Getting Hooked on Digital : Cable Systems Venture Into a Service that Connects Directly to Home Stereos

They canvass the streets in sneakers with nylon backpacks slung over their shoulders, knocking on doors and asking you to listen to a sales pitch unlike anything you’ve heard before. If you let them inside your home, they won’t dump dirt on your rug and promise their new power vacuum will suck up the stains.

Instead, they’ll unload a pair of portable Bose speakers and hook them up to your coaxial cable through a special tuner. These door-to-door salesmen represent your local cable TV company. What they’re selling are sounds, swelling orchestrations of Bach, Beethoven and Berlioz if you’re a classical music fan, or folk ballads from Garth Brooks, Bonnie Raitt and the Judds if country is your twang. There’s also hard rock, reggae, contemporary Christian and just about everything in between.

For an average monthly fee of $10, a premium cable service called digital audio offers anywhere from 19 to 30 categories of commercial-free, deejay-free music, all piped directly into the back of home stereo systems. The CD-quality music is transmitted digitally over coaxial cable, encoded as binary bits of computer information so there is no chance for distortion.

A growing number of cable operators throughout Southern California are either testing or signing up with one of three competing services--Digital Music Express, Digital Cable Radio or Digital Planet (see chart). Because of the challenge in explaining the unfamiliar concept of digital audio to consumers, in-house demonstrations are one of the most effective marketing techniques local cable companies are using to get the word out.

“The big obstacle right now is that people are really having a tough time understanding what (digital audio) is,” said Peter Ruben, vice president of marketing for Paragon Cable in Orange County. Since October, he has marketed Digital Music Express, or DMX, to 14,000 of his 90,000 homes using a door-to-door sales team, demonstrations at local audio stores, phone solicitation and direct mailing. So far, 800 subscribers have signed on for the service.

“This is a service that’s distributed by cable companies, which are known to distribute only cable television products,” he said. “So when you tell people it’s for their stereo, they don’t understand. Once we’re able to give a demonstration of the product, we have no resistance.”

Just as stereo broadcasting on FM radio was the logical evolution of the limited AM band in the 1940s, supporters argue that digital audio’s time is the 1990s. In a depressed economy where advertising dollars are down and smaller radio stations specializing in less-popular styles of music are being pushed out of business, digital audio provides a model that transfers the cost of programming to consumers.

“One key difference between us and radio, a lot of our more specific music formats can’t cut it as radio formats because the whole purpose of radio is to deliver people to advertisers. They’re looking for the widest possible demographic, so their programming is built around that,” said Paul Clough, vice president of marketing for Digital Cable Radio in Hatborough, Penn. Digital Cable Radio, also known as DCR, offers 19 different music formats plus audio simulcasts of HBO, Cinemax, Showtime, MTV and VH-1.

“On the other hand,” Clough said, “people are paying for our product. So while there are fewer radio stations offering easy listening music because it’s less popular today, we can offer it. The same goes for hard rock. They’re niche markets, and there’s a demand for them, but it’s a demand radio can’t really fulfill.”

Digital audio services are not required to pay recording artists or music companies for the rights to play their tunes. Instead they pay a flat fee, as do over-the-air radio stations, to both Broadcast Music Inc. and the American Society of Composers and Publishers, which reimburse music composers and publishers. Performers and record labels are not directly compensated because digital audio play, like radio, is considered free publicity that drives up record sales.

In fact, DMX offers a hand-held remote control--for an additional monthly fee--with an LCD window that displays the title, artist, composer and record label of the songs being played on any of the service’s 30 music channels. DCR subscribers can get the same information by calling a 800 number, and the service will soon offer a remote control of its own.

“We regularly play music that never makes it to big commercial radio stations,” Clough said. “At the beginning we were so small we didn’t mean anything to the recording industry. In time we will.”

DCR and DMX, the two largest services, have risen rapidly since their introduction last year, thanks to carefully chosen equity partners. Both forged relationships with large cable TV equipment suppliers to manufacture their hardware and with giant cable operators that own multiple cable systems to bring into the fold.

DCR is available on 40 cable systems across the country and continues to launch service on six to eight new systems each month. DMX has 35 systems and adds 10 to 15 a month. Digital Planet, without cable industry partnerships, has had a more difficult time gaining advantage in the digital audio derby.

“I have some concerns,” said Cablevision Industries marketing vice president Bob Helmuth. He is exploring DMX and DCR for his systems, which include the west San Fernando Valley. “Right now we’re in a recessionary environment, and a lot of people who would normally be predisposed to take this product might be reluctant to pay $10 a month. That could be a tidy sum for people to go for right now.”

Digital audio proponents say that the monthly subscription fee is less than the cost of a single CD. And with the rising popularity of home theater systems, the digital simulcasts of premium cable channels offered by DCR and on a system-by-system basis on DMX are a bonus, they said. Still, signing up subscribers has been a hard-fought battle.

“When cable first came out, people were used to getting television for free and balked at paying for it,” said Bill Erickson, sales and marketing manager for Copley-Colony in Costa Mesa, which is offering DCR with a 30-day money-back guarantee. “Now, 10 years later, cable TV is commonplace. People are used to getting radio for free, and they’re not familiar with this concept.”

