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Who will be watching the launch of Charter's all-digital network in Long Beach? Other than local customers, who'll be getting improved picture quality and, eventually, more ethnic programming? Oh, nobody much. Just the entire cable industry and its competition...
By K.C. Neel
Someone had to be first. Cable operators know they need to make the switch to all-digital networks if they're going to keep launching new services and deliver picture quality that rivals DBS, but everyone's been awfully shy about being the first to take the plunge.
So nine months ago Charter chairman Paul Allen decided there had been enough talk about transitioning cable's analog networks to fully digital ones. He and his senior team, including CEO Carl Vogel, COO Maggie Bellville and newly promoted CTO Wayne Davis, picked Charter's Long Beach, Calif., system to serve as a model for an all-digital platform. On July 7, Charter's digital customers in Long Beach, Calif., begin receiving all their video channels in a digital format.
"I am sure there are quite a few people in the industry keeping a close eye on how this goes," says Eric Brown, Charter's SVP, Western region.
Charter Long Beach's analog customers won't be forced into getting digital set-tops?at least not yet. Wendy Rasmussen, Charter's VP/GM for the Los Angeles area, says it will be a couple of years before the system stops delivering analog signals. Charter will try to convince as many customers as possible to make the switch before it drops analog.
The digital transition will be seamless for most of Charter's Long Beach customers. The system boasts a 67% digital penetration rate?Charter's highest?which made it a logical choice to be the first Charter system to go all-digital, says Brown. Digital customers won't have to do a thing?except enjoy better pictures, he adds.
Current digital customers won't be charged to receive the all-digital signal unless they get additional set-top boxes. Charter executives predict a deluge of calls asking for extra boxes because of the improvement in signal quality.
"When you see the all-digital signal on one TV in your house, you're going to want it on all your TVs," Brown says.
"Many people see this as a bandwidth reclamation effort," Rasmussen says. "But it's really more about picture quality."
Rather than take Rasmussen's word for it, I sat down for a "blind" test at Charter's Long Beach head-end and compared the analog and digital signals. My skepticism crumbled when I saw the stunning digital images?there was no comparison.
In blind tests conducted earlier this spring, two out of three consumers said they like Charter's digital signal better than Dish Network's signal, says Craig Watson, VP, communications, for Charter's Western division.
The MSO introduced the concept of an all-digital network to existing digital customers through a series of cross-channel ads, bill stuffers and direct mail pieces on June 9. As part of its campaign, Charter teamed up with the city of Long Beach to sponsor the Aquatic Center built to host this summer's Olympic swimming trials.
"The timing was such that we could leverage our participation and use it to help launch our new all-digital product...and introduce our new management," says William Jungermann, VP, marketing, for Charter's Western division.
Trial by Fire
Most of Charter's senior management team on the West Coast is new; Charter's corporate team cleaned house last year after an accounting scandal led to an SEC indictment of several former employees. Only Lennie Smith, director of technology for the Western division and the lead engineer in the digital transition in Long Beach, goes back with Charter for more than a couple of years.
Four months after Brown left Time Warner Cable in Minneapolis to join Charter in June 2003, he?and the rest of his team?had to deal with one of the worst fire disasters in California history. Almost 1 million acres burned, much of it in Charter's service territory. The company lost its entire head-end facility in Big Bear/Lake Arrowhead and raced to restring wire in the affected service areas so customers could stay connected via their computers and TVs.
"We actually gained customers after the fires," Brown says, "because we were the only providers who were there. We wired people as soon as we could reach them. We brought computers to libraries and schools and other public places so people could use the Internet. It was a classic example of what we could do in our communities."
Charter remained active in the community. Several employees have been involved with Habitat for Humanity, and Charter is looking to make the charity one of its pet projects, Watson says.
Community-building efforts such as these will help Charter as it moves into the second phase of its all-digital marketing campaign, which begins later this year when the company experiments with ways of convincing its analog customers to switch to digital. Although Charter's marketing efforts generally are centralized, because the digital transition is unique to Long Beach, corporate VP sales/marketing Kip Simonson has been working closely with Jungermann and Pattie Eliason, director of sales and marketing for the Los Angeles market, to come up with a marketing plan that will appeal to Charter's analog, as well as new, customers.
The results of their experiments will form the basis of future digital rollouts, says Simonson.
Charter's Super Head-End
The transition to a dual analog/digital network, although fairly rapid, was complicated and expensive. Charter's engineering staff had to build and maintain two head-ends side by side. Charter executives, who would not disclose exact figures, say that it cost "millions" to retrofit its Long Beach head-end.
