The past year's boom in digital set-top box distribution has sent digital-cable networks jockeying for position and eyeing opportunities to grab more shelf space.
After several years of static numbers, digital set-top box distribution estimates now hover in the 10 million range, and some industry observers predict that total could double by the end of 2002.
And as cable operators experience digital's ability to deliver improved cash flow — and Wall Street's willingness to reward increased penetration rates with higher cable-subscriber valuations — they are expected to step up distribution even further.
"Through 2000, I think the pace of digital rollouts was slower than what the industry had projected," said David Zagin, senior vice president of affiliate sales for A&E Networks. "Now we're seeing companies like Charter [Communications Inc.] and Comcast [Corp.] really showing some numbers and, industry-wide, we are seeing set-top box deployment pick up."
But increased digital set-top penetration doesn't automatically translate into more carriage opportunities. For this new wave of so-called "diginets," the mean streets of digital distribution are fraught with obstacles and challenges.
Channel space has been devoted to networks that once were hell-bent on analog carriage but now, weary of the wait, have finally acquiesced to digital status.
Operators have also devoted more bandwidth to premium-channel multiplex services and have budgeted space for potential video-on-demand and subscription VOD gambits.
None of this speaks to a spate of new services — both stand-alone outlets and brand extensions from powerhouse media companies — which are clawing for carriage.
And established network players are muscling their new networks onto digital tiers by discounting their base channels or leveraging their retransmission-consent chips.
As Discovery Networks U.S. senior vice president for distribution and marketing strategy Lori McFarling lamented: "Sometimes you can work your tail off and then what happens? You watch as the retransmission-consent networks are handed the distribution. It's a real challenge right now."
Distribution difficulties aside, nascent diginets are also trying to program and promote themselves in a world of limited license fees and advertising.
HANGING TOUGH
"The guys who will win this race are the guys with patience and who have a business plan that can accommodate a totally different kind of marketplace," said Fox Family Worldwide president of distribution John Burns. "This is a long-term game of patience."
Burns should know. Fox Family Channel last year pulled the plug on two digital networks — BoyzChannel and GirlzChannel — after struggling for a year to secure distribution.
Those newcomers were hamstrung by several factors, including slow digital-cable rollouts. At the same time, cable operators carped over the asking price for the two networks: 25 cents per subscriber.
In retrospect, the timing was also bad. A flood of kids' programming had already hit the market, making it tough for Fox Family to get its networks noticed, Burns said.
"There was a window about two or three years ago when AT&T [Broadband] started launching its digital strategy, where there was a real hunger for fresh, new programming," he said. "With Boyz and Girlz, we were just a little too late. I can't tell you how many times operators said to us, 'We wish you were here six months ago.' "
The Fox Family progeny weren't the only diginets to get caught in the shelf-space squeeze.
Scandinavian Channel, which carried programming from Denmark, Finland, Iceland, Norway and Sweden, went dark in May. Executives cited the slower-than-expected rollout of digital set-tops and a lack of additional investment capital as the reasons for Scandinavian Channel's demise.
Classical music-oriented Fanfare also sounded its last note in May. The 3-year-old network had some carriage commitments, but couldn't stay afloat.
Even juggernaut Discovery Networks U.S. last year found itself shelving Discovery People.
Despite these flameouts, the onslaught of new networks continues. Lifetime Television this summer will launch Lifetime Real Women, an ad-supported network featuring reality-related programming told from a female point of view. It's being offered for both analog and digital distribution.
Barry Diller's USA Networks — which already includes performing-arts purveyor Trio and Newsworld International — plans this fall to launch a new diginet to compete with Court TV. Diller's partner in the network, called Crime Channel, is John Langley, creator of the TV series Cops
and operator of Web site Crime.com.
WORKING THE NUMBERS
It's not easy to make the economics of digital networks fly. Programmers can't charge much in the way of license fees and often must wait until a couple of years into the channel's life to see any cash flow.
When programmers can secure fees, they often amount to little more than pennies per subscriber.
The advertising-revenue waters are also choppy. The industry is trying to convince Madison Avenue that a diginet with 10 million highly targeted subscribers should be considered as an ad vehicle alongside a network with 50 million less-targeted viewers. It's a hard sell in a medium where reach has deep roots.
With today's soft advertising market, it appears that media buyers are more interested in funneling their dollars to established analog services.
Still, digital networks continue to offer new paradigms for doing business.
"When you're able to go out and offer multiple services, say two or more, and when you're able to sell them in a cumulative manner, then you're talking about a situation that can really open up revenue opportunities," said A&E's Zagin, who oversees Biography Channel and The History Channel International.
Count 20 million subscribers for the diginets — and a respectable core product — and that's a highly attractive buy, Zagin maintained.
Lifetime executive vice president of distribution and business development Louise Henry Bryson said that with 14.8 million subscribers, Lifetime Movie Network will take part in the advertising upfront for the first time this year.
"I don't know if there's a formula," she said. "What I know is that now, with nearly 15 million [households] for Lifetime Movie Network, I think advertisers view it in a positive way. The other advantage we offer is that it's women's inventory."
