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High Cost, Low Perceived Value Slow Consumers' Digital Cable Adoption

24 Apr, 2003 By: Holly J. Wagner

If DVD has created the most excitement of any consumer or media product in recent memory, digital cable is the anti-DVD, eliciting more yawns than any media technology over the same time frame.

Cable companies have spent more than $70 million to upgrade their systems to digital cable, but they are struggling to persuade consumers that the upgrade is worth the cost, according to a report from analysts at McKinsey & Company.

With subscriber growth at about 30 percent, subscriptions are hitting the wall.

Cable companies charge an extra $10 to $14 a month for a digital upgrade, but many nonpremium channels and networks only broadcast in analog, so upgrades often apply to only a portion of the channels available. Consumers may be willing to pay that rate to add new programming from a premium network, but, as the analysts pointed out, “it seems that many viewers are less than thrilled at the thought of paying more money just to get a better picture and an on-screen program guide for the same shows they received with analog TV.”

Churn for digital cable services is higher than for any other media, according to McKinsey analysts Fraser K. Cameron, Stephen Hasker and Elizabeth Hilton Segel. The churn rate -- the rate at which customers try and then drop a service -- runs between 4 percent and 5 percent for digital cable, compared to 2.5 percent to 3 percent for analog cable, 1.5 percent to 2.5 percent for high-speed Internet service and 1.3 percent to 1.5 percent for digital broadcast satellite (DBS).

Meanwhile, monthly fees for DBS are about the same as traditional cable service, but all channels are transmitted digitally. As a result, customers who abandon digital cable are more likely to defect to a DBS or personal video recorder (PVR) provider like TiVo, which supports digital programming along with ad-skipping and time-shifting capacities.

As long as studios and networks fear the digital environment and the potential loss of ad revenue, the analysts predict digital cable adoption will remain sluggish.

“On-demand services from the cable companies could give viewers a similar ability to omit commercials, but participating networks, and even the studios, could retain greater control through the use of up-front advertising and the ability to disable the fast-forward function during interstitial slots,” the analysts contend.

They offer five strategies to move VOD adoption forward: compensate networks for missed ad revenue; create a new advertising model for the technology; price on-demand services to entice consumers; measure audiences as broadcast networks do; and create effective copy protection for digital programming.

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