Listen Up, Big Guys!
There are well over a thousand cable system operators in the U.S. Of those, only 10 have more than 500,000 customers. While the big MSOs are involved with the alphabet soup of DOCSIS 3.0, VoIP, OCAP, VOD, DVR, HD, increasingly faster Internet access and other new services, medium-sized cable companies are expanding with VoIP, VOD, DVR, HD, faster Internet access and other new services.
Most of them are, anyway. Mid-sized companies–those who count their customers in thousands to tens of thousands–usually proceed at a more deliberate pace, constrained by limited resources, which include smaller subscriber bases, manpower and, most importantly, financing.
And if mid-size companies are feeling the effects of those restraints, they are felt even more acutely by the smallest companies, many of them literally still mom-and-pop outfits.
It's hard to generalize about small- to mid-sized companies. Some have competition from the local phone company; some arethe local phone company, too. Some are operating in areas of declining population; some in boom areas.
If there is one generalization to make, it's that size does matter. In a cash-flow business, size is directly proportional to how much money a company has on hand, and how easy it is to borrow more.
Matt Polka, president of the American Cable Association (ACA), which represents small- and mid-sized cable operators, says, "The economics for a small company are so much different; cost-per-subscriber issues are so much more acute."
Money is not the only determining factor, however. There are, after all, many mid-size and small companies that find ways to not only compete but thrive. But the unending slew of new technologies represents a perpetual upping of the ante, a continual pressure raising the minimum level of competitiveness. That's making it harder and harder to be anything less than big.
The worst news is for the smallest companies, those with fewer than 1,000 subscribers, including many who have fewer than 100 customers. These operators have extremely limited options to compete with DBS that offers more channels, many in HD, and digital video recorders.
Many of these smallest cable companies are the ones who are still running aging plants with only 450 MHz or 550 MHz of bandwidth.
For some of those operators, upgrading from 450 MHz to 550 MHz might be possible, but it's sometimes too high a hurdle to get beyond 550 MHz. Cable plants with 750 MHz of spectrum are predicated on the installation of at least some fiber, which is rarely financially feasible for the vast majority of operators with, say, 500 customers, let alone for those with only 50.
The most affordable option is to install high-gain amplifiers to buy a little extra bandwidth and manage ingress and distortion, but that's unrealistic for a completely unexpected reason–nobody made many high gain amps, and now they're hard to find. If there are any to be found, that may buy a small operator enough bandwidth to add 12 to 18 more channels.
"Even on a thousand subs, it's hard to make it all work," says Dave Chymiak, president of Tulsat, a sales and support company in Tulsa, Okla. Tulsat caters largely to the biggest MSOs, but has a few smaller accounts. On the day Chymiak was contacted, he'd just received two more requests for high-gain amplifiers–which he didn't have.
Meanwhile, more and more rural phone companies and cooperatives have been deploying fiber-based systems to deliver the triple play. The Fiber to the Home Council counts well over 900 U.S. communities with fiber, the majority served by small telco companies (again, many of them are both the local telco and the local cable company).
For the smallest operators, with something as fundamental as bandwidth too frequently out of reach, any discussion of anything as costly as installing advanced CMTSs for IP-based services or deploying softswitches for VoIP is moot.
The largest MSOs have many systems at 860 MHz, and most are at least evaluating the
possibility of upgrading to 1 GHz. As fundamental a resource as video bandwidth is,
however, it’s out of reach for many smaller cable operators.
Small companies can and do thrive, but sometimes at a cost. Boycom, which operates in six small communities in southwest Missouri, had actually increased revenue recently by rolling out data services and digital video and concurrently raising its rates in its largest market, Poplar Bluff, where the company has a 550 MHz system. But the company has been losing subscribers in its other markets, some of which offer only 11 channels, President Steve Boyers reported at The 2006 Independent Show.
Limited access to financing is a concern for mid-sized companies too. Even cable operators with tens of thousands of subscribers are too small to merit attention from national lenders. Local lenders, meanwhile, rarely have the expertise to understand the cable model; operators report having to teach potential lenders about the business before even getting to their requests for loans. That assumes the local lender has the money, which is far from a sure bet in smaller communities.
But if a company can demonstrate growth either through expansion of customers or of revenue, the money is there, ACA's Polka says.
That's a big "if" for the smallest of companies. When any cable operator raises rates, it loses customers. Boycom's example shows that can be done, but with fewer subscribers, a company is already close to the point where it could lose too many.
But among mid-sized operators, "there is some optimism about growth," says Andy Randall, VP of marketing at Metaswitch, a vendor that has devised a small, carrier-class switch designed to allow smaller operators to migrate to a softswitch-based VoIP system. "There is population growth in many places."
