Why are the media conglomerates vertically integrating around content? Perhaps this line from the following story provides a clue... >Why are rates rising in an era when inflation is so low? The cable >and satellite industries are paying dearly for programming, which >accounts for about 50% of their operating budgets. And I question the author's conclusion that consumers are the big winner here. How can this be true when rates increase more than the inflation rate year after year... Consumers are the big losers, as they are forced to pay more and more for advertiser supported content. Regards Craig DECEMBER 1, 2004 NEWS ANALYSIS By Steve Rosenbush The Real Winner in the TV Wars As satellite outfits and cable operators duke it out, consumers stand to benefit most from the increasingly cutthroat competition Satellite TV is turning out to be a more formidable rival for cable than some analysts anticipated. The satellite business is expected to add more than 3 million subscribers this year, bringing the total to nearly 25 million. For cable, however, the number of subscribers is projected to decline slightly, to just over 73 million. And satellite's ability to sign up subscribers is showing no signs that it will slacken anytime soon. While the number of cable customers is expected to remain more or less flat, satellite operators are expected to add a further 2.9 million viewers in 2005 and 2.7 million in 2006, according to analyst Rob Sanderson of American Technology Research. "The satellite market is on a tear -- it's not even close," Sanderson says. He also expects the growth period to last until the end of the decade, a few years longer than many investors have been anticipating. BROADENING GAP. Satellite's growth has been fueled in large part by its value-priced services. Echostar (DISH ) offers 60 channels of digital programming for $29.99 a month, and consumers can double the number of channels for just $10 more. While cable prices vary widely from market to market, a comparable cable package with 120 channels will often cost $45 or more. Also, cable rates are rising faster than satellite's. The price of cable-TV service, excluding features such as high-speed Internet access, phone service, and digital video recorders, is expected to rise 2.5% to 5.9% in 2004, according to major cable operators. Comcast (CMCSA ) is expected to raise rates 5.9%, although the average bill will rise at half that pace because many customers take advantage of discounts on higher-end offerings. Time Warner Cable (TWX ) is expected to boost the rates of its expanded basic services by about 4%, according to spokesman Mark Harrad. Satellite companies haven't yet announced prices for 2005. They usually wait for cable companies to go first, then raise their rates by a smaller margin. Unlike satellite companies, cable operators are required by law to announce their price increases. The net effect is that the price difference between satellite and cable gets a little wider every year. THE ANALOG HANDICAP. Why are rates rising in an era when inflation is so low? The cable and satellite industries are paying dearly for programming, which accounts for about 50% of their operating budgets. The cost of programming is increasing almost 10% a year, according to Bobby Amirshahi, a spokesman for cable operator Cox Communications (COX ). And cable companies are at an added disadvantage because they need to recoup their investment in new networks, especially as they make the transition to the digital era. Comcast, for example, has spent $39 billion to upgrade its systems since 1996. More than half the cable customers in the U.S. still receive an analog signal. Since these systems don't have as much capacity, they can't transmit as many channels as satellite systems. Also, analog can't support a variety of pricing plans because the pipes go only one-way, broadcasting the same service to everyone. If cable companies want to maintain the edge in the mass market, "they're going to have to make a faster transition to digital," Sanderson says. Satellite operators, whose networks are all digital, have made huge gains at the lower end of the market, where customers are most price-sensitive. Also, satellite offers a bigger selection of channels for less money, and it has more pricing flexibility. WIN SOME, LOSE A FEW. Cable companies, on the other hand, have been content to focus on the sale of higher-end services. And that's not a bad strategy. The profit margin for add-ons such as broadband and phone service is around 45%. That compares quite favorably to the margin for cable-TV service, which is about 35%. Video-on-demand is also proving to be popular. During the third quarter, Time Warner added 100,000 subscribers for this service, bringing the total to 1.4 million. The gain far outstripped the loss of 11,000 basic cable subscribers. Cable operators can't afford to be sanguine, though. Satellite companies are figuring out ways to offer pricier services such as broadband and video-on-demand, according to Sanderson, so cable won't have the higher end of the market to itself forever. It's clear that the battle between the cable and satellite companies is really just getting under way -- and the real winner will be consumers. Rosenbush is a senior writer for BusinessWeek Online in New York Edited by Patricia O'Connell ---------------------------------------------------------------------- You can UNSUBSCRIBE from the OpenDTV list in two ways: - Using the UNSUBSCRIBE command in your user configuration settings at FreeLists.org - By sending a message to: opendtv-request@xxxxxxxxxxxxx with the word unsubscribe in the subject line.