Added Fox's Burns, "I like launching services." He's been involved in the launch of several channels, including Game Show Network and Wisdom Television.
"But I think at this point you have to have a fairly compelling idea or concept, and I'm not sure how many of those there are left out there," Burns said. "You also need to be part of a big company or have a proprietary right to their programming. If your marketing and sales organization are in place and you can do a business plan that is compatible with the digital marketplace, well, yes."
But Doug Hull, senior vice president of OlympuSAT — which handles operations for a number of smaller, independent digital players including FamilyNet, Canal Sur and TV Chile — said many operators are still looking for programming from providers outside of the mainstream.
"We had to ask ourselves if cable operators are willing to concede any future programming ideas to only those that come out of the big four — [The Walt] Disney [Co.], [AOL] Time Warner [Inc.], Viacom [Inc.] and Discovery," said Hull. "Their digital networks are little more than brand extensions and repurposed programming, often sold in a heavy-handed way.
"The answer we came up with was, 'No.' "
CARROT AND STICK
Attracting the attention of operators is another challenge — and one the established programmers are in better position to address.
"It is very
competitive out there," Zagin said. Netting high grades in a Beta Research Corp. or Total Research study offers one measure of intrigue. But the best way to develop interest, programmers said, is through incubation and sampling.
With that in mind, The History Channel International in August will launch a weekly, Sunday-morning branded programming block on The History Channel, which reaches 72 million TV households.
A similar History International stunt, which showcased The History of Ireland
on St. Patrick's Day, drew a 1.3 rating in primetime for its analog sibling. As a result, the network plans to offer two similar primetime "International" specials on The History Channel during the second half of this year.
Likewise, Nickelodeon dedicates an hour every morning to fledgling network Noggin's kid-friendly programming.
"We can see that we get great sampling off it," said Noggin general manager Tom Ascheim. "I know that sampling is an approach that works. When I drop my kids off at school, other parents always mention something that they saw" on the Noggin block.
For its part, Discovery Channel on May 20 aired a six-hour block of aviation programming, branded as a Discovery Wings presentation. The block featured hosted interstitials on aviation and a significant rotation of promotional spots hyping the joys of digital-cable subscribership.
Discovery also offers operators digital barker spots that they can air during unsold local ad avails, adjacent to any networks' home-and-leisure programming. They push both Discovery Home and Leisure Channel specifically and digital cable in general.
"In sales, you can have a stick or a carrot approach," said Discovery's McFarling. "The carrot approach is a back-to-basics one. Essentially it works like this: How can we help our distribution partners make more money at the local level?"
CHURN, CHURN, CHURN
In addition to subscriber-acquisition ammunition, diginets want to be seen as retention tools.
Discovery partnered with Comcast Corp. in a digital acquisition and retention campaign in the MSO's Southeast Michigan system. Culling names from the network's 7-million-name "loyalist" database — which contains every consumer who has ever entered a Discovery sweepstakes or called the network for programming information — Comcast created a campaign with a $6.95 introductory monthly rate for digital.
New subscribers also were entered into a Discovery sweepstakes. The program generated a 9-percent response rate among the 1,800 Discovery contacts. Churn following the campaign also improved relative to the area average, dropping to 3.7 percent from 5.2 percent in the six months following the effort.
Lifetime's Bryson says her company's networks also highlight their retention advantage. "Our research shows women tend to be more loyal to a network.," she said. "Our networks get women to buy into a digital tier, and then stay there."
THE RIGHT PROGRAMMING
While it may be great to reach a niche, it's even better to have compelling programming to use as a foundation, network executives agree. The problem is finding fascinating fare that fits into the diginet economic model of little revenue and big expectations.
"It isn't hard for us," said Noggin's Ascheim. "We'll be north of 20 million homes by the end of the year, and in large part, it's because this is the kind of stuff people want their kids to watch. Its fun, educational, commercial-free and very consumer friendly."
That said, he acknowledged that diginet economics are tough, even for a network like Noggin that enjoys tapping into the highly regarded programming libraries of parent companies' Nickelodeon and Sesame Workshop. Even with such attractive archival material to choose from, Noggin offers a lineup that's 40 percent original programming, with plans to hit 50 percent by year-end.
"Digital subscribers are excited about this neat new box and all these neat new channels," Ascheim said. "They paid a lot of money for what they expect will be great new products. If you don't get the money up on the screen, they're going to be disappointed and you're going to get bad word-of-mouth."
Which leads to another point: Some networks, such as Discovery, have taken lot of heat because their diginets are viewed as repositories for repurposed programming. But when Discovery created its diginets, it realized that it was building from a new economic model, McFarling said.
"Let's say a show does great for Discovery and gets a 2 rating. That means 90 percent of TV viewers have never seen it. Yet, they have a huge interest in the category," she said. "Why not take that passion and interest and use it to drive revenue to the cable operator?
"These aren't shows that have aired for 10 years on broadcast. It is our most compelling programming put on at a convenient time. How can that be bad?"
