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Local telcos, cable companies partner for profit

Thu, 10/31/1996 - 7:00pm
Ken Pyle, Product Manager, E/O Networks

The paradigm for manufacturing companies has shifted from the vertically integrated manufacturer of the postwar era to one working in concert with partner companies to create end-products. Companies may be partners at one level, such as manufacturing, while they compete at another level, such as marketing the product to the consumer. This is possible because "soft" assets, such as brand name, packaging, service and distribution channels, are often more valuable than the manufactured product.

This shift away from vertical integration is occurring in service industries as well. For example, some airlines are shifting from owning airplanes (i.e. production method) to owning only the knowledge or information resources (i.e. the reservation systems and frequent flyer awards). Examples can also be found in the telecommunications field where brand name and other soft attributes are a company's key asset.

Similarly, opportunities exist for local cable TV and telephony operators to share facilities in a cooperative fashion, providing benefits to both parties. This is counter to the current paradigm where cable TV and telephony operators engage in cutthroat competition. The benefit of cooperating instead of competing includes addition of system capacity that otherwise might not have been economically viable, at rates that are competitive with new entrants. This article details the drivers that make local cable TV/telco operator partnerships viable, applications where network sharing is feasible and possible business relationships to ensure successful partnerships.

Background

Prior to a partnership between local telephony and cable TV, each must have an overriding need that justifies joining with a potential competitor. This need results from fear or inertia. The fear comes from either real or potential competition, and the inertia is what must be overcome to offer a new service. For a telco, the competition could come from wireless providers — PCS or cellular — or landline providers, such as cable TV or competitive access providers. The cable TV operator faces immediate competition from direct broadcast satellite and potential competition from MMDS and local telcos. Either way, competition often drives the requirement for an expedient service solution.

The inertia factor is organization-dependent and results from a company's method of doing business. The infrastructure requirements of providing telephony service are different from those required for providing cable television programming. In this context, infrastructure is much more than the physical plant connecting the central office or headend to the end subscriber and includes all of the elements required to conduct business. In other words, the cable TV and telco operator are experts in their respective service offerings and face a learning curve when serving a new market.

Some of the unique attributes of telco and cable TV operators are generalized in Figure 1.

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The cable company is familiar with the sourcing, processing and delivery of broadband, broadcast services, in contrast to the local telco, which is expert at providing narrowband, switched services via the public switched network. Cable craftsmen are trained for installation and maintenance of coaxial networks. The telcos' craftsmen, on the other hand, are adroit at working with twisted pair. The time required for training craftsmen on a new media is significant and cannot be overlooked when deciding the best way to implement new services.

Finally, the challenge of dealing with local franchise authorities, in the case of cable TV, and the state public utility commissions, in the case of a local telco, is another new skill-set that must be mastered for each respective operator.

Strengths that both the telco and cable TV provider offer include an in-region infrastructure, an existing subscriber base and brand name recognition.

The extent to which the brand name is of value depends on how well an operator's service has been marketed. By definition, neither operator provides service outside of its exchange or franchised service area, so system expansion beyond its existing boundaries is an issue.

Applications

The reasons for local cable TV and telcos to share infrastructure include network cost-reduction, minimizing time-to-market for providing new service and expansion of service area. Infrastructure sharing provides a cost-effective and timely way for the local operators to defend against new competition. Some of the specific applications of infrastructure sharing are headend and/or exchange consolidation, service extensions and service region expansion.

Headend and/or exchange consolidation. The cost of a cable TV headend or central office ranges from $100,000 to more than $1 million. The consolidation of these facilities has thus been occurring for some time as a way to decrease capital and maintenance costs. These consolidations have typically been accomplished using fiber optic trunking techniques. With the cost of installed fiber ranging from $7,000 per mile in rural areas to more than $20,000 per mile in urban areas, the economics of infrastructure sharing are compelling.

