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Winning the Game for TV Viewers

If the battle for television viewers were a baseball game, the two opposing teams would be digital satellite and digital cable. The game would be in the bottom of the third inning, with satellite leading by two runs and cable at the plate. Satellite gets on base early by offering more channels and digital quality; steals second through aggressive pricing, promotions and superior customer service; and then hits a home run with exclusive deals for sports programming. Cable, caught off guard by satellite's early offense, is now up to bat with expanded digital marketing and dish buy-back programs.

Cable's promising new player, video-on-demand, is on deck with other interactive applications waiting in the dugout. Not to be outdone, satellite has brought in personal video recording to relief pitch. How strong is satellite's lead? How successful will cable be in their comeback? How well will these new interactive services play? What will be the outcome of this high-stakes game?

CURRENT SITUATION

To help answer these questions, Scientific-Atlanta Inc. recently commissioned a study to better understand digital satellite and digital cable's position in the market. The study surveyed 1,789 current digital satellite homes and 1,730 current digital cable households across the United States. Questions were asked about customer satisfaction, digital service features and benefits, the perceived value of digital satellite and digital cable service and the likelihood of each household remaining a digital cable or satellite subscriber over the long term.

While still early in the game, the survey indicates that digital satellite currently leads digital cable along several dimensions including:

  • Customer satisfaction—More satellite subscribers report being extremely satisfied with their service.
  • Customer loyalty—Satellite subscribers claim to be more likely to remain subscribers over time.
  • Customer advocacy—Satellite subscribers are more likely to recommend their digital service to others.
    Key factors likely influencing satisfaction, loyalty, and advocacy include:
  • Price—Satellite subscribers on the average pay $14 less per month than digital cable, excluding the upfront purchase price.
  • Performance—Satellite subscribers rate picture quality and service reliability higher than digital-cable subscribers do.
  • Value—Satellite subscribers are more likely to pay for additional receivers and outlets than digital-cable subscribers are.

These factors as well as others have enabled satellite service providers to gain a strong foothold in the multichannel video market and to effectively steal share from cable service providers. Based on the research sample, roughly 60 percent of new digital-satellite subscribers defected from cable, while only 4 percent of digital-cable subscribers defected from satellite.

With market valuations of $4,500 or more per subscriber today, this defection comes at an incredible cost. Last year, satellite service providers added roughly 3 million new subscribers. If 60 percent of those new subscribers defected from cable, then the cable industry would have lost — temporarily or more permanently — upwards of $8 billion in market value.

LOOKING AHEAD

In the last six months, cable service providers have made tremendous progress in moving to reclaim their market strength. Cable's share of new multichannel digital subscriptions grew from 58 percent a year ago to roughly 77 percent at the end of the second quarter of 2001. According to SkyTRENDS, satellite added only 430,000 new subscribers in the second quarter of this year, compared to 699,000 in the previous quarter and 889,000 subscribers in fourth quarter of last year.

What will be each team's game plan going forward? How will each side compete in this high-stakes game? Both sides will likely look to capitalize on their strengths, to build defense where required, and to continue to fight for share. Arguably, satellite still has the short-term advantage over digital cable, but their advantage is weakening and the tables will soon turn.

Cable can and likely will counter most, if not all, of satellite's current strengths through extended channel offerings, enhanced customer service and improved marketing tactics. However, to ultimately defeat satellite and win the game, cable will need to develop a differentiated and higher-value product in the eyes of the subscriber. Interactive applications provide that value. Cable today holds a tremendous advantage over satellite: Cable has already deployed high-speed, interactive networks and supports an installed base of 12 million digital interactive set-tops.

Satellite has moved quickly to develop their own interactive applications as a defense. But that industry's inherent challenge resides in its installed base of feature-poor set-tops. To compete, satellite will need to convince its 17 million customers to swap out existing set-tops for new versions containing hard disks and/or enhanced capabilities. Otherwise, subscribers will not receive anything more than what they already have: digital channels, digital music, pay-per-view and a guide.

Over the longer term, satellite will likely attempt to replicate many of the interactive-television applications that cable will provide, as evidenced by British Sky Broadcasting Group plc's Sky Digital interactive services in Europe. However, satellite will always be at a disadvantage to cable. A telco return path of only 56K cannot compete with the high-speed, always-on return path of digital cable. Satellite subscribers are left with a slow and somewhat cumbersome solution for interactive applications.

Additionally, cable can and will deliver on-demand solutions that satellite will not be able to replicate, including real time VOD and subscription-VOD. According to Forrester Research, "MSOs need to tap into America's latent desire for on-demand television — what we call 'must-keep digital cable.'

VOD is the key." Why? Because digital cable offers subscribers the ability to access video content based on their own preferences and schedules, a very attractive offering to the subscriber. According to S-A's research, about 39 percent of digital cable subscribers wanted "anytime access" to video and movie content. A recent rollout of subscription-based VOD in a South Carolina cable system demonstrated the high level of demand for these types of services.

Looking ahead, Forrester Research projects that on-demand and ITV services will swell cable industry receipts by almost $900 million in 2002, and they further project that one in four digital cable viewers will be exposed to on-demand television by 2002. Paul Kagan Associates recently reported that VOD-related services would reach 37.9 million subscribers by 2006. So it is no surprise that VOD tops the list of promising interactive applications for cable operators today.

Finally, promotion should play an integral role in the game for subscriber loyalty. To keep satellite from stealing another base and scoring again, cable operators must show subscribers why they should play ball with the cable team. To the average consumer, these digital television services may all seem the same. Deploying applications, marketing those new services and then developing improved training and education materials for both the customer service representatives and subscribers will help digital cable differentiate their services relative to satellite and to succeed over time.

To ultimately win the game, digital cable needs to develop a strategy for the home runs of the future. Cable operators need to deploy interactive applications into their cable systems today to capitalize on their current advantage over satellite, to win back lost subscribers and to build a sustainable competitive advantage to reduce subscriber churn over the long term. If digital cable can do that, they will win the World Series and take an ITV trip to Disneyland.