Cable cos test system to expand HD, keep costs low

NEW YORK (Reuters) - Cox Communications said on Wednesday it is testing a technology that allows cable operators to offer more bandwidth-hungry high definition (HD) programming by delivering a television station only when the user tunes in.

The technology called switched digital video is just one step in a battle by cable companies to fight off competition from the advanced TV services of telecommunications rivals and from satellite operators who claim leadership in HD.

Cox and cable peers including Time Warner Cable Inc and Cablevision Systems Corp are looking to switched digital to maintain their offering of premium TV services and keep costs low in an escalating battle for network bandwidth.

"HD is absolutely a bandwidth hog and cable operators can offer virtually unlimited programming when they go to switched digital," said John Connelly, executive vice president at BigBand Networks Inc, which is providing privately held Cox with switched digital technology.

Cox, the third-largest U.S. cable operator with 5.4 million homes, is initially rolling out the technology in its northern Virginia market.

Switched digital costs in the tens of millions to integrate into a cable operator's existing system, saving space for more channels and faster Internet speeds by only delivering programs when they are ordered.

Use of the technology could trim the bills for cable companies spending up to $80 billion worldwide by 2012 to meet bandwidth demands for combined video, voice and Internet services, according to some analysts.

Telecoms companies like AT&T Inc and Verizon Communications Inc are spending nearly $25 billion over the coming years to offer advanced digital video services.

"Cable operators trying to satisfy the increasing bandwidth demands of HDTV customers feel very much like the thrifty grocer who tried to cram 10 pounds of potatoes into a five-pound bag," said Stan Schatt, analyst at ABI Research.

"The increasing bandwidth demands on cable operators will soon reach crisis stage, yet this is a 'dirty little industry secret' that no one talks about."

HIGH DEFINITION SUBSCRIBERS

HD in particular has emerged as a frontline in cable's battle to keep its subscribers from moving to telecoms companies or satellite operators.

No. 1 U.S. cable operator Comcast Corp last week convinced a federal judge in Chicago to order satellite operator DirecTV Group to pull advertisements claiming consumers prefer the quality of HD on satellite over cable.

Analysts say the competition for HD subscribers is only beginning as more households buy HD TV sets and receivers.

DirecTV, the largest U.S. satellite TV operator, launched another satellite last month to offer more capacity and is promising 100 distinct HD channels by early next year.

"The next 12 months are important in terms of customers assembling their HD systems at home, but also in terms of cable making HD available in their systems for their customers," says Thomas Eagan, analyst at Oppenheimer.

Investors are also concerned U.S. cable companies will again have to spend billions of dollars digging up roads of cities and suburbs to lay new cable for HD channels.

Earlier this year when Comcast disclosed it was increasing its capital spending outlook to keep up with the rapid roll-out of digital services, its shares fell 3 percent.

Christopher Marangi, portfolio manager at Gamco Investors, said his fund does not assume a cable rebuild for companies it holds including Time Warner Inc, Comcast and Cablevision.

"We think cable operators still have the tools in their knapsacks to expand capacity with switched digital and the like," Marangi said. "We don't view cable companies as capacity constrained in the short term."