Digital audio is being heavily marketed to young, affluent households. The ideal DMX consumer, according to marketing information provided to cable operators, is primarily between 18 and 34, has a household income of $30,000 or more and has invested at least $1,000 in audio equipment.

“One of the reasons Paragon launched DMX in Orange County first is because our research told us that 50% of our existing cable subscribers have CD players,” Clough said. “So a lot of people in this area listen to music and have a high desire for quality, and they are our initial target. We’ve found that 80% of people who take DMX have CD players.”

The capital investment that cable operators sink into digital audio is not cheap. They spend anywhere from $8,000 to $20,000, depending upon the size of their system, for the technical equipment to receive and downlink the digital audio information from satellites. They must also purchase hundreds or thousands of home tuners for roughly $100 each to rent to consumers.

“The biggest drawback is the cost of the equipment in the homes,” said Shelly Trainor, marketing director for Cablevision of Orange, which does not offer a digital audio service. “And there’s an additional cost to consumers. I’m wondering how many of them will really be interested in spending another $10 a month for radio, when in Los Angeles there is a lot of radio to choose from. I don’t know if the market is big enough yet, which is why we’re waiting to see.”

But there are numerous advantages to digital audio, its backers say. Because audio signals are squeezed between existing cable channels, cable operators, who are already cramped by limited channel capacity, do not have to give up any space on their systems. They figure that they can do good business with a modest 4% or 5% buy rate, and most of them are doing better than that.

Another advantage is that few subscribers cancel the service after they sign up. “In the cable business we call it churn when somebody drops a service,” said Dimension marketing director David Limebrook, who tested Digital Planet before recently switching over to DCR. “The churn rate (for digital audio) is about 3% or 4%, only slightly higher than basic cable itself. Once it’s established, it becomes part of the regular activity of the household.”

According to a 1990 study by the Arbitron Co., 54% of respondents said they listen to the radio at home during an average week, as opposed to “another place” (26%) or the car (20%). However, there seems to be little concern that digital audio will mount a serious long-term threat to broadcast radio.

“Because of the way drive time impacts radio, when a lot of people flock to the radio for a very short time, auto listening is much more significant than in-home listening, which is spread out over a 24-hour period,” he said.

The Haves and Have-Nots in Digital Sound

Although most cable operators say they are exploring digital audio, most of them have not yet added the service. Here’s a list of local systems:

ORANGE COUNTY CABLE COMPANY: Cablevision of Orange DIGITAL AUDIO SYSTEM: No immediate plans to add CABLE COMPANY: Comcast DIGITAL AUDIO SYSTEM: Digital Cable Radio AVAILABLE: started May 1 COST: $9.95 a month CABLE COMPANY: Community Cablevision DIGITAL AUDIO SYSTEM: No immediate plans to add CABLE COMPANY: Copley-Colony DIGITAL AUDIO SYSTEM: Digital Cable Radio in Costa Mesa only AVAILABLE: Yes COST: $9.95 a month CABLE COMPANY: Dimension DIGITAL AUDIO SYSTEM: Digital Cable Radio AVAILABLE: Yes COST: $9.95 a month CABLE COMPANY: MultiVision DIGITAL AUDIO SYSTEM: Testing all three services on limited basis with no immediate plans to add to any of them CABLE COMPANY: Paragon DIGITAL AUDIO SYSTEM: Digital Music Express AVAILABLE: Yes COST: $9.95 a month, $2 extra for remote

SAN FERNANDO VALLEY CABLE COMPANY: CableVision Industries DIGITAL AUDIO SYSTEM: No immediate plans to add CABLE COMPANY: King-Los Angeles DIGITAL AUDIO SYSTEM: No immediate plans to add CABLE COMPANY: King-Santa Clarita DIGITAL AUDIO SYSTEM: Plans to add a digital audio service AVAILABLE: Next year CABLE COMPANY: Sammons DIGITAL AUDIO SYSTEM: No immediate plans to add CABLE COMPANY: United Artists DIGITAL AUDIO SYSTEM: No immediate plans to add.

ELSEWHERE CABLE COMPANY: Century DIGITAL AUDIO SYSTEM: No immediate plans to add CABLE COMPANY: Comcast-Simi Valley DIGITAL AUDIO SYSTEM: In negotiations with Digital Cable Radio CABLE COMPANY: Daniels DIGITAL AUDIO SYSTEM: Tentative plans to add Digital Cable Radio AVAILABLE: Later this year CABLE COMPANY: Jones-Lancaster DIGITAL AUDIO SYSTEM: SuperAudio* AVAILABLE: Yes COST: Included in basic cost CABLE COMPANY: Jones-Walnut Valley DIGITAL AUDIO SYSTEM: SuperAudio* AVAILABLE: Yes COST: Included in basic cost CABLE COMPANY: Ventura DIGITAL AUDIO SYSTEM: No immediate plans to add * A non-digital audio service that offers nine channels of music and entertainment Source: Cable companies