Cablers spell relief D-T-V

Digital switchover will boost subscriptions; the questions is how much?

Most cable operators have been struggling with basic-subscriber declines in recent quarters, but the digital TV transition early next year could provide a once-in-a-lifetime boost for some.

Observers say that overall, cable companies — rather than their satellite TV and telecom rivals breathing down their necks — look best positioned to sign up a portion of the estimated 14 million U.S. homes who still only get free over-the-air television rather than paying monthly fees to multichannel providers.

Collins Stewart analyst Thomas Eagan and others estimate that cable firms could win over about 1 million-2 million of these homes, or 7%-14%, starting in the fall, followed by a crunch closer to the February switch deadline. Sanford Bernstein analyst Craig Moffett suggests that these new subscribers would be worth $1,000 each over their lifetime to cable firms, meaning they could create up to $2 billion in added value for the industry.

Consumers in over-the-air homes have several options come the switch to all-digital TV signals Feb. 17: use "rabbit ears" set-top antennas for every set in the home, use rooftop antennas, sign up for multichannel service or give up TV.

Overall, "the digital TV transition could represent a once-in-a-generation catalyst for cable stocks," Moffett concluded in a recent report, arguing that it should push basic-subscriber momentum into positive territory in 2009 and drive stocks.

The argument that he and other experts make is simple. Rabbit ears in any one position likely won't get users all of ABC, NBC, CBS and Fox in any given market. Plus, the urban part of the over-the-air population — which many describe as poorer, more elderly and more heavily Latino than the average consumer — tends to live in multidwelling units where rooftop antennas "may simply not be an option" or encounter too much interference to work properly, Moffett said.

As a result, multichannel might be the way to go for many. Because these folks are somewhat techno-phobic and budget-focused, basic-cable packages look like a logical solution.

Cable also has a particularly strong value proposition for the over-the-air population, given that more than 90% of them have phone service, which cable could provide more cheaply, Moffett said.

Comcast, the largest U.S. cable operator, is making just that argument. It has about 7 million-9 million over-the-air customers in its markets, estimates Derek Harrar, senior vp and GM of video services.

He said Comcast's entry-level video service package costs $14 on average. Add in phone service that's cheaper than that of telecom firms, and a former over-the-air TV user could end up spending about the same or even less for Comcast services than they do for their communications needs, Harrar said.

"It's a really simple and affordable solution," he said. "With one call, people can take care of all their TVs."

Moffett said if Comcast gets its usual share of cable subscribers, it would win at least 350,000 of the over-the-air refugees.

Who comes out on top in terms of signing up the over-the-air refugees might depend on who already serves lower-spending customers and whose markets have less-adequate reception without a multichannel setup, said Miller Tabak analyst David Joyce.

"Some multichannel video providers are more strategically catered to … attracting these lower-value subscribers" most affected by having to move from analog to digital, he said. Joyce mentioned Charter Communications, Mediacom Communications and RCN as likely beneficiaries along with satellite firm Dish Network, which tends to attract lower-end users.

While analysts expect a digital TV transition boon, cable — and satellite — executives have shown more guarded bullishness at best.

"We do see an opportunity" to win and then upgrade new customers, Charter executive vp and COO Mike Lovett said in a recent earnings call without raising hopes too much.

Time Warner Cable CEO Glenn Britt said reaching over-the-air homes with marketing messages could be a challenge and that the multichannel market is too mature for major gains. Overall, TWC expects to "modestly pick up some customers," he said.

"We'll certainly go after it," DirecTV CEO Chase Carey said of the analog user segment. "I would not end up saying at this point we're planning for it to be a huge positive." His satellite company has been focusing on higher-end and higher-spending consumers.

"There is probably going to be about a six- or seven-month window where we're just not going to know how that's going to affect us," Dish CEO Charles Ergen said. "All we can do is get ourselves in a position to take advantage of whatever might happen."

Whether over-the-air users are ready for the digital conversion or not, multichannel players certainly are. (partialdiff)