Cable Operators

Mixed Picture: HD Penetration Up, But Viewer Confusion Persists

12/14/2009 2:00 PM Eastern

As the number of U.S. households with high-definition television sets approaches the 50% threshold, viewer confusion about HD technology continues to create challenges for operators.

The numbers make it clear that consumers are embracing HDTV. According to market-research firm DisplaySearch, 41.3 million HD sets will be sold in 2010, up from 37.6 million in 2008.

“You would think that the state of the economy would produce some pretty severe headwinds on the television business, but that has not been the case,” said Paul Gagnon, director of North America TV research at DisplaySearch. “In every quarter of this year, we have seen growth in [HD TV set sales] that has exceeded our forecasts.”

Even as rising sales have pushed HDTV penetration to record levels, though, consumers seem as confused as they are enthusiastic about the technology.

HDA large number of homes with HD sets — some 14 million, according to a recent survey by Frank N. Magid Associates — do not receive high-definition TV service. That means consumers are spending hundreds or thousands of dollars for high-definition sets that aren’t displaying broadcast or cable channels in HD.

“Only two-thirds [66%] of those who say they own an HDTV set subscribe to an HD service, which is about the same level [64%] that we found in last year’s survey,” said Maryann Baldwin, vice president of Magid Media Futures, which released its annual HD survey in late November.

Meanwhile, the huge sums of money spent by programmers, cable operators, telcos and satellite providers to upgrade to HD have produced some minor changes in the way people watch television, but don’t appear to have prompted a sea change in TV viewing habits or in the way people choose multichannel providers.

There’s some evidence that increased satisfaction with HD pictures encourages consumers to watch more TV, according to Nielsen senior vice president of insights, analysis and policy Patricia McDonough. A 2009 Nielsen-funded study by the Council for Research Excellence found that bringing an HD set into the home “increased viewing by 6% to 7%.”

There is also some evidence that HD viewers are spending more time with HD programming than in the past. A recent study from Knowledge Networks, How People Use HDTV 2009, found that 43% of 13-to-54-year-old HDTV viewers watched high-definition programming every day — a 65% increase in the last two years, according to Knowledge vice president and group account director David Tice.

But even though they’re watching more HDTV, consumers’ programming choices are starting to look a lot like the ones they made while viewing their old, standard-definition sets. Said Tice: “Their selection of what they would watch is now closer to what they would normally watch, because what is available in HD is much more mainstream than it was two years ago.”

Despite that increase in HD programming, many viewers are still watching a lot of TV in standard definition. And surprisingly large numbers of viewers aren’t watching the HD programming available to them.

The Knowledge Networks study found that only 58% of men and 41% of women were actively surfing the HD channels for something to watch when they first turn on their set. Only 15% said they’d stopped watching a channel because it wasn’t available in HD, indicating that content continues to trump pixel count.

Nor are many consumers dumping their multichannel provider to get a better HD package. A recent Leichtman Research Group study found that only 6% of those surveyed actually switched multichannel providers in the last year because of HD programming choices.

Each year, Leichtman also asks HD set owners if they’d switch to another provider if they could get twice as many HD channels for the same price.

“Each year the number of people who say they’d switch decreases,” said Bruce Leichtman, the research firm’s president and principal analyst. “This year, only one-third said they would switch. Basically, consumers want to stay with what they have. HD is not necessarily the driver of that switching decision.”

UPPING CAPACITY

That doesn’t mean the arms race to find more capacity for more and better HD content is likely to end anytime soon.

There are several major trends in the consumer-electronics business likely to force operators to set aside more bandwidth for HD in 2010 and beyond, said DisplaySearch’s Gagnon.

On the high end of the business, manufacturers continue to develop even better displays and in 2010, they will begin offering sets capable of rendering 3-D HD images. Those trends, said Gagnon, will boost demand for bandwidth-intensive formats such as 1080p and 3-D in the next few years.

More immediately, the increased popularity of lower-cost midsized sets will convince more consumers to upgrade to high def — and encourage those who already have HDTVs to buy second or third sets for bedrooms or elsewhere in their homes.

Thirty-eight percent of HDTV owners have more than one set, according to LRG estimates.

These additional sets will force operators to find more bandwidth to deliver multiple HD streams into the home. They may also boost demand for expensive HD DVRs, which can cost $300 to $400 per box. To avoid those costs, a number of operators have already deployed or are testing whole-home DVRs.

Meanwhile, operators are leaving huge sums of money on the table, as many new HDTV sets aren’t being connected to high-definition multichannel-TV services.

Three recently released studies from Knowledge Networks, Magid and LRG all found that less than two-thirds of all homes with an HD set actually receive signals via a multichannel provider or an antenna. Magid, for example, found that some 14 million homes with an HD set are not getting HD signals.

EDUCATING CONSUMERS

One big reason for this gap, which researchers have been reporting for several years, is consumer education.

“In many ways [consumer education at the retail level] is getting worse,” said Leichtman. “The set buyers today are not going to a specialty store, like they were three or four years ago, and really studying and educating themselves. They are buying off the floor at Wal-Mart and discount stores, where they’re not getting educated.

“Only 36% said they were told how to receive HD programming at the store. That’s the lowest level ever.”

The result is a major loss of revenue. Convincing just 30% of those 14 million HD homes to sign up for a $10-per-month HD tier would produce $42 million in new revenue each month, or about half a billion dollars each year. Convincing 60% of those folks to use their HD set to actually watch HD channels would bring in $1 billion each year.

