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Small ops struggle to launch new services

Thu, 11/30/2000 - 7:00pm
Craig Kuhl, Contributing Editor

For small, independent cable operators, the realities of increasing competition, advancing technologies, lack of access to capital and the growing popularity of new services are presenting both opportunity and concern as they redefine and reinvent their businesses.

Small Operators' Numbers Game

Average cost of key equipment:

Converter boxes—$360

Headends—$360,000

computers—$25 per subscriber

Average monthly capital expenditure per subscriber for rebuild/upgrade: $200 (for 3 years)

Average monthly revenues for interactive TV and new services: $228 per subscriber ($94 directly to operator)

Average small system value: 7 to 9 times cash flow

Source: The Gartner Group, Daniels & Associates, selected small operators

At the top of the opportunity list sits the deployment of digital technology and services. In fact, the overwhelming majority of small operators admit nothing even comes close. Virtually all of them acknowledge the absolute necessity of staying on the technological and new service curves as a means of competing with DBS, ISPs and a growing number of hybrid multi-service providers.

Yet for most smaller independents, many of whom are underfinanced and under-resourced, launching the new wave of services deemed essential to be competitive is a concern, and a painful work-in-progress which is prompting a cross-section of creative business models, service combinations and technologies aimed at a patchwork of different markets and expanding customer demands.

Lack of access to capital for upgrades/rebuilds, low economies of scale to allow favorable ROI (return on investment) and a growing customer service wish-list, such as high-speed data, Internet access and more channels, are contributing to a small operator's sense of urgency to launch additional products.

"Small operators have similar challenges as their bigger brethren to roll-out new services," says Mike Goodman, senior analyst for the Yankee Group, a Boston-based media research and analyst firm. "But they have the added challenge of having fewer resources and few subscribers, and they can't generate as much revenue from new services. They'd better find a creative, technical way of getting those new services to their subscribers, or someone else will."

The sense of urgency to deploy new services in a converging, competitive market is being felt throughout the small operator community, with many scrambling to find the right mix of services and technologies at the right cost.

i_Polka.gif
Polka

"There's great urgency recognized by all small operators to be sure their systems have digital and Internet services. It's an accepted fact that for smaller operators to succeed, they must launch digital services ASAP," says Matt Polka, president of the American Cable Association.

Finding the capital to upgrade or rebuild older systems originally designed to handle video only and migrating them to unfamiliar new services is a tricky proposition, however, and though smaller operators for decades have struggled with a lack of access to capital, the stakes are now higher than ever.

Most banks show little interest in taking the time to handle the relatively pint-sized loans needed by smaller cable systems to upgrade their systems and launch digital, Internet, high-speed data and future services, forcing many operators to seek financing any way possible.

Says Polka: "If you're not asking for $10 million, don't even bother. That's a critical issue for operators. Lately, however, more lenders are recognizing this is a good business, and some banks are lowering their thresholds to less than $5 million."

For most small operators, it's none too soon. Yet the financial reality, or unreality, of securing a small business loan for a 5,000-subscriber system in rural America persists. "Access to capital is very difficult, so most small operators can't build 750 MHz systems because the cost is prohibitive and there's little economy of scale. They're facing a whole set of challenges they've never been confronted with before," says Pat Thompson, senior vice president of Daniels & Associates, a telecommunications and cable brokerage firm.

Those challenges include rising franchise fees and programming costs, integrating sophisticated and costly new technologies and hardware into their legacy systems, and the growing issue of how to deal with being at the low end of the equipment and technology food chain.

"They (smaller operators) always seem to be the last ones to get fiber, cable and equipment if they want to upgrade or rebuild," Thompson notes.

Whichever end of the equipment and technology food chain small operators find themselves at, most experts agree they have little choice but to seek a way to deploy new services and not become a competitor's lunch.

"We don't even calculate penetration and ROI because we have to do these services to protect our business, but getting headend equipment is difficult and always slows us down, and the expense ($350,000 and up) is always there," admits Bob Gessner, president of Massillon Cable TV, a 50,000-subscriber system in northeast Ohio. "But we have to have the headend gear. There's no choice,"

Once the choice is made to upgrade or rebuild a small system, many of which remain at less than 450 MHz, securing the headend equipment and hardware to make it happen is another potential nightmare for small operators. "HFC equipment demand is very strong with upgrades and rebuilds, and it's very difficult to get labor into the field," notes David Eng, senior vice president of the Americas for C-COR.net, a network equipment and hardware provider. "We're getting real data on the urgency of getting these new services to market to start the cash flow, but the logistics are always challenging,"

Nevertheless, Eng insists smaller operators have at least one advantage over their competitors. "Many smaller operators are still very aggressive and many can move faster than their larger counterparts. Size can work to their advantage," he says.

In Massillon's case, size and speed probably prevented the system's demise. Says Gessner: "If we'd been lax in responding to early competition, we would have been overbuilt. But with a combination of new services, broad offerings and the right price, we've prevailed. We've learned there's not a lot of customer loyalty anymore. They go where the channels and choices are."

Those choices are bound to expand in the near future. Says Goodman: "DBS is rolling out interactive services, and they keep piling on more services. People see and read about them and want them, too. Smaller operators, in turn, must bring competitive services to their subscribers."

HITS (Headend In The Sky) is doing what it can to help small operators compete. Some smaller systems are signing agreements with ISPs in addition to upgrading and rebuilding their systems to add digital services. As daunting a task as small operators have in elevating their businesses to include digital, Internet, high-speed data and eventually telephony, most show the staying power necessary to compete. Says Thompson: "It's a difficult time for them. But it's a choice to stay in the business because they love it and have a sense of commitment."

Whether that love and commitment can translate to profitability remains to be seen. Myriad issues remain, and the competition is growing in intensity. "It's not an easy decision. The sub-plot to lack of access to capital is that small operators can't generate as much revenue from new services, so they have to spread the capital costs to fewer subscribers. It all has to be done very economically," Goodman maintains.

Yet most experts agree that small systems aren't likely to simply fade to black, while help may be on the way in the form of new legislation and good old local service. "Customers know they can get good service from a hometown source, and there is a bill called the Broadband Enhancement Act that would provide federal loan guarantees for digital, data and Internet and for broadcast signals. There's also talk about tax credits for small operators to deploy digital and data services," says Polka.

Shedding cable's less-than-stellar reputation for service may be more difficult for small operators than passing a loan guarantee bill, however, even in the hundreds of rural communities they've served for decades. Concedes Polka: "We're still living with the impact of negative feelings of subscribers, even in the rural communities. But it's amazing to see the number of companies deploying new services to a few thousand subscribers. They're part of the community, and despite the challenges, they'll do all they can to succeed."

That success, experts conclude, will depend on how creative small operators can be in their mix of new services, and how economical they can be in their deployment.

E-mail: cakuhl@compuserve.com

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