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Cable Companies Are Offering Free Services to Avoid Price Cuts


For cable companies, making money from premium content may mean giving it away free.

Competition from satellite-television providers is forcing companies to tout, sometimes free, exclusive content and new services. Take Comcast Corp., the country's largest cable provider by subscribers. It now offers up to 500 free movies on demand and gives its Internet customers free streaming music and video clips. The rationale: Beefing up services, even if it means giving some away free, is better than slashing prices.

"They're not doing this to be nice to customers. They're doing this to have a competitive edge," says Brahm Eiley, an analyst with Convergence Consulting Group Ltd. in Toronto.

Offering exclusive content has helped Comcast spur interest in new services such as video on demand. This, in turn, boosts revenue. Customers who want some of these new features must sign for more services. Premium services also help companies differentiate themselves from rivals. Satellite companies, for example, cannot offer video on demand.

Cable companies are "in a situation where there's a commodity, that's exactly why they are looking to differentiate themselves through unique content," says Jeff Swystun, global director of branding at Interbrand, a unit of Omnicom Group Inc.

Like many in the cable industry, Comcast is grappling with slowing revenue growth in a mature industry. Comcast, which has a stock market value of about $68 billion, generated revenue of $20.31 billion last year and is expected to increase revenue to $22.27 billion this year.

The company's stock, recently priced at around $31, trades at about 48 times 2005's expected earnings, according to Thomson First Call. That's still a pretty lofty valuation for a company operating in a mature market.

Rival satellite-TV provider DirecTV Group Inc., trades at about $16, or about 115 times this year's expected earnings, but posts double-digit revenue growth. EchoStar Communications Corp., which also has double-digit revenue growth, trades on about 10 times expected earnings.

Free movies have helped Comcast drive demand. It got 112 million "views" on its video-on-demand service in June when it had 3,500 programs in its on-demand library, up from 74.5 million views in December when it had 2,700 programs. Roughly 90% of Comcast's video-on-demand content is free.

While consumers also can get this content elsewhere -- say, the local video store -- Comcast says its ability to package it is unique.

David Watson, Comcast's executive vice president of operations, says content is just one factor. The customer's "exclusive control" is another.

Other cable companies, such as Cablevision Systems Corp. and the Time Warner Cable of Time Warner Inc., provide all digital-cable customers with a number of free on-demand channels -- giving customers reason to favor cable over satellite. Comcast, Time Warner and closely held Cox Communications Inc. will be carrying radio personality Howard Stern's show on an on-demand basis starting this fall. That service will carry a subscription fee. Cablevision is offering an exclusive sneak peak of new Nickelodeon program, "Go, Diego, Go!," on its video-on-demand service this month.

Comcast also offers free content on its high-speed Internet service. It signed a deal with RealNetworks Inc. to add a free, streaming radio available to subscribers. But Comcast says exclusive content is less important to its high-speed Internet service and features such as parental controls or security are emphasized more. "Content is important, but it's more important what we can do with it," Mr. Watson says.

Industry experts have lauded Comcast's offering of exclusive content and services, but the approach can backfire, too.

Indeed, America Online, Time Warner's online branch, has done the opposite, making most of its formerly exclusive content available to everyone this summer. Facing declining subscriber numbers, AOL said it had no choice.
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