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The JetBlue of digital TV?

Fri, 04/30/2004 - 8:00pm
Jeff Baumgartner

U.S. Digital Television Inc. and low-cost airlines have two things in common: They both travel above ground and promise to provide the most value for the buck.

USDTV is using datacasting technology and leased digital broadcast spectrum to go after cable and DBS with a limited tier of standard- and high-definition programming for $19.95 per month (set-tops cost another $98). At launch, that tier included Disney Channel, Toon Disney, Fox News, ESPN, ESPN2, Discovery Channel, TLC, Food Network, HGTV, Lifetime and Lifetime Movie Network. Customers can get Starz! for a bit more.

Steve Lindsley
USDTV Chairman and
CEO Steve Lindsley
The company has already launched in two markets (Albuquerque, N.M. and Salt Lake City, Utah), and hopes to be in 30 markets by year-end.

CED Editor Jeff Baumgartner recently discussed USDTV's plans with company Chairman and CEO Steve Lindsley. An edited transcript follows:

CED: Why do you think the world is ready for a low-cost, reduced lineup alternative to cable and DBS?

Lindsley: That's the mother-lode question. If there's no consumer demand, then we're all wasting our time. From a consumer standpoint, it's our belief that consumers are increasingly being left behind by big cable and satellite operators.

My Exhibit A on that is the incredible digital cable churn that the cable systems have experienced. They've launched digital cable in these markets with the hopes of providing more channels to justify greater revenues per household. But unless a consumer buys subscription-video-on-demand or a VOD package or HDTV with it, the churn for more channels for more money is enormous. We take that to believe that if you are a consumer who is value-oriented first, not channel-oriented first, there is a company that can provide the major categories of entertainment that you want.

CED: Obviously "cable-nevers" are your prime targets. Who else are you targeting?

Lindsley: Our experience in Salt Lake, and the nationwide research we've conducted...show us that it's a very broad group who will have an interest, both in terms of their existing provider or non-provider, in case of the cable-nevers, and in the amount of money they make.

We do believe that our target, number one, will be the cable-nevers. Also, the expanded basic cable group that is churning out of digital cable or more value-oriented than channel-oriented right now. Those are our two primary targets.

CED: What I found interesting is that HDTV is part of your service, but HDTV is typically seen as a big-ticket item, so people who want HD aren't that concerned about a $60 cable bill. Yet this is a group you're targeting with a $19 service. What am I missing there? What's the connection?

Lindsley: What we're doing is trying to position the company in front of the trends that are very evident out there. [Sen.] John McCain [R-Ariz.] wants to hold hearings for a reason. Cable prices continue to go up and up and we believe there are millions of homes that are not satisfied with the digital offerings that are being given to them. We believe we can become an acceptable alternative to that group. The second trend that we think is going to exceed everyone's expectations is the penetration of both digital and HDTV monitors. Our case-in-point is that we have a very close working relationship with Wal-Mart, our primary distributor, even though we are working with and will continue to work with other distribution partners. But we spend a lot of time with Wal-Mart, and [it]...just began to make room on the shelf for HDTV monitors. It believes that HDTV is now becoming ready for a mass play. We believe that as well. We believe that a consumer who buys USDTV...knowing that the service provisions high-definition television, the customers are more likely to subscribe to the service because of it.

CED: Explain how your customers are going to get HDTV from you. Will they simply get whatever HD programming is available off-air in their given market, or are you selling them a separate HDTV service with other high-definition channels?

Lindsley: Once the customer is activated either through a self-install or a professional install, they're getting what we call "The Best of Television." They get 12 of cable's most popular networks. The box also is an ATSC off-air receiver, so they can tune to every local digital channel in a given marketplace. In this market [Salt Lake City], between the cable channels and the over-the-air guys, there are close to 30 channels for $19 a month.

CED: Are they paying extra for HD?

Lindsley: There's no separate HD tier. It's all for $19.95.

CED: You're selling a box at retail for about $98, plus $30 for an antenna. If you also go the retail route with a DVR-capable box, what price point do you think will resonate with the consumers you're targeting?

