Diving Into the Spectrum Pool

USDTV's recipe for success
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USDTV's recipe for success

SALT LAKE CITY

To receive cable channels in some markets, consumers need look no further than their local broadcaster and maybe the old rabbit ears. Sorry, how's that again?

It's all about what innovative, cost-conscious upstarts like USDTV are doing with digital technology, some capital and marketing prowess. In three initial market rollouts, USDTV is taking the basic business model of cable and DBS, mixing in a bit of shared digital spectrum and a set-top box receiver, and for a price, asking broadcasters to feed the end-result to consumers. Yet although the Salt Lake City-based company is offering an otherwise $200 digital receiver for a hugely discounted $20, and charges only $20 monthly for cable-channel services on one receiver ($5 monthly for each additional box), USDTV also may be taking a bit more credit than it deserves for what it exclusively provides.

USDTV is attempting to bridge the niche between two extremes--the costly 200-channel universe of digital HD-SD, VOD and TiVo-like services on one end, and the free, but meager, menu of over-air analog stations, on the other. As a remedy, USDTV is marketing a compromise diet of 20-30 channels (arguably) of both broadcast and cable fare, which is fed to subscribers terrestrially with digital spectrum dedicated by as many local broadcasters as needed to digitally send out a dozen cable channels. Each local broadcast partner digitally transmits its own portion of USDTV's service using its own digital transmission facilities (see accompanying sidebar).

The identity of USDTV's local broadcast partners (and any spectrum-usage fees they receive) remain a guarded secret for now, since the company said it does not want to jeopardize any future negotiations on digital must-carry. And at least one affected broadcaster has indicated he has signed a nondisclosure agreement and, therefore, could not comment on the service. USDTV's current trio of markets served only has to tap as few as three to four broadcasters in each market--Salt Lake City, Albuquerque and Las Vegas--especially since at least one local broadcaster (and perhaps others) committed a full 75 percent (15 MB) of its total digital spectrum to the cause, according to Brent Petersen, USDTV's senior vice president of communications & marketing.

Although the huge commitment leaves very little spectrum left for a broadcaster's own services (even with ever-improving compression technology), the FCC requires that the broadcaster only has to provide the equivalent of one digital SD channel at least equal to its analog service, and it requires no spectrum-sucking HD programming whatsoever.

CAUTIOUS OPTIMISM

USDTV subscription sign-ups began last winter in Salt Lake City and last spring in Las Vegas and Albuquerque. By mid-August, a total of about 9,000 customers in all three markets had been tallied. USDTV originally projected its service would be available in 30 markets by the end of 2004, but recently it scaled that back to about 7 markets. The company expects to expand the service to 40 more markets next year.

USDTV Chief Operating Officer Richard Johnson told TV Technology that each market has a fairly equal share of the customer pie, somewhere under 3,000 subs per market. He said USDTV, for its part, is satisfied with the numbers: "We consider more than 8,000 [subs] very good, considering we had a soft launch and some other factors. We're very pleased." Johnson said USDTV will keep the identity of new markets under wraps for now, but will be announcing new ones starting later this fall.

Petersen said that "more than half of USDTV's current subscribers are 'antenna people,'" those TV homes that had no cable or DBS service at all. But he stressed its customer base is coming from both sides of the economic spectrum: "The point is, there is a broad demographic appeal not only for the low [income groups] but also for high demographics, who are looking for value for their money. And there's always that group that simply never liked cable to begin with, or the idea of paying for [television]," Petersen added. USDTV reasons that most cable and DBS viewers watch only a small percentage of the scores of channels offered to them and that they pay for. Therefore, they contend, providing fewer channels for far less money provides a value-added benefit to this no-frills option.

USDTV offers its subs a sampling of cable fare that includes one news channel (Fox), two sports outlets (ESPN I and II), a Discovery Channel, Lifetime, Disney Toon Channel and a few others. It does not provide such cable staples as CNN, The Weather Channel, Comedy Central, USA, A&E, Sci-Fi, AMC, CNBC, Disney Family, Nickelodeon, The History Channel, Bravo, AMC, TNT, MSNBC and dozens of other basic-tier offerings, and no premium channels such as HBO's various HD and SD offerings (although it does provide Starz! for a few extra dollars).

DOING THE NUMBERS

Although some of USDTV's marketing literature and Web site seem to boast of offering high-quality digital broadcast channels in local markets as part its overall package--in fact, all local SD and HD broadcast channels are already retrievable with widely available receivers, whether someone subscribes to USDTV or not. For example, more than half the lengthy list of USDTV channels noted for Salt Lake City is comprised of already-available local DTV stations, including five PBS channels. (Currently, none of the cable channels the company provides to subs is HD.) Petersen acknowledged that this could be confusing, and said his firm does make both the cable and broadcast offerings more convenient to access on the USDTV receiver box.

It's also been pointed out by some industry observers that by simply providing an HDTV receiver to subs for only $20, the company is helping expand the overall DTV universe of customers (especially since its primary receiver distributor is Wal-Mart, the largest retailer in the U.S.). As for the value-added factor, that depends on one's perspective: The typical cost to cable and DBS viewers today is under $1 per-channel (using a basic menu of 50-plus channels and a monthly fee of $50 or less). USDTV's dozen cable offerings, going for $20 monthly, amount to nearly $2 per-channel. Still, when all is said and done, USDTV's monthly fee is less than half of most traditional basic cable/DBS bills.

Those receivers for USDTV subs that sell for $20 at Wal-Mart are manufactured under a special agreement with Chinese plasma display maker Hisense. Wal-Mart also sells a second, virtually identical receiver under the U.S. Digital brand for about $198, also made by Hisense. Both receivers prominently feature the USDTV logo. The U.S Digital receiver is sold nationwide, and like the USDTV-Hisense box, it should encode all HD and SD terrestrial broadcast channels without subscriptions. Eventually, the U.S. Digital brand receiver could be used to encode USDTV's cable package, if and when the company expands into that given market.

An indoor or outdoor VHF-UHF antenna is available at Wal-Mart and elsewhere for about $30. In July, USDTV announced a partnership with LG Electronics to supply fifth-generation 8-VSB chips and ATSC tuners in its new receivers, available by late 2004. The technology is designed to enhance terrestrial digital reception in difficult viewing areas, especially urban canyons. USDTV also plans to equip new receivers with Microsoft's Windows Media 9 (WM9) technology to improve compression. An HD-PVR option is planned for 2005 as well.