CAPEX: Thoughtful, disciplined, strategic
The new mantra for recessionary capex and spending.
The sharp-toothed bite of the economic downturn is invariably being felt by the cable and telecommunications industries. Yet the teeth marks are even deeper and wider within their supporting vendor communities.
From large MSOs to the smallest equipment manufacturers, maintaining the highest levels of service, technology, operations and customer care are always paramount concerns in a fiercely competitive environment.
But add to the equation the high-stakes balancing of capital expenditures (capex) and spending strategies with the harsh realities of the recession, and it makes for a near-perfect storm of challenges that demand a re-engineering of business models and corporate spending strategies.
There are pockets of opportunity and optimism, but the vast majority of cable and telecom service providers and their supporting vendor communities are re-defining, re-tooling and re-thinking their 2009 and beyond spending strategies.
“No question, the economy is having an impact on the way organizations are touching customers. All the companies operating in the environment (cable, telecom) with tighter margin for error are doing very thoughtful deployments of capital and disciplined spending. That’s the language they’re using when talking to the market,” said Joe Atkinson, principal at PricewaterhouseCoopers.
The language also includes pushing technologies such as DOCSIS 3.0, tru2way and switched digital video (SDV) to the forefront.
“For everyone, it comes down to speed and capacity, and DOCSIS 3.0 and tru2way will get most of the investments. But operators must keep the lights on, and service must be of the highest quality. It’s about getting back to disciplined and thoughtful spending, because there’s real danger in shutting off strategic investments,” Atkinson said.
The lights-out option isn’t a pretty one, he maintains. But in near-desperate recessionary times, some may not have a choice.
“The question in ’09 is how do companies position themselves for growth in the long term, but not put themselves so far ahead of the leading edge that they take more risks than they should?” he added.
How, indeed. Larger companies such as Motorola are seeing cutbacks by service providers and a more cerebral approach to spending.
“Cable MSOs, as expected, are cutting back on major infrastructure spending. Not to zero, but with a more thoughtful strategy on spending. Capex is challenging, but they also must compete, so they’re making network capacity larger and/or more efficient. We’re seeing fiber being taken deeper, node splits, spectrum enhancement and networks adding capacity, with more focused efforts in specific markets, and they are optimizing streaming and storage of content in the network,” said Kevin Keefe, vice president of marketing for Motorola access network solutions.
Motorola is experiencing its own set of recessionary challenges, Keefe admitted. “More of our vendors are taking products off the shelves, and that certainly impacts our business. And, operators are spending more on revenue-generating units. So how do we keep up with R&D spending to get through this dip, with fewer major plant upgrades?”
Motorola, he added, will continue investing in R&D and technology with HFC architecture and will focus on video networks and STBs.
Cisco/Scientific Atlanta, said a company spokesperson, is seeing only “pushed out” schedules versus outright cancellations of equipment orders. “With AT&T, STB shipments are full-speed ahead, and we expect to see heightened spending on access networks and on optics. Cisco has no debt and $26 billion in the bank. However, we are not immune to the economic downturn, but are fully prepared for it.”
Most service providers argue that they have done just that – prepare for an economic downturn – either through great foresight or just plain luck.
“We’ve been either very lucky or have had good foresight to have spent capex to upgrade our plant the past five years. We’ve spent a significant amount of capex, so our budget for ’09 has been reduced. But there is a slowdown in home growth, and our discussions of 2.5- to 6 percent growth are now 1 percent. But we still see construction happening, and people are migrating toward triple-play products and the bundle,” said Andy Kober, executive vice president and CFO for Bresnan Communications.
Bresnan, which is a partner with Comcast at CableLabs, is employing “lots of database marketing and analytics,” Kober continued. “So each project and initiative has an ROI, is measurable and directly tied to revenue. We’ve also budgeted out 18 to 24 months for scaleable technology. For us, it’s about quality of service and a fast-follower strategy with technology, and increasing our presence in the commercial market.”
The enterprise market isn’t exactly on fire, however, at least not during the current economic downturn. Yet there are some opportunities, albeit few and far between.
“AT&T and Verizon anticipate at least a 10 percent reduction in enterprise revenue, and we think that’s low. In 2008, there was a 12 percent decline, and that run rate will increase. The enterprise market is just terrible for telecoms,” said Pete Dailey, research manager for Frost & Sullivan.
The cable side isn’t much better, he noted. “Comcast wants $5 billion in enterprise revenue by 2012. That’s very aggressive. Cable can pick off some smaller enterprises, but it won’t have a material impact on cable’s business.”
What will impact cable’s business, he maintains, are investments in categories that make their operations more efficient.
Said Dailey: “New accounting models, revenue assurance, fulfillment systems, automation for self-fulfillment and a shift from personnel to system, because you can depreciate systems. Companies must continue with their success-based capex, and DOCSIS and tru2way are where the spending opportunities are.”
