CABLE TV;TELCO REFORM LIBERATES SMALL-MARKET CABLE BIZ

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The post-telecommunications reform era has arrived in smaller cable TV markets.

The recent telco rules immediately deregulated cable in markets with under 50,000 people. Not only are these areas free from rate regulations, but cable and telco companies can immediately enter each other's business.

This development is designed to encourage competition in these industries. But these opportunities-coupled with the growth of another cable programming distributor, direct broadcast satellite-also mean changes in local cable advertising in small markets.

Ad sales staffs at current cable operators face not only possible competition from telcos but the growth of satellite-dish services such as DirecTV and USSB. These technologies have boosted the penetration of the biggest cable networks, such as CNN and ESPN, to 70% of all U.S. households.

INCENTIVE TO SWITCH

Cable industry observers have predicted increases in subscribers' monthly cable bills. If these projections solidify, subscribers may have incentive to switch.

That would lead to fragmentation of a market's cable viewership. Yet buyers and sellers see this situation as being a half-full glass and not a half-empty one.

"It's going back to a laissez-faire attitude where diversity and competition are encouraged," says Allen Banks, executive director of media, Saatchi & Saatchi Advertising, New York. "I think it's an exciting opportunity from a consumer's perspective and an exciting opportunity from an advertiser's perspective."

Although the exact details of the bill's new rules aren't due from the Federal Communications Commission for six months, executives who sell and buy local cable advertising expect changes.

"I believe competition is good. Even though it may hurt my industry a bit, I think it will help get cable TV into all homes in America," says Darrell Campbell, president of CableTime, a subsidiary of TCA Cable that sells ads for 175 systems reaching 1.5 million subscribers in Texas, Arkansas, Louisiana and Mississippi.

Local cable advertising offers small businesses targeted reach at low cost. For example, Mr. Campbell says a 30-second spot in Big Spring, Texas, costs $2.50 per commercial for advertisers that buy at least 28 spots. That translates into $70 or more a week to reach the 9,200 subscribers there.

"The penetration of cable households in most of our markets is greater than the circulation of local newspapers," Mr. Campbell says. Local advertising "informs them of what's going on in their community. People like to see their friends and neighbors on TV promoting their businesses."

In addition, America's rural population is starting to show new signs of life. Although about 80% of Americans live in metropolitan areas, it's no longer true that the urban population is growing much faster than the rural population (see chart on Page 26).

Still, telco reform brings with it the threat of Baby Bells invading cable operator territories. Indeed, Ameritech has cable franchise pacts in suburbs of Chicago, Detroit, Milwaukee and Columbus, Ohio.

WORKING TOGETHER

Some operator representatives say Baby Bells have already contacted them about working together.

"They're actually looking to have cable companies or cable rep firms to represent them," says Keith Dudek, advertising sales manager for Cable AdNet, a rep for 15 New England cable systems. "From an advertising perspective, you can still buy the entire market with one phone call."

However, if the advertising cooperation breaks down, Mr. Dudek says the situation will be comparable to a small town with two daily newspapers, where companies have to decide whether to advertise in one or both outlets.

Increased competition in cable distribution could also spur growth of smaller cable networks like Golf Channel as competitors search for ways to help differentiate themselves.

"What it will all come down to is, what can we get uniquely from one that we can't get from another?" Mr. Banks says.

This holds true for viewers and advertisers alike. Viewers will subscribe to the distributor-satellite, telco or cable-that offers the programming they want. The fragmentation should lead to easier and more effective target marketing for advertisers.

IDENTIFYING SUBSCRIBERS

"The opportunity is going to be there to identify who is subscribing to what," Mr. Banks says.

One problem he foresees is fragmentation could make it harder to mass-market.

"They're going to have a bigger problem trying to sell their soap to a national audience," Mr. Banks says.

However, as Steve Effros, president, Cable Telecommunications Association, points out, both DBS and cable can bring viewers CNN and ESPN, but spot cable is the most targeted way small businesses can reach local customers through TV.

To stave off potential competition from telephone companies entering the cable market, smaller cable operators are teaming up. Consolidation offers smaller operators strength in numbers when competing for ad dollars.

"Right now, the cable industry is going through consolidation," Mr. Dudek says. "They're either forming alliances or buying each other out. As these markets consolidate, I'm getting more towns and cable systems to offer major clients."

"That's why you need one advertising voice selling advertising for a market. A single market needs one quality service out there selling ads," Mr. Campbell says.

Strategic alliances aren't just for smaller markets either, as shown by U S West's pending acquisition of Continental Cablevision.

But alliances won't alter the flavor of local programming or advertising, observers say.

"This telecommunications bill is not going to change the nature of the viewer. It may change the system" of distribution viewers choose, Mr. Effros says. "There's going to be a national distribution system and a local distribution system. That's not going to change. There will be more of a focus on local programming, more potential for local advertising and target marketing."

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