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With headend or exchange consolidation, shown in Figure 2, the service areas of the telco and cable TV operator overlap, and it's possible that they might even compete in some service areas.

There are several ways of sharing the cost of the infrastructure, including one operator owning the facility and leasing dark fiber to the second operator. Another method of cost sharing is to form a jointly-owned entity, similar to regional advertising interconnects, which would be responsible for facility maintenance.

Service extensions. Extension of service to areas either not served or poorly served by cable TV or telco interests are applications where infrastructure sharing can make sense. Again, in these applications (depicted in Figure 3), the cable TV and local telco's service areas most likely overlap.

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Large, multi-tenant dwellings are ripe for service improvements via a direct fiber optic feed to the building. New subdivisions at the edge of a city are another opportunity for cable TV and telco fiber extensions.

Lastly, installation of fiber optic links as replacements for analog and digital telephone carrier often justifies the extension of cable television service to rural communities that were previously too small to justify cable television.

As an example, assume a service extension to a rural community with the specified characteristics (see Table 1).

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As can be seen from the Table, the dominant cost factor is the cost of fiber from the headend to the rural community, while other costs, such as optoelectronics for signal trunking, coaxial and twisted copper pair plant, are secondary.

The extent to which the fiber cost is shared among telephony and cable services is a factor in determining the feasibility of extending cable service to a given community.

Utilization of fiber optics in providing rural telephone service reduces the amount of electronics required in the outside plant facility, as well as eliminates the capacity limitations of copper alternatives. A major advantage is the sharing of the transport bandwidth. In other words, telephony service often provides the sole justification for the placement of outside plant fiber.

Additionally, the telephony system provides a means of returning alarm information from the cable TV optical receiver to the central office or headend. Cable TV optical receivers are added only at those locations along the fiber route where the subscriber density is high enough to support cable television service.

Service region expansion. A third type of application is expansion of service into out-of-region areas. These regions are locations beyond the operators' existing franchise or exchange boundary. In this scenario, a telco in one location unites with a cable TV provider in another area to compete against other local telco and cable TV providers. By selectively sharing infrastructure, both entities are able to quickly and cost-effectively increase the size of their serving areas. This concept is illustrated in Figure 4, where a telco and a cable TV provider with adjacent exchanges share facilities to expand their reach.

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In the above scenario, the local telephone company provides the switching infrastructure, while the cable TV company provides the headend expertise. Key to extending these services into the adjacent regions is the use of fiber interconnects.

In the illustration below, inter-office fiber optic rings are assumed. Cable TV transport is via an "AM" fiber system, because it minimizes the amount of remote signal processing. A fiber optic-based digital loop carrier system with distributed optical network units (ONUs) provides the transport of telephony signals from the central office, because it cost-effectively allows low penetration service to easily be distributed over multiple sites.

Penetration of service will be low initially, as both the cable TV and telco entity are new players outside of their initial service area. Thus, it is important to target service offerings at areas where success is likely, and infrastructure is in place. Examples include service to apartment buildings, small business and new subdivisions.

Another possibility, courtesy of the Telecommunications Act of 1996, is to use the incumbent telco's copper network. To exploit this, an ONU would be placed near a service access interface (SAI), and distribution and drop pairs would be leased from the competing telco.1

The marketing and administration of service outside of region can be performed in several ways. As an example, the telco and cable TV company might provide joint promotional campaigns for their services.

Additionally, billing for each service could still be independent, but might be coordinated such that they appear in the same envelope. Revenue for right-of-way use could be in the form of a per-subscriber fee.

Summary

A number of opportunities exist at the local level for cable TV and telco partnerships, including out-of-region service extensions, system expansion and headend consolidation. The synergies between the cable TV and telco worlds can offer a compelling reason for them to partner to provide increased system capacity and service offerings and to compete against other, out-of-region entities.

This ability to share facilities in a cooperative fashion is contrary to the common belief that local cable TV and telephony operators must and will engage in cutthroat competition.

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