Eventually, IP technology may enable the company to distribute digital channels to the rest of the Western division head-ends, which would then be able to deliver a full slate of digital channels without having to be completely retrofitted.
"[Long Beach] could be considered a super head-end one day," Smith says.
Charter plans to digitize its entire analog tier?101 channels, including 24 local off-air stations and 10 PEG and local origination channels. Charter spent the last several months securing permission from the networks and station groups to transmit the signals digitally.
At press time, a handful of networks and stations were holding out. Some networks were angling for better leverage at contract renewal time; others were concerned that an all-digital network would lead to getting put on tiers, which would hurt their ad sales, Brown says.
Charter will flip the digital switch July 7, whether or not the straggler networks sign on. If a network refuses to let its signal be digitized, it will be delivered via analog. Charter hopes the degraded image quality of those networks in comparison to the rest will convince them to go digital.
Brown looks beyond mere signal quality when considering the benefits of an all-digital network. "There's an almost limitless number of possibilities with a 100% digital network," he says. "It's also one of the most frustrating aspects of it?that being the number of possibilities. We'll certainly be able to be more aggressive when it comes to meeting our customers' programming needs."
Beating EchoStar at Its Own Game
Long Beach, California's fifth-largest city with a total population of 437,816, is ethnically diverse, and Brown believes he can neutralize Dish Network's stronghold in the area by offering more ethnic programming. According the U.S. Census Bureau, 33% of the population is white, 36% Hispanic, 15% African-American and 12% Asian. Almost 29% of Long Beach's residents were born outside the U.S.
Charter faces stiff competition: The penetration of DBS services ranges anywhere from 13% to 20% depending on the ZIP code, according to Media Business Corp.
Rasmussen attributes the high DBS penetration rates partly to the satellite services' expansive delivery of ethnic and foreign programming. EchoStar has been successful in Long Beach because its rich mix of ethnic content has resonated well with area residents, Brown says.
An all-digital network will make it easier for Charter to provide a wide-ranging array of foreign and ethnic programming, Brown says. "Long Beach is one of the most culturally driven communities in the area, which makes it challenging when it comes to meeting everyone's needs," he says.
Long Beach also is diverse economically, although its population is not wealthy overall. About 13% makes less than $10,000 a year; almost half makes between $10,000 and $50,000; 9% makes between $50,000 and $100,000; 10% earns between $100,000 and $200,000; and 2% makes more than $200,000 a year, according to U.S. Census Bureau data from 2000.The median household income is $37,270 a year.
Charter's high-end services are popular in Long Beach. In addition to the high digital penetration rate, Charter enjoys a 28% high-speed data penetration rate.
DVRs also are popular, Rasmussen says, and VOD is gaining steam. The company also is getting requests to expand its slate of high-definition programming, which is something Brown wants to do as more bandwidth becomes available.
"Perhaps we can offer a Voom-type product of 40 or 50 HD signals versus five or six now," he says.
Charter stopped selling analog to new customers more than a year ago. Today, nine out of 10 new customers are opting for one or more of Charter's five digital tiers. Rasmussen says most of the system's marketing activity centers on selling digital packages, which cost $4 each.
"We haven't launched any VOD or DVR campaigns yet, but we are beginning to look at them," Rasmussen says.
Charter's primary challenge is adding new customers. The Long Beach operation, part of Charter's larger Los Angeles cluster of systems that includes Riverside and the San Gabriel Valley, sports a high digital-to-basic penetration rate, but a paltry basic penetration rate of 40%?15 points below the national average of around 55% of cable-ready homes. The system counts 76,300 basic customers today.
Long Beach residents receive two dozen off-air signals with few reception problems, which partly accounts for the low number of basic customers. About 50% of Charter's Long Beach customers reside in multiple dwelling units, says Rasmussen, and more Long Beach residents rent their homes (59%) than own them (41%), according to the U.S. Census Bureau, meaning the population is somewhat transient.
Meanwhile, Brown expects to work closely with the city of Long Beach as Charter makes the transition to a fully digitized plant.
"Everyone is paying attention to this project," he says. "Mayor [Beverly] O'Neill has been wonderful to work with, and her role as the new president of League of Cities will surely have an impact on how it's viewed nationally [by other city regulators]. This whole project should work as a model for how cities and cable operators can work together to make sure residents have the best products and services available."
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