At Last, Cablevision Joins the Digital TV Party

Investors have been worried about Cablevision's (CVC Quote - Cramer on CVC - Stock Picks) ability to play catch-up with other major cable operators.

Such concern may be well-justified, it appears.

Using relatively untested hardware, the New York City-area cable operator launched a new digital video service on Sept. 28, years after other major system operators began deploying the technology. Comments from early customers of the service, which enables expanded channel capacity, better-looking video and interactive services including video on demand, indicate it's unlikely to signal a quick turnaround.

Like other cable operators, Cablevision is depending on new services -- digital video, high-speed Internet access and telephony, for example -- to compensate for anemic growth in basic cable and to fight off competition from satellite television services such as Hughes Electronics' (GMH Quote - Cramer on GMH - Stock Picks) DirecTV. The new digital service, dubbed Interactive Optimum, "represents Cablevision's most significant technological advance to date and enables us to continue to offer our customers original and unique services," the company said in a recent release.

Uncertainty about Cablevision's ability to roll out the service has been one of several factors -- including increased leverage and AT&T's (T Quote - Cramer on T - Stock Picks) divestiture of its Cablevision stake, completed Thursday -- that have weighed on the stock, sending it to 52-week lows more than 60% below its highs. The stock fell 59 cents Friday to $35.39.

Doubts

Even in the high $30s, the stock is still expensive, says ABN Amro analyst John Martin, a key risk factor being the company's ability to roll out several new services simultaneously, using Sony (SNE Quote - Cramer on SNE - Stock Picks) hardware that hasn't previously been used commercially. (Martin, whose firm hasn't done underwriting for Cablevision, rates the stock a hold.)

Some of that risk has been indirectly confirmed by Cablevision, which originally said it expected 50,000 new iO customers by the end of the year, but then revised its target to 40,000 subscribers.

Further confirmation comes from the "cablevision_digital" section of the Yahoo! Groups online discussion forum, where customers for the new service post comments about their experience with the service -- and where Cablevision's executive vice president of engineering and technology, Wilt Hildenbrand, often responds to specific complaints.

Last-Mover Advantage

In their online postings and in interviews with TheStreet.com, some of the first customers for iO -- early adopters who presumably are predisposed to liking new technology -- paint a picture of a service that's good, but not great: good-looking video, yes, but also glitches suffered on a daily basis by set-top boxes advanced enough to share some of a computer's worst qualities, and a high price tag that might not play so well in an economic downturn.

Cablevision Catch-Up Digital service subscribers among major cable operators*

*Figures as of June 30, 2001, excluding Cablevision's digital service projection for year-end 2001. Source: Company press releases

Ed Burke, a bank auditor living in North Babylon, N.Y., tells TheStreet.com that he likes what he sees with the new service. "So far, I'm impressed with the quality of the picture, especially on the digital side," he says. Burke, who got his service installed in early October, is also happy with the video on demand, which enables him to select a movie or television show from an onscreen menu, then watch it as if it were on a tape in his VCR -- pausing, fast-forwarding or rewinding as he desires.

The service hasn't been perfect, however. On a regular basis, the set-top box freezes up just like a computer; it stops responding to his remote control and displays a "javascript error" message on his TV screen. So just as people have learned to reboot their PCs at moments like these, Burke resets the set-top box to get it started again (one time he had to unplug the device and plug it back in to get it to operate). For Burke, this is a minor problem; he says he really doesn't have any complaints so far.

That doesn't mean Burke is sold on the service, which costs about $26 a month on top of the $109 he was already paying Cablevision monthly for cable and high-speed Internet. "I don't know if I'm going to keep it," he says, "because it's very pricey."

Scott, an East Meadow, N.Y., Cablevision subscriber who asked that his last name not be used, says the video on the digitally transmitted channels is noticeably better than a conventional cable signal, but the audio doesn't match up to Cablevision's promise of CD-quality sound. He is happy to get channels such as ESPNews, but not so happy about the package's price, which brings his monthly bill, including an Internet connection, up to $166, excluding seasonal sports packages.

The tax accountant is much more interested in the expanded channel selection than he is in iO's new interactive features. The only VOD service he's interested in are free offerings, because he's already paying so much. He doesn't like iO's email service because he says it's slow and he can't use his email address. The interactive program guide isn't useful, and he constantly has to reset his new set-top boxes because they lose sound on digital channels and lock up frequently. He says he'll definitely keep the service, though he might pick a less-expensive option without the interactivity.

Despite his misgivings about the iO product, Scott says he's extremely happy about the attentiveness of Hildenbrand and Rick Spanbauer, an iO employee who also participates in the cablevision_digital group. "Those two are incredible to have access to," Scott writes in an email, "and I cannot stress enough how much we all appreciate their help. They actually listen to customers' complaints and respond."

David Pfister, a Cablevision subscriber in Port Washington, N.Y., falls into the "it's-too-expensive-but-I'll-probably-keep-it" camp along with Scott. Pfister, a technology executive, agrees that the video quality is excellent, though technical glitches frequently crash his box and mar the video and audio signal. The program menu runs a poor second place to the one he has with his TiVo (TIVO Quote - Cramer on TIVO - Stock Picks) personal video recorder system.

That being said, Pfister says he expects iO will follow a successful course already set by its cable modem service. "I was one of the first cable modem users back in '96 and it had issues," writes Pfister in an email to TheStreet.com. "Cablevision hung in there and worked them out, and now it's a phenomenal service. They'll get iO right the same way."

They will, perhaps, but when? To meet its goals for the rest of the year, Cablevision will have to sign up customers at the rate of at least 420 a day, seven days a week. In the post-Sept. 11 environment, people will want to cocoon, for sure. But how much will they pay for the privilege?