A kaleidoscope of moving parts
Tier 2 and 3 operators are adopting new business strategies to deal with a rapidly changing TV environment.
The once heavily tech-driven business model of small Tier 2 and Tier 3 cable and broadband service providers is morphing into a kaleidoscope of moving, interchangeable parts.
Pushed by fierce competition, drastic cost cuts for technology and equipment, rising customer expectations, and shrinking video margins, smaller operators whose subscriber counts number in the four- and five-figure range are fiddling with and tweaking their business models like never before.
A recent ABI Research study predicts a slow migration away from pay TV to online video. ABI found that 20 percent of online consumers consider online video as a replacement for pay TV.
No surprise there, but it does emphasize that business model evolution is necessary today, not tomorrow. It is why the smaller cable operator community is being encouraged to incorporate a healthy dose of edgy new strategies and advanced technologies to survive and thrive in a competitive new business environment.
“There are now several things smaller operators must embrace in the new business model – multi-room DVRs, advanced user interfaces, TV Everywhere and more. Clearly, these require capital, so the challenge is to find a way to monetize the technology, like usage-based billing, and develop strategic vendor relationships. Those are two important components to the new business model,” said Ken Wright, principal of Wright Solutions, an industry consulting firm.
Just as important, says Mike Paxton, senior analyst for the research group MRG, is investment in technology.
“The cost of technology is dropping, but it’s still a significant investment for smaller operators. They already seem to be the last ones to roll out new technologies and services, but in today’s competitive environment, they must invest. They’re under pressure to deliver new services customers want, and that is forcing them to change their business models.”
The crucial new service, he noted, is high-speed Internet. “No matter what capacity, it’s the anchor service. It gives them a sustainable advantage over DSL and is critical to their business models and profit margins.”
At BendBroadband, a small operator in central Oregon and widely considered to be one of the more progressive operations, sustainable and growable are the operative words.
“The key for us in the evolution of our business model has been the lower cost and simplicity of technology,” explained Amy Tykeson, CEO and president of BendBroadband. “It has helped facilitate meaningful change. We’ve continued to evolve the business services model, and in the past few years have focused on wireless spectrum in two auctions, giving us growth headroom. And we’ve added a last-mile connection with a 10-gig ring and PON in select markets. So much of the business model evolution is based on needs.”
Needs indeed, with some risk-taking near the top of the list.
Added Tykeson: “It’s a complicated business, and there are no sure things. But being smaller, we’re nimble and can turn opportunities around quickly. We’ve taken some risks and are first movers with technology like 4G LTE fixed wireless. It gets us out there with customers and vendors early on. The challenge is defining the new business model and then changing it. It gets faster and faster. But we’re not waiting until the story is written.”
One story in progress is unfolding at TV Cable of Rensselaer in Indiana, which serves a number of small communities between Indianapolis and Chicago. Its business model lacks the diversity of Bend’s but requires similar components.
“Today, technology changes with the seasons. We’ve invested in a fiber-to-the-home upgrade since the cost of FTTH has dropped drastically, even lower than coax, and maintenance is near zero. But it must be built right. It’s not like cable,” said Eric Galbreath, vice president of operations for Rensselaer.
Cable video isn’t what it used to be, either, he admitted, and not the revenue generator it once was. Not by a mile.
“We probably couldn’t do video without the help of the NCTC (National Cable Television Cooperative) lowering program costs. Now we’re looking at VoIP and business service-class VoIP and active with Internet services for businesses. We’re just doing video to pay wages and minor expenses,” Galbreath said.
He added that Rensselaer’s model now includes a partnership with Indiana Fiber Network and sales of “tons” of backhaul services to libraries, schools and hospitals.
“Building a fiber infrastructure is crucial to a smaller operator’s evolving business model. It’s had the biggest impact on our business,” he said.
High-speed Internet has also been a game changer for Rensselaer, he noted. Albeit with some early consternation.
“It was a scary gamble. Do we eliminate video? With CMTS costs at $150,000, it was very risky initially. But you’ve got to do it all, and Internet service probably saved us from losing subs, or worse. TV Everywhere is our next golden mug," Galbreath added.
Business services are also projected to be golden for a smaller operator’s business model, according to Daniel Howard, senior vice president of engineering and CTO for the Society of Cable Telecommunications Engineers.
