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Wrestling with return path realities

Wed, 03/31/1999 - 7:00pm
Craig Kuhl, Contributing Editor

Upgrading cable plant to include an active two-way path is being touted as the latest and greatest passage to new revenue streams. New services such as high-speed data, telephony, video-on-demand and others are fast emerging as integral components to a cable operator's business model. Invest anywhere from $75 to $180 per home passed, or about $1,500 a mile, according to industry experts, and voila! New revenue streams abound, pushing the upstream path to near no-brainer status for many of the major MSOs (multiple system operators), and a growing number of small- to mid-size systems.

At a recent CableLabs briefing, Tele-Communications Inc. (TCI) reported that 4.6 million homes are now passed by two-way plant, and fully 60 percent of its homes passed should be two-way active by year-end 1999. Comcast plans to be 71 percent two-way by year 2000; MediaOne, 70 percent; and Time Warner Cable, 85 percent.

Yet while few cable companies dispute the long-term revenue opportunities likely to come with activating an upstream path, the initial capital investment, maintenance, additional personnel, labor and potential hidden costs for return path activation continue to make the leap to a two-way plant relatively dicey for many cable operators.

Just how long it will take for the payback on initial investment, and if the math really warrants these services, are questions weighing heavily on the minds of cable operators as they boldly take the upstream path to two-way services, like it or not.

"You really have no choice," says Mel Jenschke, vice president of engineering for TCA Cable in Tyler, Texas, a cable system currently migrating to two-way service. "Customers are going to demand services like cable modems, and if you're a public company, the analysts want your plant to be two-way operational."

Whether investor, market, or revenue-driven, most operators concede that two-way is the path to future profits. However, just how significant those revenues will be to a company's overall financial performance, and how much capital will be needed to get there, are issues likely to shadow an operator's bottom line for years to come.

The costs

Most industry officials agree that the average cost to activate a two-way system ranges between $750 to $1,500 a mile, with initial equipment costs to activate two-way being relatively low, especially if a system is already upgrading to 750 MHz. "Much of the reverse path gear comes with the 750 MHz equipment like trunks and bridgers," Jenschke says.

Each headend requires a one-time, incremental investment of approx-imately $3,000 to upgrade the sweep equipment, and a signal level meter. Passive devices which separate the downstream and upstream paths are also needed, at $15 to $20 per amplifier location. Says Jenschke: "You've got about $50 of equipment in each station, so if you have a lot of stations, it could get expensive." The two key components to an upstream rebuild—upstream amplifiers and filters (passives)—will usually cost between $300 and $800. But upstream optical and laser transmitters are also needed at the nodes, and cost about $1,000 for each transmitter, with receivers running between $500 to $1,000, though the cost can be spread across several hundred subscribers.

Another cost which many operators are discovering is the replacement of inexpensive splitters people have put in their homes. They have to be replaced with more efficient passives by the operator. For that reason, many operators choose not to install these passive devices because this adds at least an hour to every modem or set-top installation.

Mix in the labor costs, which operators fear most in upgrading to two-way, and phantom maintenance costs which could arise down the road, and the pressure mounts for two-way services to generate revenues, quickly. "Investors will want significant revenues from two-way services five years from now. So payback is critical," says Joe Van Loan, senior vice president of technology for MediaCom, a 345,000-subscriber system in Middletown, N.Y.

Labor challenges

With the acute shortage of labor now firmly in the crisis stage, finding quality construction crews and technicians to build and maintain two-way plant is the number-one concern of most operators who are upgrading to two-way. Says Jenschke: "It costs about $25–30 per amplifier location to balance the amplifier reverse station. Then, it costs $50 an hour to troubleshoot. Plus, with modem service calls, we have to consider it as an outage, and if we take the system down, we have to communicate to customers individually via e-mail," Jenschke says. Each contributes to the growing cost of labor. TCA, Jenschke adds, wants to upgrade 3,000 homes to two-way in 1999. With the labor shortage, however, it will only get 1,800 done because, he says, "We can't find the labor to do it."

