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The Changing Landscape of Pay Television : Cable: Now that the novelty has worn off and the number of VCRs and basic services has grown, the once-soaring market is flattening.


Throughout the 1980s, Home Box Office and Showtime were synonymous with the lure of cable television. The pay channels grew at a dizzying pace because viewers liked the novelty of watching uncut movies before they appeared on the networks. Eager subscribers literally chased the cable truck down the street to sign up.

But now pay TV has hit a wall. The business is having its worst year in history. Subscription levels at HBO and Showtime will be up marginally this year and will be flat or down at sister pay TV networks Cinemax and the Movie Channel.

"The pay TV business wheel had been leaking air" says Larry Gerbrandt, senior analyst at Paul Kagan Associates, a media research firm in Carmel. "Now it's gone flat."

Recent trends in pay TV are particularly bleak. Fewer cable subscribers are willing to pay the additional $10 to $20 a month for one or more pay TV channels. The number of homes buying pay channels, as a percentage of all cable subscribers, is shrinking.

"We are a maturing business," acknowledges Michael Fuchs, the outspoken chairman of HBO who relishes his image as the bad boy of cable. "It now is flat enough that the industry is finally getting concerned."

Last year, HBO had 17.3 million subscribers, and company officials say they will add only "a couple of hundred thousand" subscribers this year. Cinemax, HBO's sister channel in 6.4 million homes, will lose subscribers this year for the first time. For Showtime, subscriber trends have been even worse. Showtime and its affiliated network, the Movie Channel, together lost 95,000 subscribers in the first three months of this year and are likely to end 1990 at little more than 10.5 million homes, gaining barely 100,000 over 1989.

The television landscape of 1990s is unrecognizable compared to the boom years for pay TV in the last decade. Pay TV's strongest selling point--that it offered movies uncut and without commercials years before they appeared on network television--is no longer unique.

Probably no innovation in television has hurt pay TV more than home video, where blockbuster movies are released months before they appear on HBO or Showtime. Videocassette recorders, which were in only 5% of homes in the early 1980s, today are in 70%.

On top of that, pay TV is now competing with a stronger selection of "basic" cable networks and regional pay sports channels that are attracting a growing portion of viewers.

"Pay TV is flat to down because of the proliferation of more networks and more choices consumers have," concedes Tony Cox, president of Showtime. When pay TV started in the mid-1970s, there were only four cable networks. Today there are 69.

Also in the future lurks pay-per-view, which can deliver movies into the home before they are available on pay TV.

As a result, the two dominant pay TV channels are taking different approaches to retard the slowdown in their growth.

HBO is positioning itself as a "brand name," moving further into original programming, while Showtime is seeking radical changes in the pricing of pay TV.

Pay TV's current woes can be traced to the heady days of the 1980s, when HBO and Showtime launched "exclusivity wars" to secure pay TV rights to Hollywood movies. The strategy, which sought to differentiate the rivals so that the same film would not appear on both channels, did not come without a steep price.

Showtime is committed to spend $2.3 billion for movies over the next seven years. Saddled with these programming costs, Showtime Networks Inc.--which is owned by Viacom Inc. and encompasses Showtime and the Movie Channel--lost money between 1987 and 1989. This year it expects to be marginally profitable.

"Even in good times, it's not a great business," concedes one senior Showtime executive.

HBO, which is owned by Time Warner Inc. and has revenues topping $1 billion annually, in recent years has seen its pretax profit margin bounce between 9% and 13%.

But the two pay TV rivals no longer can compete by bashing each other (although Viacom still has a $2.4-billion antitrust lawsuit pending against Time Warner and HBO).

Faced with stronger challenges from emerging cable channels, HBO and Showtime are trying to persuade the cable industry that pay TV is still viable.

Significantly, HBO and Showtime are not panicking about their programming. They continue to have good ratings, frequently beating out one of the Big Three networks during prime time in households that buy pay TV.

"There are still tens of millions of homes which don't take HBO," Fuchs says. "But I'm not going to get that business by making another made-for-TV movie. It's only by banging away at those people."

Along with more banging, Showtime and HBO are now focusing on subscriber retention. As much as 4.5% of HBO's subscribers unplug each month, which means on an annual basis the pay TV channel must replace about half its subscriber base--ratios akin to the very mature magazine business.

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