Part 2

HDTV Newsletter:

Let's hone in on the television side. There was an interesting article in the Wall Street Journal on the 24th and they are saying that the economic vision for interactive television for the Bells is quite clouded.

Dr. Green:

It is a huge cost in building a full service network. That is the economic reality. Cable television looks easy to other people, and obviously it is a very successful business. People love the product. They love multichannel television. It has become an essential. That is one reason government became more involved in it. It is no longer a luxury, it is more a necessity now. At least some believe so. At least the younger people feel that. Some of the older generation still feel like television should be a free commodity. But increasingly the younger generations are accepting, and certainly going to subscribe to wired services.

The telephone companies look at cable as a rather easy technology, but it is really not. It involves a lot of advanced technology. Then to advance it further, to add computer capability to it in order to have interactive, for example, that is a pretty big step. There were a couple of lines in the (WSJ) article about cable companies backing off a little bit, citing Time-Warner as not quite having met their objectives in Orlando. The problem for us is not so much the technology issues, but the economics.

The cable industry has always been very financially responsible. Our record in the credit markets is outstanding. The reason for that is that the industry is very careful to keep their revenues in line with the capital investments. So, we have a history of incrementally introducing technology. We took the old tree and branch architecture and replaced the trunk lines with fiber. That is only 17% or 18% of the plant and you get 95% of the benefit of fiber-to-the-home in doing that. So, you have a giga hertz from a neighborhood node. That was a very easy increment and not only that, very cost effective. It cut the maintenance cost down. It cut all of the cost of the amplifiers, which was expensive. The real breakthrough there was the reduced cost of the lasers.

The same is happening with digital. We are going to employ digital boxes. Our companies are experimenting with all kinds of approaches. Time-Warner is an example doing a full service network. The other industry leader, TCI, is doing it incrementally. They will introduce one service at a time. Which ever one takes off...

TCI formed a company call @Home. They will provide turn-key data services for cable companies, including TCI, of course. Digital compression... obviously that is pretty straight forward.

HDTV Newsletter:

How important is digital compression to the small cable companies?

Dr. Green:

Digital is less important to a big urban operator than it is to a rural operator. Now Time-Warner is a big urban operator. They have few small systems and what they have they are in the process of selling. TCI is a consolidation of very small operators. That is one reason that TCI is more of a pioneer in the digital compression area.

An operator in your region of Waldport (OR) is really under the gun from competition from satellite. It is rural, and you can go buy a dish and get 150 channels. The service will most likely be twice as expensive, but a much better selection. So, can the guy in Waldport give you 150 channels? The answer is: not very well. Even if his system is upgraded to carry 550 MHz or 750 MHz with each channel he adds he must have a satellite receiver costing upwards of $5000. He has to amortize that over the few thousand subscribers he has. The digital systems can be added to his system, immediately giving him competitiveness to the satellite. The cable industry operates a satellite services, as well. I believe Hughes now has 700,000 paid subs and Primestar has some 500 to 600 thousand. The economics for Primestar is just about par with a cable service. There are packaging options which may be a little different than cable. It is a pretty important competitor, though not advertised a great deal. It is sold through the cable operator.

The problem with the DSS is that it is expensive. That is why it has leveled off. They are trying to reduce the barrier costs through financing, but it is a nice dish and a good service.

The TCI digital uplink plant is actually bigger than that of Hughes (DirecTV). By the TCI facility is the only studio I know of that is equipped with HDTV cameras.

HDTV Newsletter:

Is TCI aggressive on HDTV?

Dr. Green:

They are. John Malone, in particular. John personally has the initiative to provide the first HDTV service. I think the problem is that the rest of the cable industry listens to him, doesn't get excited about it. They are not opposed. But John believes in it as well as does Gerald Levin (Time-Warner). They think that the cable industry ought to lead the parade. With the digital uplink they could have an HDTV picture on the air tomorrow. They would have to pick a standard and go with it.

HDTV Newsletter:

This is the first glimpse we have seen of a real start. There is certainly enough power in Malone's hands.

Dr. Green:

Yes. TCI's position on HDTV is: we really believe in it and want to do it. But we are disappointed that the standard has become bifurcated into SDTV (standard 525 digital television) as well as HDTV. We have worked on and supported the HDTV standard from the very beginning. We have spent five million dollars doing experiments and tests and working with the suppliers. Now at the eleventh hour they (broadcasters) come a long and add SDTV to it... we already know how to do that! We have the boxes and have a plant cranking out digital signals for it, and now they say they want to change it. We think it would have been lot better to stay on the HDTV path because that is a valuable new service, and, if you don't really promote HDTV vs. SDTV... people are not going to go out and buy the receivers. You really have to have an attractive service and you are not going to do that if have people broadcasting anything they want. People are going to confuse digital television with HDTV if they do all of these formats that they (broadcasters) are talking about. It will be hard to distinguish it.

One of the things High-definition needs in order to move into this marketplace is differentiation. It will differentiate itself if you give it a change. But you have all of these material interest and competitive interests slugging it out and it muddies the water. It is too bad.

HDTV Newsletter:

We have been suggesting a shared risk venture where all who are sincerely interested in a true HDTV plan gather in a commercial unit to create the market and distribute the signals.

Dr. Green:

That is exactly what John Malone is thinking. He sees that it is very easy for him to put up an HDTV service. He could do it jointly with Time-Warner. Time-Warner could produce an HDTV version of HBO overnight. The fact that there would not be too many customers is a problem. But we could produce it in all sorts of ways, not being stuck with the broadcaster paradigm.

HDTV Newsletter:

We suggest the home theater market being the most likely as first. Does the idea of providing HDTV receivers along with the programming to that segment have appeal?

Dr. Green:

One of the things John Malone has explored is acquiring the HDTV sets and leasing them, taking the risk out of it for the consumers. We can build those receivers to our specs. We can cycle those receivers as well. From the early adopters they move on to the next segment. That is how you get a service started. You do it with investment. Our revenue stream is not from advertising. We can lease receivers as part of a service. We have lots of movie services to work with.

The cable industry is in a much better position to introduce HDTV than anyone else. Incrementally we can do it much less expensively. There is an opportunity cost because we will have to remove five channels from regular television. But with the early roll out of digital we may have the capacity to do that. Later on it may prove more difficult as we have more (program) services, so we need to introduce (early) the (HDTV) service. We understand that the economics will not be compelling for awhile, but it is a great new service.

HDTV Newsletter:

Is there not also a good will value in doing so?

Dr. Green:

I think that is one of the reason John thinks it would be a good idea. Even more than that is that it is bringing new technology to the American public. The broadcasters are just not motivated to introduce the technology. They have become bottom line businesses. Guys that are in charge of the networks and say "to heck with doing anything new."

Continued

The Millennium Project