December 03, 2000

Consolidation among cable system operators and the increasing availability of new services, such as digital basic, video-on-demand, and interactive TV, will push the number of U.S. households subscribing to digital cable service to 27 million by 2005, according to a new report from the Yankee Group.

The report, titled "Digital Cable Takes Off," notes that while industry consolidation has helped spur deployment of digital cable, most operators are still in the process of upgrading their infrastructure to offer this service and are finding rapid acceptance from a relatively small base of early-adopting consumers. Over the long term however, the challenge will be attracting the next wave of subscribers once digital has fully penetrated the early adopter segment.

"If the cable industry intends to meet its goal of having the majority of subscribers receiving digital cable, it must improve its value proposition, particularly to non-premium households," says Michael Goodman, senior analyst for the Yankee Group's Media & Entertainment Strategies practice. "Originally designed to appeal to premium subscribers, which comprise approximately 32% of cable households, and with a typical entry price of approximately $45, operators will be hard pressed to get digital cable into the homes of consumers who spend less, don't have a set-top box and do not subscribe to a premium service."

In order to appeal to these non-premium and price-sensitive households, cable operators like Comcast and AT&T are launching digital basic packages to appeal to non-premium households.

In addition to greater availability and new programming packages, the Report predicts that interactive TV services such as TV-based Web access, T-commerce, and video-on-demand will help sustain demand for digital cable over the next five years.

Year Digital Cable Subscribers (in Millions)

2000 - 7.7
2001 - 11.7
2002 - 15.5
2003 - 19.2
2004 - 23.1
2005 - 27.0

Some other key findings from this Report include:

· The stage of deployment for digital cable varies by market, and this in turn affects the adoption rate. In markets where digital cable has been available for several years, the rate of adoption may slow after the first early-adopting consumers are acquired.

· Interactive TV will further digital cable penetration. Interactive TV applications, such as video-on-demand, e-mail, enhanced TV and high-speed Internet access via TV, all require a digital set-top box. As these applications become available, consumers will need to upgrade to digital cable in order to gain access.

· Digital cable could eventually reach a maximum penetration of approximately 65% to 70% of cable subscribers. Not all cable subscribers will subscribe to digital cable in any form. Approximately 30% to 35% of cable subscribers will choose not to subscribe to digital cable.

· New subscribers offer cable operators a strong opportunity to sell digital cable. While, cable's annual churn rate stands at approximately 26%, most of this churn is due to cable subscribers moving. But when these moves are completed these customers renew their cable subscriptions at their new location, presenting customer service representatives with the opportunity to sell them digital cable.

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