Plus, it is becoming easier to target business customers. Most cable plants don't necessarily pass businesses, Randall says, "but you can get T-1s in almost anywhere."
Once financing is secured, though, there's no reluctance to spend it, and no shortage of things to spend it on. Many mid-sized operators already upgraded to 750 MHz and believe they have the bandwidth they need, though some are pushing for more. Shen-Heights TV, which has about 3,500 subscribers in Shenandoah, Pa., is nearing completion on an upgrade to 860 MHz.
Shen-Heights is gradually rolling out HD, and next year plans on introducing VoIP. The decision on what to provide when, says company President Martin Brophy, was dependent largely on what customers have been asking for.
It is possible for mid-sized companies to ride the front of the technology wave. A progressive operator can position itself as a test bed for new technologies. Equipment vendors working with a smaller operator can demonstrate functionality and get some initial marketing data they can then show to larger accounts.
"We've deployed a lot of the technologies the big guys have," says Patrick Knorr, the GM of Lawrence, Kan.-based Sunflower Broadband.
Sunflower Broadband, which serves several counties outside Topeka and Kansas City, Kan., is among the more forward-thinking operators of any size. When DOCSIS was first introduced in 1998, Sunflower was among the first to adopt the technology. The company currently offers digital and on-demand video, high-speed broadband, wireless broadband, VoIP, and recently-deployed ad insertion technology from SeaChange International.
"Access to technology is getting better–the gulf is narrowing. Costs are coming down–hardware costs anyway," Knorr says.
When big companies buy large volumes of any given piece of equipment, sales volume serves to drive the price down for everyone. Still, the cost of entry is often higher for a small- to mid-sized operator.
"You do pay a penalty for being small," says BendBroadband CEO Amy Tykeson.
BendBroadband, with about 35,000 subscribers in Bend, Ore., offers VoIP and digital simulcast, is targeting local businesses, and recently launched a network DVR service in conjunction with its primary VOD vendor, C-COR Inc. The operator also is preparing to upgrade to DOCSIS 3.0 and to migrate to an IMS (IP Multimedia Subsystem) architecture–projects that BendBroadband CTO Frank Miller expects may take two years. The company also plans to deploy the OpenCable Application Platform (OCAP), possibly in 2008.
Tykeson explains that the digital simulcast equipment BendBroadband had to deploy had 10 times the capacity the operator actually needed. Similarly, the company uses Cisco CMTSs, which come in a chassis configuration and can be scaled up, but buying a chassis is still a significant expenditure.
"If you wait," she says, "you can avail yourself of a more cost-effective solution, but then you pay a penalty in terms of time to market."
Volume purchases by the big MSOs can drive prices down, but volume discounts aren't always available to small companies. That's true not only of hardware, but also for content.
In VOD, for example, the top 10 MSOs pushed the programmers hard for access to free VOD. "Well, some programmers say, 'we did it for Comcast because they made us, but we're not going to do any other deals'," says Sunflower's Knorr.
Meanwhile, FCC dictates loom large. Setting a hard deadline of July 2007 to populate systems with boxes that can accept CableCARDs will hit operators of all sizes, in terms of cost, and simply in terms of procedure.
Several examples of the impact the coming ban on set-tops with embedded security will have on small and independent operators were outlined in a letter sent to the FCC last month by the ACA, and signed by key execs from ACA members Armstrong Utilities, Atlantic Broadband, BendBroadband, Cable ONE Inc., and Sunflower Broadband.
Among those examples, Bend-Broadband said it was able to increase digital penetration 33 percent in the 12 months since it started leasing the DCT-700 to subscribers, and offer a digital cable package for only $4.90 more per month than analog cable. If required to deploy the DCH-100, Motorola's equivalent low-end all-digital box with a CableCARD interface, the operator estimated that its overall capital expenses will jump by 15 percent to 20 percent, and consumer prices for set-tops will rise by $3 to $5 per month. In addition to "derailing digital growth," the ban on set-tops with integrated security, BendBroadband said, would force it to abandon its goal of going all-digital in 2008. BendBroadband, as well as many other operators, are seeking a waiver on certain low-end digital boxes, including the DCT-700.
Similarly, Sunflower Broadband of Lawrence, Kan., said it presently offers an all-digital product using the DCT-700 for an additional $3.95 per month. If it is forced to deploy the DCH-100, the operator will need to charge about twice that–$6.95 per month–a move that "will slow down or halt" its digital transition.
Beyond that looms the 2009 transition to all-digital. Irrespective of size, Polka said, in order for any operator to succeed in the short, medium and long term, they will have to migrate to an all-digital system and deploy a bundle of services. "You want to stick to all analog? You will be at a competitive disadvantage," he says.
Looking ahead, Polka says the ACA is finalizing a report that will make recommendations to its members on what technology and services they need to deploy. n