Has pay-TV run its American course?

In looking at the U.S. pay cable scenario, pundits have started to observe how the concept of pay television, as personified by Home Box Office, has possibly reached its plateau.

With 17.6 million subscribers, HBO is the oldest and largest pay television service in the U.S. But with pay cable penetration dropping, as of May |91 to 28.2 per cent, (its lowest level since 1987,) and VCR penetration at 72.5 per cent - an all time high - is there cause for HBO to worry? Will home video, basic cable, DBS, Pay-Per-View, more theatrical premieres on broadcast television coupled with higher TV cable costs, precipitate the decline of pay-TV services?

"Where we sit today is at the top of the rope. HBO has shot up in a classic |S' curve. The next several years will determine ways in which we manage to bring it up again," said John K. Billock, executive vp, marketing. "We will no longer be distribution driven. Rather, we will be market driven, which is going to characterize the 90s." HBO's growth was flat this year, compared to an increase of about 300,000 last year.

HBO viewers have complained that they can't see popular one-year-old movies when they want to watch it. Either it is offered too late in the evening, or it is rarely on. At the same time, they complain that there have been too many repeats of other movies. Looking to stem the tide of subscribers cancelling the pay movie service, HBO has turned itself and its sister channel, Cinemax, into three-channel multiplex services, by reconfiguring its schedule into separate time-shifting feeds. This will allow the viewers more opportunities to see the same programs at different times, with little repetition, and without incurring any additional costs. The multiplex service will be provided to cable affiliates at no extra charge. They expect that this tactic may expand the services by adding nearly 500,000 new subscribers to HBO and Cinemax.

"This will make our monthly inventory two to three times more accessible. We will change the way consumers think of us, if that's what it takes to remain the leader in pay television," said Billock.

In his views on the marketplace today, Jeff Bewkes, HBO's exec vp and chief financial officer, said: "The home video market has already been digested - it's been around for a number of years. Back in 1985, the press had ostensibly written us off. Then all of a sudden, we've grown five million subs." Bewkes does not foresee pay-per-view as a likely competitor for HBO in the next three to five years, "since in terms of usage dynamics, the pay-per-view market is still in its incipient stages."

With ratings declining for TV screenings of theatrical products, HBO is depending more on its original programming. This strategy is expected to improve the channel's stagnant subscriber growth.

While trying to maintain the stability of its core business, HBO has diversified itself into market niches and ancillary businesses, such as hotels, direct broadcast, home video and licensing.

By examining the "demographic bubbles," Billock feels that they have anticipated the significant Hispanic market in the 90s, with the soon-to-be-launched HBO Ole, as well as their domestic Spanish language feed, Selecciones. "Plus, tomorrow's 60-year-old is today's 50-year-old. HBO will watch these aging subscribers, which will also bring along a new young group of viewers."

HBO has recognized that indeed, the danger of pay television plunging into the soon-to-be saturated multichannel abyss, does exist. However, HBO is looking at multiple answers - for one reasonable solution.