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Paff

Once the elusive construction crew is secured, a solution to spiraling labor costs is building in the return path from the get-go, and creating a well-defined maintenance process, says Andy Paff, chief technical officer for Worldbridge Broadband Services, a technical outsourcing firm for advanced broadband services. "Why would you do an upgrade or rebuild without interactive services? It's hard to imagine a system not justifying a return path," Paff says. With labor costs representing roughly $35 of the $50 per- home cost of upgrading to two-way, Paff insists significant dollars can be saved by adding traps, bridgers, trunks, etc. during upgrades. "You can save money if you make that decision now," he says.

Paul Gemme, vice president of plant engineering for Time Warner Cable, which has completed 75 percent of its two-way upgrades, agrees. "Realistically, if you go back and do it (two-way) later, it will cost you more. You can probably save $15–16 per home passed by building in two-way during upgrades. Contractors work on a per-foot basis, so you can save considerable amounts of money. If you're going to increase revenues, you must make the capital investments, so you might as well save on labor costs upfront."

But will revenues follow the decision to install two-way anytime soon? Says Paff: "In the trenches, it's a difficult exercise for cable operators (justifying return path). Building in a return path can be expensive, and there is some indecision about whether or not customers will like these new services. Plus, we have no experience to tell us it will pay off in three or five years. But without it, cable would be a dead end. And the cash flow is coming that will pay for the capital investment," Paff says. He adds that data services are currently at a five percent penetration level, and climbing.

Some aren't as confident, however. Says Jenschke: "Where will the revenues come from? These new services are supposed to do all these great things, but we're not there yet. They're not knocking our doors down for cable modem service, which is only at one to two percent penetration currently. I think return path revenues will come from a combination of impulse pay-per-view movies and new services."

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Nagel

Cox Communications, which executives say will be 67 percent upgraded to two-way by year-end 1999 in its nine major systems, sees the movie/Internet/data/telephony mix as the revenue leader. "Video will be the most important product for the next 10 years," says Tom Nagel, director of business product development for data services at Cox. "But data and telephony will cause a share shift from the current 95 percent video, and five percent data and telephony (picture)." Van Loan, however, is sure those revenues are there. "People like digital and Internet services. If we have a 30 percent penetration level with digital, and Internet services at $10 a month in additional revenue in the next five years, that's another $16–20 a month in revenue," he says.

Competitive pressure

Beyond the revenue vs. capital investment question inherent with upgrading to two-way services, however, there are underlying rationales for activating two-way. "We need these incremental services to take the pressure off rate increases and to be competitive with DBS and digital video," admits Ken Wright, executive director of engineering and telecommunications development for InterMedia Partners, which expects to be 90 percent two-way rebuilt by year-end 1999. "We also want to be in the IP telephony business, and you can't do that without two-way," Wright adds.

Adding a return path to the business model will also require additional personnel trained to handle a number of tasks never before required in the cable industry, many of which will require new job skills. Industry experts put the figure at 50 percent more personnel who will be needed to maintain two-way services in the new century. And that comes with a price tag as well. "The most difficult spectrum to utilize is the upstream, so you need more technicians to maintain it. It's not a great place to transmit information over a cable system," says Dave Rozzelle, a principal of Media Connections Group, a telecommunications consulting firm in San Francisco.

Van Loan notes that MediaCom uses one technician per 400 miles of plant, or one per 30,000 subscribers. However, the more customers, the higher the maintenance. Adds Rozzelle: "The more times you need to touch the system, the more technicians will be needed."

As the economic realities of the return path become more apparent, what will be needed most by cable operators, experts say, is patience and a clear vision of their upstream revenue futures. Concludes Paff: "As the market demand catches up with the technology, the five percent penetration level will grow. It will look much better in five years."

 

Crunching the numbers

The average cost to activate a two-way system ranges between $750 and $1,500 per mile.

Each headend requires a one-time, incremental investment of about $3,000.

Passive devices which separate the downstream and upstream paths are also needed, at $15 to $20 per amplifier location.

The two key components to an upstream rebuild - upstream amps and filters -will usually cost between $300 and $800.

Operators must replace inexpensive splitters homeowners have used with efficient passives.

One solution to spiraling labor costs is building in the return path when conducting upgrades or rebuilds.

Approximately 50 percent more personnel will be needed to maintain two-way services in the new century.

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