After switch, Wilmington consumers sticking with free TV

by Kim McAvoy, TV Newsday

Last fall, when Wilmington, N.C., broadcasters were getting ready for the
DTV switchover trial, the city's local cable operator, Time Warner Cable,
saw a golden opportunity.

Here was a chance to lengthen its subscriber rolls.

A "dear neighbor" letter went out to Wilmington residents encouraging them
to sign up for a $7.95 per month basic cable package as an "easy solution"
to the DTV transition.

Time Warner is not alone is trying to capitalize on the DTV transition.
Other cable and satellite operators have offered similar inducements as the
government and the media have warned consumers with increasingly urgency
that era of broadcast analog TV was coming to an end.

Comcast and Cox are offering new customers free basic cable service for up
to 12 months, if they sign up for at least one additional service such as
phone or Internet.

Comcast also has a $10 a month basic cable package for a year and current
subscribers can get free hook-ups for additional sets in the home.

"The simple fact is that basic cable is the easiest path through the digital
transition and now consumers can get it for free," announced Comcast's Derek
Harrar, general manager and senior vice president of video services, in a
press statement released in October.

But, despite such efforts, consumers have proven surprisingly resistant to
the call of pay TV and the number who have chosen to convert from antenna to
cable or satellite is falling short of many expectations.

At one time, SNL Kagan analysts thought that as many as 20 percent of the
nearly 16 million over-the-air-only households would migrate to cable or
satellite during 2009.

But now the company thinks the conversion rate will be closer to 10 percent
or a gain of 1.6 million new pay customers (one million for cable and the
rest of satellite), says Justin Nielson a senior analyst at SNL Kagan.

What's changed?

Nielson cites the recession. "More people are going to opt for the converter
boxes than signing up for cable just because of the cost. It is a one-time
cost for the converter box." he says.

"We've seen a dramatic increase in the fourth quarter in the number of
coupons redeemed and the number of DTV converter boxes sold," Nielson adds.

The converter box, which cost about $60 retail ($20 with a government
discount coupon), permits consumers to continue watching TV on their old
sets by converting off-air digital signals to analog. Consumers also have
the option of buying a new digital TV set and hooking it up to an antenna.

Nielson also thinks a lot of individuals are happy with their converter
boxes and are "actually impressed" with the new signals and the HD
programming that they are able to get over the air.

Barclays Capital had a similar conversion about free-to-pay conversion.

It originally predicted 2.6 million over-the-air-only homes would opt for
cable or satellite during the transition rather than go through the expense
and hassle of buying a new TV set or acquiring a converter box. But it
revised the figure downward dramatically in a November report on the impact
of DTV transition.

The transition is not likely to be a "bonanza" for pay-TV providers, the
report said. "Based on Wilmington results, we estimate only 10 percent of
OTA-only households are likely to switch to pay-TV, adding 1.7 million new
subscribers worth about $3.7 billion in market capitalization."

The 1.7 million estimate covers the DTV transition period from the end of
2008 through the first two quarters of 2009, says Alan Miles, vice
president, equity research for media, Internet and telecommunications at

Miles says that two-thirds of the 1.7 million new subscribers will choose
cable, with the remaining going to satellite services.

"In both cases these numbers are small and when we calculated what they
would be worth to the pay TV industry, it wasn't a lot of money; it wasn't a
material impact," Miles says.

Barry Goodstadt, of Centris, a research firm that is tracking DTV through
consumer surveys, said last October that eight million homes (about half the
over-the-air-only homes) would make the leap to pay TV.

That migration — 5.3 million to cable, 2.7 million to satellite — would add
a combined $6 billion more to their annual revenues, Goodstadt said.

Goodstadt based his forecast on findings that the DTV signal is not as
rugged as advertised and consumers would have trouble with antennas or
simply wouldn't want to hassle with them anymore.

Based on its latest research, Centris is now retreating on those numbers.

Within the last six months, 2.2 million homes that rely on over the air
signals as their primary source of TV have signed up for cable or satellite,
according to David Klein, executive vice president of the firm.

And Klein says that at least two million more OTA households will switch to
a pay TV service over the first two quarters this year.

Satellite and cable would capture an equal share of the 4.4 million
converts, he noted.

But Klein also says that the migration to pay will continue long after the
DTV transition is over, hitting the seven or eight million mark by the end
of 2010.

"The trend has shown that over-the air homes are declining very steadily,"
Klein says.

Take away the expectations and cable can celebrate basic subscriber growth,
something that it hasn't really seen in several years.

Early last year, Sanford C. Bernstein & Co., made a conservative assessment
of pay TV gains, predicting that cable and satellite would pick up a
combined 1.4 million homes.

But that growth shouldn't be dismissed, it says.

In a financial forecast for Comcast, Bernstein says: "In a year [2009] that
may be the high water mark for telco video additions, and low point in the
broader economy, the cable industry could well enjoy its best year for basic
video subscriber growth in more than a decade."

Cable and satellite operators, of course, know best what kind of subscriber
lift they are getting from the transition, but, so far, they aren't talking.

They have always been reluctant to share subscriber figures and they now
understand that it would be politically unwise to ballyhoo any subscriber
gain from the pain the DTV transition is causing just about everybody else.

"We feel there is some mild opportunity for us to take subscribers, but
we're not spinning it as the second coming," says Alex Dudley, a spokesman
for Time Warner Cable.

And what exactly happened in Wilmington — the great DTV transition test bed?

Time Warner didn't "really track" what new subscriber gains it might have
made in Wilmington, says Melissa Buscher, director of media relations for
Time Warner's Carolina region. "It was more important for us to make sure
the message got out being a test site than it was for us signing up new

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