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WILL DIGITAL TV HELP SATELLITE BROADCASTERS BEAT CABLE?

For direct-broadcast satellite (DBS) operators, the advent of digital TV would seem to be bad news. After all, until now, DBS broadcasters have had a monopoly on sending high-quality digital signals. From Nov. 1, a growing number of local and cable broadcasters will send standard- and high-definition signals, too.

But the DBS industry isn't worried. It thinks the move to digital will help mitigate DBS's biggest competitive disadvantage against cable: the inability to deliver local signals.

For DBS operators, gearing up for high-definition TV (HDTV) involves minor investment and promises almost certain losses over the next few years. Still, both DirecTV and EchoStar (DISH) are moving forward to soon launch minimal HDTV programming with more coming next year. (PrimeStar isn't a player in HDTV). Since local and cable broadcasters' delivery of HDTV will be spotty at first and will never blanket the entire country, DBS will be the only nationwide service for HDTV.

DirecTV, whose 4 million-plus subscribers make it the industry leader, began tests of HD transmissions in January and plans to begin real broadcasts in November. At first, it will broadcast primarily promotional programming, mostly movie and sports clips, aimed at retail showrooms. In the first quarter of 1999, DirecTV and its partner, U.S. Satellite Broadcasting (USSB), plan to add HBO's HDTV channel, probably for no extra cost. This could quickly lead to pay-per-view programming.

POCKET CHANGE. So with two channels, and no new revenues, DirecTV doesn't expect many pure returns from its HDTV efforts. "We think two national channels will be sufficient for the next couple of years," says Larry Chapman, executive vice-president at DirecTV. "But if there's more demand, we'll consider expanding."

Meantime, while small, there will be costs. Chapman estimates that $3 million to $5 million has been spent to equip the uplink facility with encoders, routing infrastructure, monitors, and other gear. Some additional costs for transponders, at $100,000 to $200,000 per month, will also be incurred. DirecTV expects to get one or two HD channels per transponder, compared with seven or eight for standard-definition TV. "No, we won't make any money," Chapman says. "Maybe in three or four years."

Subscribers, too, will have to pony up to get HDTV via DirecTV. In addition to pricey new HDTV sets, they'll need new set-top boxes and satellite dishes that'll cost about $700 to $800, although prices will fall quickly later.

Despite these costs, DBS operators see the spread of digital broadcasting as an opportunity. More and more digital TV sets will include DBS decoders. And the HDTV services sent via satellite will require new antennas that can also receive additional local or niche programming.

BUILT-IN PRESENCE. The key to DirecTV's strategy is an exclusive deal with Thomson, maker of RCA and other TV brands, to equip all new digital TVs with an internal HDTV decoder that can receive both DirecTV and terrestrial HDTV signals. Says Chapman: "Now, when we sell a set-top box, it gets activated, but it's hard work. But as people buy HDTV sets, we'll be included automatically as a feature set." Chapman says the other benefit is that "We'll get more incremental subs and get them more cheaply." Now, DirecTV spends about $420 in new-subscriber acquisition costs.

Since DirecTV will subsidize part of the cost of the Thomson deal (as it does currently for its set-top boxes), consumers will have to bear only a minimal additional expense. DirecTV is also pursuing similar decoder deals with other manufacturers.

The bottom line? Chapman reckons there'll be a 25% to 100% "market lift" thanks to HDTV. This means that if DirecTV's ultimate subscriber level without HDTV was 10 million, the total with HDTV could be boosted to 20 million subscribers.

Despite the hype, DirecTV isn't making things easy for viewers. In fact, technically, it's quite a mess. First, because its primary satellite is nearly full, the company will use a transponder on a different bird, in a different location. This will require subscribers to use a larger dish. Now, most people can pick up DirecTV signals with an 18-inch-diameter round dish. For HDTV, they'll need a 21-inch by 33-inch elliptical dish.

Second, the broadcast format isn't completely set. Of course, the receiver will handle all 18 FCC-approved formats. But officially, DirecTV is still in the process of choosing between 720 scanning lines in the "progressive" format or 1080 lines in the "interlaced" format (see "Defining Terms on High Definition"). Most likely, it will be 1080i. And this decision will be influenced by Thomson's interests.

WRINKLES. EchoStar, the other DBS show in town, is planning a retail showroom channel similar to DirecTV's and also plans to carry HBO's service next spring. Unlike its rival, EchoStar aims to rebroadcast the networks' HDTV programming, but it has yet to reach an agreement with them on this.

Another wrinkle is copy protection. Mark Jackson, senior vice-president of the company's satellite services division, says there has been no agreement on a copy-protection scheme for HDTV transmissions. Studios are concerned about the potential for unlimited, perfect-quality copying via new digital VCRs. "The studios want to rectify that for HDTV," says Jackson. "They'll hold our feet to the fire to get the content." He's concerned that, as with digital video disks, the dispute could delay the release of content, especially for new material.

While CBS (CBS), subsidized by Sony Corp. (SNE), will broadcast a handful of National Football League games this season in HDTV, Jackson says the programming consumers want most -- sports and live concerts -- will come to them last. "Everyone needs new equipment, new procedures in the broadcast center," he says. "It's easier to do films and put them into HDTV."

As for formats, EchoStar will begin with full 1080i but would prefer to get to 720p. "Everyone will go to this once a lot of channels are up there," Jackson says, noting that this would save bandwidth. It also will allow a 60-frames-per-second refresh rate that is well-suited to sports. "In the end," he says, "economics will drive us to 720p."

EXTRA BIRDS. Similar to DirecTV's deal with Thomson, Echostar has deals with Philips (PHG) and JVC to embed decoders in some digital TVs. And also like DirecTV, EchoStar will not use its main bird for HDTV. It will use Echostar III and EchoStar IV, which will require subscribers to buy a second 18-inch dish. However, these birds are used to distribute local channels in more than 20 markets, in a contentious service that is key to EchoStar's attempt to compete with cable: The more consumers that EchoStar can get to buy the second dish, the more viewers who won't need cable for local channels. Consumers also will need a new set-top box, of course. How much will it set them back? "We're not saying," says Jackson.

As for EchoStar's costs, Jackson says, "I don't have a clue." But this much he does know: EchoStar is going into HDTV because "it's the wave of the future," says Jackson. "We're trying to support our partners -- consumer electronics stores and the networks." And trying to grab a piece of the next big thing in mass media.

By Steven V. Brull in Los Angeles



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