“It is a major opportunity for operators to increase their programming subscription” revenue, said Jill Rosengard Hill, senior vice president at Frank N. Magid Associates.

To address that problem, some operators have established closer ties to retailers and are running ads to educate consumers.

“This holiday, we’ll once again be running our 'HD not included campaign,’ ” said Comcast senior vice president and general manager of video services Derek Harrar. “It is sort of like a 'batteries not included’ reminder to people that if you buy an HDTV, you will have to remember to get the service.”

But much HD marketing continues to focus on raw channel counts and bragging rights over having the most HD content.

“It’s been almost three years since we made the announcement at [the Consumer Electronics Show] that we would have 100 HD channels,” said DirecTV executive vice president of content strategy and development Derek Chang. “Since then, we’ve had the first-mover advantage and been the HD leader. Over the last two or three years, the other guys have been trying to catch up, but no one has really caught up with us.”

Currently, DirecTV has slightly more than 130 linear channels and is planning to continue to ramp up its HD lineup in 2010. As part of that effort, the satellite-TV provider is planning to launch its new D12 bird, which should be operational in the first half of 2010, at year-end.

“That will give us 50% more capacity,” Chang said. “We will be able to do up to 200 channels, when other guys are struggling to get to 100.”

DirecTV hasn’t decided if it will use all of that capacity for new HD channels, though, Chang said.

DirecTV is also attempting to establish an image-quality leadership position by offering more content in 1080p. All of its new Hollywood movies are now available on demand in 1080p and it recently launched a linear movie channel in that resolution.

3-D may also be on the roadmap. “We’re trying to gauge our potential entry into that market right now,” Chang said.

TELCO POSITIONING

Phone companies have also been positioning themselves as HD leaders. Verizon Communications’ fiber-to-the-home FiOS TV service was designed to help establish the telco as the leader in a number of key areas, including HD, noted vice president of content strategy and acquisition Terry Denson.

“We eclipsed the 100-HD channel mark faster than anyone else and even though the competition is closing the gap, we’ve clearly established a leadership position,” Denson said. “We have every reason to believe that we have the highest HD penetration in the industry.”

Verizon presently offers more than 125 HD channels, 2,400 on-demand HD titles and a whole-home HD DVR option, with more on the way.

Verizon’s fiber infrastructure gives it the capacity to add more HD content over the next year, said Denson, and this infrastructure will allow the telco to eventually roll out 3-D and 1080p programming, though he expressed some doubts about the immediate demand for 1080p and 3-D.

AT&T isn’t deploying fiber to the home, but its IPTV infrastructure has allowed it to rapidly expand its U-verse TV HD offering.

“With an all-IP platform, the capacity for carrying channels is not an issue,” said AT&T executive vice president of content Dan York. “We’re open to bringing on as many HD channels as is economically feasible for an affordable offering,”

So far this year, AT&T has added 25 channels to U-verse and deployed an HD premium tier with such networks as Smithsonian Channel and MGM HD. “We currently offer at least 110 HD channels, more than cable in all our U-verse markets,” York said.

The telco is also expanding its HD VOD lineup and has deployed a whole home HD DVR.

Cable operators have also been using a wide variety of tools to ramp up their offerings.

Comcast, for example, has been expanding its HD channels by reclaiming analog spectrum. “We are on track to have completed [the transition in] about one third of the footprint by the end of the year,” said Comcast’s Harrar. “In those markets, we are comfortably north of 100 HD channels.”

Comcast hasn’t set a timetable for the completion of its other markets but Harrar expects the work to be “substantially done” in 2010.

The Philadelphia-based MSO has also been ramping up its VOD HD offerings to over 2,600 HD titles and this year was the first to launch HBO’s high-def VOD product, Harrar said.

To further strengthen its offering with consumers who may be reluctant to pay for an HD tier in a tough economy, Comcast is offering “HD for free” to all its triple-play subscribers.

“It is a pretty challenging market to sell something new into the home but our packages have really helped us” get more homes to sign up for HD services, he said.

Comcast will continue to add more HD content in 2010, though Harrar downplayed the potential impact of satellite moving towards 200 HD channels.

“By the time you get to 100 HD channels, I don’t think we feel like we have a competitive deficit because we also have robust VOD offering compared to satellite,” he said.

The operator is also planning to roll out whole home DVRs early next year and has experimented with 3-D content. “Both 3-D and 1080p are movie-centric technologies at the moment, and we’re looking to grow them out with the on demand platform which is where consumers most like to watch movies,” Harrar explained.

Cox Communications’ vice president of video product development and management Steve Necessary noted that the MSO has also been bulking up its HD line up.

“It varies but right now we are in the low 80s on average,” Necessary said. “A year from now, we expect to be well over 100.”

The Atlanta-based MSO is also looking to add more HD content to its MyPrimetime on demand service and recently cut a deal with NBC Universal to add more of its series in high def.

In addition, Cox is also trialing a multiroom DVR, which he says “we will be deploying broadly in the first quarter of next year” and it is upgrading its guide to make it easier for subscribers to find VOD content.

Such efforts seem to have paid off. The 2009 Magid survey of HD homes found that 67% of cable subscribers were satisfied with the available number of HD channels, up from 21% in the 2004 survey, compared to a 74% satisfaction rate for satellite.

“Satellite customers have shown pretty high levels of satisfaction with HD services for quite a while now,” said Magid’s Baldwin. “But we started to see growing satisfaction for cable last year and they now are pretty close to the same levels of satisfaction as satellite.”

September