The spending at Time Warner Cable, said President and CEO Glenn Britt in a prepared statement, “will be to manage – both operating expense and capital – to fit the economic realities as the year progresses.” And, he added: “We will focus even more on making our services easy to buy. The much slower RGU growth late in the year demonstrated that our business is not immune to economic and competitive forces. But we remain confident that our strong subscription relations will enable us to weather pressures better than many businesses.”
One of those businesses – SureWest, an IP network serving the Sacramento, Calif., area – has put a hard freeze on its benefit plan and reduced its employee count from 1,000 to 700 in the past three years.
“No one was planning 12 months ago for what happened, and California has been hit hard in the real estate and employment areas. But people are keeping their existing services, and we’ll continue to go after that market,” said Steve Oldham, president and CEO at SureWest.
SureWest, whose strategic plan called for $75 million to $80 million per year to overhaul its ILEC and add to its copper plant, has cut that spend to $55 million to $60 million, and has made the decision to eliminate dividends and transform itself into a growth company, Oldham said.
It’s a clear sign of the recession’s impact. Said Oldham: “If the capital market was still like two years ago, we would be doing both network expansion and acquisitions. But now, the question is how quickly will the market return? Technology and the customer value proposition are still very important – for example, higher data speeds. And technology still sells. We must also put good people in critical positions, so we have added 20 customer service and technology people.”
Just how those new people in critical positions are trained is yet another product of the recession, and it’s prompting companies such as Jones/NCTI to expand their training tool sets.
“We’re seeing more MSOs and smaller operators trying to be more efficient in training and in touching their customers. That has prompted us to reach out even more to customers, and that translates into the need for an online training model. It’s faster, cheaper and more efficient to train people. Cable is taking a more active role in their training by allocating training dollars to lines of business and revenue goals,” said Robyn McVicker, senior vice president at Jones/NCTI.
Jones/NCTI, a leading provider of training programs for the cable industry, recently launched its Installer Qualification (IQ) program, which ensures contract installers are qualified via online training.
The spending IQ for cable’s support community, said Yvette Kanouff – chief strategy officer for SeaChange International, a VOD provider – is definitely being tested
“No doubt, the economy has had an impact on SeaChange, but it’s more a change of focus on value. How can operators do the most with basic services with the most value to customers?” she asked; and, she added, within the changing framework of the new spending environment? “Clearly, there is a very crisp observation of cause and effect with this economy. All are closely watching what’s happening. The challenge is dealing with competition in a year when there is no extra spending on creative new products.”
That could be changing, however. Added Kanouff: “But 2009 could be the year to focus on new models like advertising-based solutions for smaller operators. It’s sad to see that innovation has to suffer. For us in ’09, it’s about staying innovative and focused on value for subscribers, and we won’t lose sight of the move toward the intelligent use of IP – not IPTV or streaming, but content delivery to networks, content-centric and content-sharing with the Internet.”
IPTV isn’t going to dodge the recession bullet either, maintains Michelle Abraham, principal analyst for the research group In-Stat. “The delay in IPTV deployments will be an effect of the recession and interactive TV services, and the software required for them could be curtailed. But we expect AT&T and Verizon to add IPTV subscribers. And addressable advertising plans could be pushed out. If IPTV pushes back deployments like FiOS, then network spending will decline. But it’s across the board,” Abraham said.
It’s also across several internal disciplines within the back office, an area most experts believe is crucial to maintain since it is not readily noticeable by customers. “Operators are trying to get efficiencies where it’s not obvious to customers, like new billing systems, online customer care, diagnostics and fewer truck rolls. We see operators investing in those in ’09,” Abraham added.
Verizon, with its passive network, “will cost less to maintain as it scales up,” she noted. And AT&T “is pushing back capex and deployments into certain markets.”
The result, she predicts, will be a three-fold increase for IPTV by 2012.
Yet for many of cable’s bread-and-butter suppliers such as ActiveVideo, the recession-led mantra is to march on and hope to come out on the other side stronger, wiser and intact.
“There’s no getting away from the economic issues. But we can’t allow them to get in the way of achieving our ’09 R&D goals,” said Ed Forman, CEO of ActiveVideo.
And, capex hasn’t exactly disappeared. Added Forman: “Operators continue to invest capital in two-way, unicast video streaming networks, and we see opportunities to help operators maximize their investments. There’s not a company in the country that isn’t looking at ways to operate more efficiently now,” he said.
Itaas, which provides the cable industry with a variety of back office and interactive services, is seeing similar shifting strategies. “We’re seeing opportunities to build cross-platform capabilities across the board, and each customer is unique in their cutbacks. We’re seeing more interest in that than ever before,” said Vibha Rustagi, CEO of itaas.
And the interest isn’t likely to wane any time soon, both in the challenges and opportunities being presented in today’s down economy, which most experts agree is calling for thoughtful, disciplined, and, well, lots of patience around capex and spending strategies.
Concluded Atkinson: “Both cable and telecom companies can create more value to customers, and they’re up to the task. There are lots of opportunities in emerging markets, as well, like international and with strategic alliances and partnerships. There’s huge opportunities for innovative collaboration that can reach new customers.”