Lindsley: Right now we don't expect the price point to change with the DVR box. With the combination of the price decreases in storage and compression, along with the volume discounts we're receiving from our manufacturer, our goal is to come out with a DVR box that will be similarly priced to the current box.

CED: Are you going to charge a service fee for the DVR functionality?

Lindsley: No, no extra charge. But it does obviously give us an exciting opportunity to get involved in subscription video-on-demand and other storage-based environments that can be very compelling to the consumer, and also speaks to why we can compete with cable and satellite. Storage and technology will help to equalize the playing field.

CED: Outside of [Dotcast's] datacasting technology you're using, is there any other corporate connection between your company and the Disney-owned MovieBeam VOD service?

Lindsley: There's no official corporate connection. We're very pleased to have the Disney Corporation as a partner on a variety of fronts, and we're impressed with what they have with MovieBeam. We believe that MovieBeam or any other subscription VOD play will be much better served if it's combined with a sustainable base package, if you will, versus out on its own.

CED: Not counting Starz!, you're starting with 11 cable channels. Do you plan to add more for that same $19.95 price?

USDTV Homepage
USDTV hopes to offer its over-the-air
digital TV service in 30 markets by year-end.
Lindsley: The strategy for the company really is very well expressed and highlighted as you take a look at what's going on in the airline industry, where you've got the discount airlines offering acceptable alternatives at a far reduced price. People are gobbling it up. Case-in-point: JetBlue Airways (became) the number-one airline out of JFK in four years. Our strategy is to be able to provide an acceptable alternative to consumers at a greatly reduced price and give them great service.

Under that scenario, as we add channels, I think that compression and storage is going to work in our favor, so we'll be able to add and experience greater amounts of content, but our goal is to keep our cost of business...streamlined and focused so that we can continue to offer this low-cost package. We're not in a hurry to add channels. But having said that, we have had several content providers come to us and view us perhaps as a way to get distribution. That doesn't hurt our economic model, because it's likely that those content providers will pay us for the distribution.

CED: Do you also foresee the day when you'll be able to mix and match programming packages? Some customers might want CNN or MSNBC rather than Fox News, for instance. By the same token, just going with one could be more of a hindrance than a help.

Lindsley: It's going to be difficult to break down the super-structure of the contracts and the relationships that the content people have with the distributors.

If you're ESPN, you may or may not want the a la carte environment, but if you're a "B" player or someone who's trying to get clearance on a cable system, that's the kiss of death. That's a content problem. We're trying to solve consumer problems.

We think our package will appeal to millions of homes across the United States. We don't think this is a niche play. We think it's a major play across the U.S.

We know this: we start with 50 percent of what an audience views anyway, because we provision local. When you add in [USDTV's cable lineup], you're going to give somebody 80 percent of what they watch anyway and save them $20 to $40 a month.

CED: What's the bandwidth situation for your service? Are you already tapped out?

Lindsley: A big part of our play is HDTV, so whatever we do, we don't want to hinder the broadcaster's ability to transmit in high definition, so we spread our bandwidth requirements to three or four broadcasters in a given marketplace who give us a chunk of pipe. We then statistically multiplex at our network operations center the content offerings so that we maximize the various chunks of pipe we're getting from the contributing broadcaster. Three to four broadcasters give us approximately 39 Mbps in a market. That's what we need to deliver the service.

CED: What are your subscriber targets?

Lindsley: We believe we can get 5 million subscribers in the next four years. We have a much bigger vision for that, but I'll tell you a number when you and I talk three years from now. I want to be able to tell you I'm on plan.

CED: When MovieBeam got off the ground, they estimated it would cost them roughly $250,000 per market to get up and running. What number are you looking at?

Lindsley: I can't answer that specifically for competitive reasons. But I can tell you the reason why we're able to compete like Southwest Airlines and JetBlue were able to compete is that we're riveted on our expenses. Our subscriber acquisition costs, our content costs, everything we do, we watch very closely. We think this will be a tremendous consumer offering and a great benefit to the broadcasters, but we also think Wall Street will love this play because of our focus on expense control and our ability to get to cash flow, break-even quickly.

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