“The business service play is attractive for RFoG in greenfields, since the reach is much greater. Margins for business services are much better, so it’s a good play for smaller operators,” he said.
Developing close relations with vendors is also a good play, Howard added.
“There’s help with vendors like Avail-TVN and others. Aggregating content delivery is making its way into the Tier 2 and 3 markets," Howard said.
And it’s video that needs the most help, experts maintain. With shrinking margins and rising customer expectations, it’s no secret video needs a boost.
“Subscribers in Tier 2 and 3 markets now expect the same level of service and content as their friends and families in larger markets, so there’s pressure to deliver these services. There’s a significant role for technology and managed services in their evolving business models, especially with video at a compressed margin point,” said Mike Kazmier, CTO for Avail-TVN.
A business model with a managed service component and robust platform to launch new services is paramount for Tier 2 and 3 operators, Kazmier said. And it definitely should be a non-proprietary ecosystem.
“Break away from a proprietary ecosystem,” he recommended.
A must-have element in the new ecosystem is HD, said Joseph Nucara, CEO of Adara Technologies. And for Tier 2 and 3 operators, switched digital video (SDV) could be the answer.
“Customers expect HD content, and most Tier 2 and 3 service providers don’t have the bandwidth. We can add several additional services and more HD channels. It’s scalable because we host and manage it,” he explained.
SDV, he added, uses a fraction of RF spectrum, which frees up QAM slots, allowing an easier upgrade to DOCSIS 3.0, and eventually 3.1.
Yet for smaller operators, the pesky, age-old nemesis of economies of scale, or lack thereof, continues to haunt even the most progressive of companies.
Said Nucara: “It permeates the Tier 2 and 3 business models and is a common thread throughout their businesses. We’ve solved it from a video perspective, but it will creep into other services.”
In the meantime, services such as next-generation user interfaces and electronic program guides (EPGs), linear content upsell, DVR programming away from home, whole-home DVR, and other incremental services are being enabled.
That’s good news for smaller operators such as Buckeye CableSystem, another smaller operator on par with BendBroadband when it comes to being proactive and progressive.
“We’re seeing hardware platforms that will allow us to ‘skin,’ or deeply customize, the applications within our network and on our customers’ client devices. And, new products such as smart home could play into our expansion and new business model. As we move toward whole-home solutions, our service model will need to expand,” said Joe Jensen, CTO at Buckeye.
Massillon Cable in Ohio, which has multi-room DVR and other technologies on its radar screen, is feeling similar pressure to meet rising customer expectations and the ever-changing technologies driving them.
“We’ve just launched multi-room DVR and have a proactive maintenance program that empowers supervisors in the field to fix the problems. And we’ve reduced the cost per stream from $10,000 to $300 by moving it in-house, along with streaming content to multiple devices. The HFC network is a great platform, but you must ensure it has enough capacity and speed. And the demand for speed is going up and up,” maintained Kelly Rehm, technical operations manager for Massillon Cable TV, which serves 45,000 customers in central Ohio.
And for Massillon and others, speed counts. Big time.
Added Rehm: “The challenge is to do things as fast as we’d like. We get bogged down implementing multi-room DVRs and getting equipment because we’re small and don’t get the attention the bigger operators get. And technology changes so fast. But we’re a small group that makes decisions quickly, and that is a real advantage.”
Another advantage that seems to be getting the attention of smaller operators is for a hosted/managed service model. Designed to lower both the capital and operational expenses, proponents see it as a real upside to a smaller operator’s business model.
“It makes more sense than in-house for smaller operators. There is definitely still some difficulty in transitioning from legacy equipment to managed services. But if Tier 2 and 3 operators have already rolled out DOCSIS 3.0 and have the IP connectivity to leverage the new services, along with the technology and equipment, they can offer additional services. But it’s tricky to put them on legacy systems,” said Bob Van Orden, vice president of corporate and business development for Clearleap.
Yet for most Tier 2 and 3 operators, tricky doesn’t necessarily translate into not-doable, particularly when it comes to their changing business models, which can change as fast as the technologies driving them.
Concluded Paxton: “Smaller operators must decide to invest in their plant because competition is forcing them to. And some smaller operators relish the changes in their business models. But some don’t.”