Small ops look to digital alternatives
Digital technology's lofty status as the cable industry's newest poster child is generating more interest and increasing the momentum into digital services for many cable operators. No doubt, digital will be widely deployed in the coming years, offering highly touted services such as video, Internet, high-speed data and more, along with the magical technology which promises to bring breathtaking changes into our homes.
Yet several questions remain about digital's true value as a business to the hundreds of smaller cable operators nationwide whose resources are limited and whose mentalities remain staunchly bottom line. What alternatives to the costly and yet unproved deployment of digital technology exist for smaller operators? And what is the right strategy to stay competitive and fiscally responsible, without blindly following the digital parade?
"We must be opportunistic with our technology and recognize that different markets will have to wait for digital, or something else to come along," says Steve Seach, president and CFO of Classic Communications Inc., a 190,000-subscriber system, with most of its systems at fewer than 5,000 subscribers. "Return on investment capital is very important to smaller operators."
Cost and competition, mainly from DBS, have been the motivating factors for smaller operators in their search for alternatives to digital technology as they move through a critical interim period, which they say will eventually lead to their deployment of digital services. In the meantime, a veritable smorgasbord of technologies and services are being considered, not to mention the business implications of launching digital services.
"We've done everything in preparation for the digital world. But come budget time, we've looked at the costs of convertor boxes and other expenses and compared them with our revenue projections, and it (digital) just doesn't make sense," says Pete Collins, president of Eagle Communications, a 13,000-subscriber system in Hays, Kan.
Collins has done the digital math, he says. "If we took HITS (Headend In The Sky) and paid $60,000 for convertors and re-tooled our headends, it doesn't make sense for $35 a month from 1,500 subscribers. If a customer buys two movies a month for $4 each, the studios first take $2, billing services take $1.20 and we keep 80 cents. When I amortize the capital investment, not including advertising, maintenance and so on, my net is minus 70 cents," Collins says. "That's why we haven't done it."
Collins points to the cost of convertor boxes, now around $400, and "greedy" studios as the main obstacles to Eagle entering the digital video business. "If movie providers digitize and condense 15 or so movies, we can deal directly with them and eliminate the $2 to the studios. I think that will happen," he says.
Until it does, Eagle is offering a 58-channel, all analog basic package, with five pay channels for an additional $9.95. It has also installed high-speed Internet access and data links between schools, hospitals and offices, which according to Collins "is an excellent ancillary business for us."
Home healthcare is Eagle's next project as an alternative to digital services. "We installed data and video links with switching devices in nursing stations at healthcare centers, and the cost of home healthcare dropped from $150 to $30 per house call. That's what we're doing to counter the digital approach," Collins says.
Despite many unanswered questions concerning digital's role with small operators, it is expected to be a key factor in their future plans, including Eagle's. Adds Collins: "We're watching digital very closely, and have its pulse through the SCTE (Society of Cable Telecommunications Engineers) meetings and so on. We're finding out about delivery schedules, problems with hardware and reliability. When the programs are there and the costs are right, we'll step forward with digital services."
That mindset is shared by the majority of smaller operators, who are saying: Wait until the technology is proven and the market softens, then deploy digital. "There's an evolution to digital, and we'll eventually run out of channel capacity. At that time, we'll go to digital as optional services," says Neil McHugh, president of Vista Communications.
McHugh says his company has no digital plans for the immediate future. It is adding 25 channels over 600 megahertz of video, and will go to a "super analog" solution with Scientific-Atlanta's (S-A) 8600X navigational device. Vista will also deploy impulse pay-per-view, WebTV and will launch high-speed Internet service and two-way data service in first quarter 1999. "We're trying to drive revenues from these boxes, and analog boxes are about half the price of digital boxes," he maintains.
McHugh believes that in three to five years, the price of digital boxes will be low enough to allow small operators such as Vista entry into the digital world. "Digital is part of our future, and these are interim steps for us. But our customers want good programming and convenience, not digital just because it's digital."
Rapid Communications, a 12,000-subscriber, 50-location system scattered throughout the Midwest, has other plans. It will roll-out HITS at its Branson, Mo. system in the year 2000 after installing fiber in two newer systems there. Yet going fully digital is still not on Rapid's radar screen. "It's not inevitable we'll go fully digital in the long-term," says Tom Semptimphelter, president of Rapid Communications Partners L.P. "It will depend on the math."
The math is expected to come from its HITS trial in Branson. "Branson will be a HITS test market for us. We'll have to figure out the costs at our other smaller systems, some as small as 200 subscribers. If it works cost-wise, we'll do it at those systems."
With the deployment of digital services in a holding pattern at many smaller systems, upgrading an aging plant is now a priority for many smaller operators, including CableAmerica Corp., a Phoenix, Ariz.-based system with 80,000 subscribers in five states. Says Chris Dyrek, vice president of CableAmerica: "To compete, we're on the digital bandwagon, but our core systems are at 550 MHz, so we must upgrade those first."
The digital course for some smaller operators, however, is not as clear, or as attractive. "We have 46 channels of basic and a 24-channel tier on top of that, and none of it is scrambled. We can offer 70 channels for $27.95 in our 'whole-house' package. That's very competitive," says Bob Gessner, general manager of Massillon Cable TV, a 44,000 subscriber system in Ohio.
Competition from DBS is another worse-case scenario, according to several smaller operators, and is prompting them to raise the bar in terms of services such as digital. "Everything we are doing is to provide a product to compete with satellite," says Tom Tupper, controller for Blackstone Cable, a system with 20,000 subscribers in five mountain states and California.
In Blackstone's mix of digital alternatives, consolidating its headends is a big part of its "small-time" clustering plan, and a top priority, according to Tupper. "Our markets don't see the value in digital. Our plan is to draw back the DBS customers we have lost by bumping our channel capacity to 450 MHz and provide as many off-air channels as possible."
The DBS threat, real or imagined, is providing plenty of inspiration for smaller operators to add services as alternatives to digital, and to even consider launching some form of digital, either immediately or down the road. Says George Allen, general manager and chief engineer for Bee Line Cable TV, a 10,000-subscriber system in Houlton, Me.: "We've been upgrading to 550 MHz and just consolidated three headends into two. DBS is not a threat at this point, but if we see it becoming one, we'll take a serious look at digital. It (digital) will, however, happen here within a few years."
For three smaller operators, the digital question is being answered by a surprising strategy: Anderson Eliason Cable Group, Galaxy Telecom and Classic Cable recently announced a partnership with DirectTV to offer a hybrid digital/analog service package to 470,000 subscribers in the Midwest and southeastern U.S.
With smaller operators caught between expensive upgrades and growing competition, the "Death Star" tag which the cable industry once placed on DBS could one day become a smaller operators' shining star.