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With huge size comes huge influence
Since acquiring AT&T's cable systems last year, Comcast has gained unprecedented clout to employ against competitors.
By Don Steinberg
Inquirer Staff Writer

For 40 years, the story of Comcast Corp. was about getting big.

For the last year, the story has been about being big - and throwing its weight around as it battles to keep customers from rivals and give its subscribers more and more to pay for.

Comcast became the biggest provider of television service to Americans last Nov. 18, when it acquired AT&T Corp.'s cable-TV systems and more than doubled in size to serve 21 million households.

It also is the largest provider of high-speed Internet service in the country, adding subscribers to that service faster than anyone ever has, with nearly five million customers.

Comcast is the biggest buyer of video content in the world, spending about $4 billion a year on programming, and it has as much TV advertising space to sell as the ABC television network.

In fact, Comcast has become the most influential customer of dozens of companies - it's the biggest buyer of cable hardware from Motorola Inc. and of HBO from Time Warner Inc. - giving it massive clout in everything from lowering the rates it pays to shaping the direction of America's mass media.

Increasingly, it is deciding how emerging technologies such as video on demand, super-fast Internet service, and high-definition television will be made available to the public.

"This is all a consequence of the AT&T deal," said Josh Bernoff, a media analyst at Forrester Research. "When you have that many subscribers, there's stuff you can do that nobody else can do. It's negotiating better rates with programmers. It's trying new technology."

As the biggest buyer of cable boxes from Motorola, Comcast has lowered the price it pays per unit to less than $150, according to industry analysts. That is about $50 less than the industry's average price.

"Being the largest customer - if Comcast wants a DVR [digital video recorder] box, then Motorola will build it," said April Horace, a cable industry analyst at Janco Partners.

"There's no question our life changed when we went from eight million to 21 million subscribers," said Steve Burke, president of Comcast Cable Communications. "People now come to Philadelphia to pitch us on ideas. People come to Philadelphia and ask us our view of the future."

At the same time, Comcast has entered what Burke calls "a more competitive environment than we've ever been in."

Phone companies such as Verizon Communications Inc. and SBC Communications Inc. have dramatically lowered prices on their high-speed DSL Internet service, looking to woo customers away from cable-modem service.

Satellite video providers DirecTV and EchoStar are pricing aggressively, too, and trumpeting customer-satisfaction ratings that are often higher than those for cable.

"Satellite has a robust video offering that's less expensive on average than Comcast's," said Aryeh Bourkoff, a media analyst at UBS Securities. In the AT&T cable systems that Comcast took over, growth of satellite subscribers was "off the charts" in 2001 and 2002, Burke said. And with its beam from space, satellite can sign up anyone in the country right now for digital TV; Comcast cannot.

Comcast's response: using its clout to hammer on emerging technologies that exploit competitors' weak spots. This year it expects to spend $4 billion just to upgrade its cable systems across the nation, enabling it to roll out new services meant to fend off rivals.

Video on demand

Last fall, Comcast used Philadelphia as a test market for video on demand, which lets digital cable subscribers choose from more than 1,000 hours of TV programs stored centrally at Comcast facilities.

Viewers can watch the prerecorded shows at any time, and pause, fast-forward and rewind them. The technology, now rolling out nationally, is replacing less flexible pay-per-view movies, which must be watched at scheduled times.

But the real reason Comcast is pushing video on demand is because satellite TV cannot - it does not have the required two-way connection.

Comcast has leveraged its clout with TV-programming providers, from the Food Network to ESPN, to get them to provide on-demand programs for free. As long as you are a Comcast digital-TV ratepayer - it costs about $14 more per month than standard cable - you can watch those shows at no extra charge.

The service has been addictive. In Philadelphia, it gets one million program orders a week, Burke said.

And in one comparison, subscriber "churn" - the rate of canceled cable accounts - was 35 percent lower in an area offering video on demand than in one that did not.

Satellite companies have countered by offering - in some cases giving away - receivers with built-in digital recorders, so viewers can record any show on TV, and pause or rewind live programs.

Comcast's return fire: It got Motorola to build a new digital box that combines video on demand and personal recording.

High-definition TV

HDTV, which provides a high-quality, wide-screen picture to owners of HDTV sets, is a similar story. Straight up, it's not a money-maker.

During home games of the 76ers and Flyers, Comcast parks an $8 million HDTV production truck alongside the Wachovia Center that beams the games in high definition exclusively to Comcast digital-cable customers.

The truck migrates along Interstate 95 so it can do the same for Baltimore/Washington teams. Comcast also is spending millions on an HDTV studio inside the Wachovia Center.

Hundreds of companies have worked on creating HDTV technology since the early 1980s, but latecomer Comcast suddenly is the country's largest distributor of HDTV programs. Satellite providers offer HDTV, but they have a harder challenge. They do not have local systems, so local feeds from across the nation can fill up their national system quickly.

With prices for HDTV sets expected to dip below $1,000 this holiday season, Comcast is in Best Buy and Circuit City stores for the first time, getting ready to sign up customers for its digital TV service. Twenty-four percent of Comcast's high-definition customers are new to the company.

Looking to the future, Comcast has used its clout negotiating with program providers to secure high-definition and video-on-demand rights to their content.

High-speed Internet

In the online world, Comcast is attacking telephone companies by turning up the dial on its broadband speed. It announced it soon will provide downloading speed of up to three megabits per second to cable-modem customers - double the maximum speed offered by most phone companies through DSL connections, which use a different type of wire into the home.

On Thursday, Comcast will unveil a revamped broadband home page for its Internet customers that will showcase what a high-speed connection can do. It gives slick access to movie previews, music, e-mail, news and other services, effectively creating a new online service that could be easy enough to use for people who have left America Online, which is the largest low-speed Internet provider and lost two million customers in the last year.

How valuable is an Internet customer? The $41 the average customer pays per month tells only part of the story.

"High-speed Internet is 15 percent of our revenue now, and it only uses 1 percent of the bandwidth we put into people's homes," Comcast president and chief executive officer Brian L. Roberts said.

Telephone by cable

Next up: taking on telephone companies more directly - by offering phone service over the same coaxial cable that brings TV into the home.

Right now, in a quiet pilot test in Coatesville, Chester County, households are using regular telephones plugged into the backs of their cable modems.

This so-called "voice over IP" is cheaper to operate than traditional telephone service.

Comcast, which inherited some telephone-by-cable customers from AT&T Broadband, expects to start selling residential service based on the newer technology in 2004 or 2005.

It may not be cheaper than Verizon, but it may be cooler: Comcast is testing phones with cameras and video screens, providing full-motion video calls.

When you can mix TV, Internet and phone in a bundle, that becomes a "triple play" that rivals cannot offer, analysts said. It boosts revenue per cable hookup - which is the way to increase revenue after an installation is done. It makes it harder for customers to leave. And it makes futuristic combinations of the technologies possible.

Comcast executives have mulled the possibility of someday making Hollywood movie releases available on demand in home theaters, in HDTV, the same day they hit theaters.

Technology also lets Comcast rethink advertising, a business worth $1 billion a year in sales now and that it hopes to double within five years. Comcast says it can sell two minutes per hour on every cable channel. Combined with video on demand, advertising minutes could essentially be unlimited.

"A Chevrolet ad on TV could point viewers to a 20-minute video on on demand," Burke said. "No one can sell that but us.

"The story line to the future is not yet written, and we get a chance to help write it," he said. "New technologies from competitors are going to continue. So we have to push ourselves technically as well. Standing still in our industry is going backward."

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