SNL Kagan's newest study, "Economics of High Definition Cable Networks," estimates that cable and satellite high definition subscribers will penetrate 65.7% of U.S. multichannel households by 2012, up from 18.8% in 2007. More than one-third of homes now have HDTV sets, with that number growing each year, so cable networks will face increasing pressure to offer more HD content.

According to SNL Kagan, 74 HD networks have launched since 2003, offering a variety of programming options, from sports to family entertainment to movies. Several of these networks are simulcasts of their standard-definition counterparts, but some show content produced in HD or transferred from 35 mm film.

SNL Kagan identifies two main sources of network revenue in the new HD era: license fees and advertising. To gain wider distribution, simulcast networks will have to sacrifice license fees, which account for about half of a traditional cable network's revenue stream. HD networks will try to compensate by increasing ad revenues, but it will be challenging to prove to advertisers that simulcast networks reach new viewers and therefore demand additional ad dollars.

"The 25 HD networks we tracked for this report tallied $49 million in gross ad revenue in 2007. We estimate that number will grow to $421.7 million by 2012, but it will still be small compared to sums generated by traditional cable networks," said Derek Baine, senior analyst for SNL Kagan. "That segment of the industry posted $19.4 billion in ad revenue in 2007 and it is estimated to grow to $28.3 billion by 2011."

Despite the hurdles new HD networks have to overcome, SNL Kagan sees the potential for huge gain. "Revenue for traditional cable networks has grown steadily over the past decade from nearly $12 billion in 1998 to nearly $38 billion in 2007, a 13.7% CAGR," adds Baine. "Revenue for the HD networks was $465.1 million in 2007 and we think it has the potential to grow to nearly $2 billion by 2012."