HDTV Enters Next Phase: The Retailing Of Cable

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The digital television transition this year entered its next major marketing phase as select cable operators began selling high-definition television equipment and services through major consumer electronics retail chains.

But delays in government approvals of interoperability standards and divergent terms among cable operators are leaving retailers with a complex roadmap for getting started. Retailers who persevere will be rewarded with increased HDTV set sales and potential incremental revenue from the sale of cable service.

In general, cable operators have indicated a willingness to add HDTV programming as a means for keeping their top-tier subscribers from churning over to digital satellite services, which have offered an assortment of HDTV channels since the launch of the DTV transition.

Meanwhile, satellite TV makers looking to maintain their leadership status have expanded HDTV offerings and are preparing to deliver new HDTV-compatible equipment, such as personal video recorders, which leaves retailers the task of qualifying the consumer for the best service for their circumstances.

This is all good news for retailers, who stand to be among the bigger beneficiaries of this new skirmish, with both multichannel TV industries dangling commissions for the registration of new subscribers and, in some cases, profit margins on the sale of cable set-top equipment. Today, consumers looking to take HDTV cable services must acquire an HDTV-compatible cable decoder box to view the new channels. This can come either directly from a local cable operator or from one of a handful of CE retailers who have arranged with regional cable companies to sell or lease HD set-top equipment to consumers.

In most cases, the consumer leases the set-top box for a few extra dollars a month, but in select cases some cable operators are allowing retailers to sell the cable decoding equipment to the consumer. For the trouble, the retailer generally makes a one-time commission payment for each sale, although the terms vary from market to market.

What cleared the way for this cooperative venture was a mandate from the Federal Communications Commission (FCC) that cable operators allow the sale of cable receivers through retail outlets. Many devices would be compatible with all the features of connected consumer electronics devices.

To address this order, CableLabs, the cable industry's engineering and standards developing organization, developed a system called OpenCable that called for the use of removable smart card security modules (called Point of Deployment Cards, now called "CableCARDs"). These cards, which plug into the back of a cable receiving device, would be distributed by each cable company and would enable locking or unlocking premium channels according to a viewer's subscription package.

This system allows for a cable-ready television set or set-top box purchased in one city to be transported to another city with the assurance that it will work on the new cable system.

In the past, analog cable systems often used virtually featureless set-top decoders with integrated security systems that interfered with the operation of popular features on TV sets and VCRs, such as picture-in-picture functions. These boxes only worked with one cable system and were typically leased by a cable company to customers, requiring limitless extra monthly charges on top of the service subscription fees.

The FCC is now reviewing a base-level digital cable interoperability agreement that was worked out between the cable TV and consumer electronics industries last December. The commission must sign off on that agreement before consumer electronics manufacturers and cable companies implement it in new equipment and services.

The base-level "unidirectional" cable interoperability agreement (also called the one-way plug-and-play agreement) consists of two major parts: the first covers how cable operators send their signals to receiving products; the second covers encoding rules for the use of that content in the home. The system provides for the use of two different digital interfaces — IEEE-1394 with DTCP content protection and DVI/HDMI with HDCP content protection, in addition to analog HD component video connectors. It also addresses the level of copying that is permissible for any given title — such as copy once, copy never, etc.

Eventually, a bi-directional — or interactive — cable interoperability agreement, which is currently under discussion between the cable and consumer electronics industries, will create a standard for how two-way interactive services will be relayed on top of the unidirectional system.

Current discussions on the bi-directional system are focused on such issues as the kinds of interactive capabilities a bi-directional system would support, including video-on-demand services and interactive program guides. The talks are also focused on the level of hardware support that will be necessary to perform these different tasks.

One source involved in the discussions said the talks were "still in the preliminary stages." Eventually — probably sometime in the first half of 2004 — an agreement will be issued, "including not only the cable TV and consumer electronics industries, but also Microsoft, Intel and some others parties," the source said.

After the FCC approves the first baseline unidirectional interoperability standards agreement, manufacturers will begin to offer digital-cable-ready HDTV sets that can be sold in any market in the country regardless of the security system a cable operator uses.

Cable operators will provide purchasers of these sets with a CableCARD to enable viewers to access scrambled premium channels to which they have subscribed.

The FCC decision on the agreement has been placed on the back burner until September as it hammers through other pressing matters such as broadcast television ownership rules, observers said. The delay will likely jeopardize some manufacturers' abilities to offer digital-cable-ready television sets next year.

"The problem is that the longer the FCC takes to act on the unidirectional agreement, the longer it takes for us to act on the bidirectional system. We have to know exactly what the foundation is going to be that we are building on," said a source working on the bidirectional interoperability agreement.

Until the FCC authorizes this interoperability standard, however, many cable operators around the country will continue to lease subscribers set-top decoder boxes with built-in security. This makes it more difficult for retailers to offer HD cable equipment and services, and makes it necessary for retailers to enter partnerships with local cable operators to begin those offers.

Cable multiple system operators (MSOs), who are anxious to get started, have partnered with a number of major consumer electronics retail chains, including Best Buy, Circuit City and Tweeter to begin selling or arranging to lease these integrated decoders.

Most MSOs, including cable giant Comcast, have thus far opted for the lease approach, enabling the customer to add an HD-capable set-top box to receive HD content on HDTV monitors. Comcast charges a nominal monthly fee for the box, and currently does not charge extra for the HD programming, provided a subscriber signs on for a basic package.

The retailer is given a commission payment, which is "competitive with what they would have made from the sale of a DirecTV or EchoStar system," Comcast said.


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