spot," Buening added. "Even if you improve the price-value
relationship by upgrading a stand-alone premium household to multiplex, that can be a
double-edged sword. Suddenly, you have to keep the channels in place to keep the

On the upside, bandwidth on both analog and digital tiers
has been freed up substantially thanks to system upgrades -- to the point where some MSOs,
like MediaOne and Cable One, have been able to allocate analog space to multiplex packages
high up on the dial.

Cable One, for instance, has committed nine channels in its
analog spectrum to HBO and Showtime plexes on several of its systems, using "negative
trapping," which precludes the need for converter boxes.

Jerry McKenna, Cable One's vice president of strategic
marketing, maintained that six months after implementing the strategy, unit sales of
premium are up 20 percent.

"All we're hoping to do with this is to slow down
our disconnects," McKenna said, "and that's what it appears to be

Since MediaOne launched its "NexTV"
premium-packaging service -- which includes multiple screens of HBO, Showtime and Starz!
-- Steve Bouchard, the MSO's vice president of video marketing, said his systems
showed a net gain of 50,000 pay units in September and an additional 75,000 in October.

"And that's after a 3 percent to 5 percent
downtrend in pay during the previous 12 months," he added.

Richard Yelen, director of cable-TV marketing for Cox
Communications Inc., stressed that his company found in its research that there had been
"too much focus on individual premium units and not enough on the financial impact to
our shareholders. It's all about revenue."

Early indications are that after Cox implemented
pay-network multiplexing, its revenues from premium services edged up 2 percent from
third-quarter 1997 to third-quarter 1998.

"We found that the primary reason why our customers
disconnect has to do with value," Yelen said, "so upping the value is key."

That's what has helped to drive HBO to push through
its radical makeover of HBO Family, which is set to relaunch in February with a heavy
focus on original series and on creating a consistent environment that competes
aggressively with its ad-supported counterparts in the kids' and family genre.

Since introducing its multiplex strategy in 1991, HBO has
expanded it to the point where some three-quarters of the HBO/Cinemax subscriber base now
receive some configuration of the multichannel service.

While both HBO and Showtime are looking to video-on-demand
to start driving their businesses in the next century (see story, this page), the pay
services still need to build credible arguments for why cable operators should take on so
many premium-network offspring that bear such a close resemblance to mom and dad.

Buening, for one, isn't biting.

"We've reached the point where video rentals and
pay-per-view are sustaining the same movie fan that the premium business has long
targeted," she said, "and right now, I'm afraid that the competition is
reinforcing the demise of the [pay] category."

Billock has more confidence that his company's
multiplex makeovers will bear long-term fruit in an end of the business that could surely
use it.

"If you make the subscription more valuable in the
home," he said, "then people will respond to getting a deal. That's what
all of us in this end of the industry have to count on."