Time Warner Cable Pact A Breakthrough for HSA
By MATT STUMP -- Multichannel News, September 1, 2009
The open-access deal between Time Warner Cable and High Speed Access Corp. is a breakthrough agreement for both companies.
For Time Warner, the deal, announced on May 8, fulfills merger conditions imposed by the Federal Communications Commission, thus allowing parent company AOL Time Warner Inc. to begin marketing its America Online service through its cable systems later this year.
For HSA, it's the first large affiliation deal with an MSO other than sister company Charter Communications Inc.
In approving the merger of America Online Inc. and Time Warner Inc. earlier this year, the FCC required Time Warner Cable to immediately sign one deal with an unaffiliated Internet-service provider, followed by two additional agreements within 90 days. The company signed its first contract with EarthLink Inc. and its second pact with Juno Online Services Inc.
Time Warner is presently testing EarthLink in Columbus, Ohio. Once the trial is completed, the MSO will launch multiple ISPs on a system-by-system basis later this year, following a schedule that's yet to be determined, a spokesman said.
While the Columbus trial and AT&T Broadband's "Broadband Choice" test in Boulder, Colo., are designed to work through technical issues, there's a second key question that must be answered: How will third- party ISPs make money from riding on cable systems?
EarthLink's cut of a typical Time Warner Cable modem subscriber's monthly $40 bill is believed to be $13. HSA's deal is believed to be similar, leaving financial analysts to wonder how the ISPs can make money.
HSA CEO Dan O'Brien said he believes there is ample room to operate. First, some cable MSOs and several regional Bell operating companies have raised rates for cable-modem and digital subscriber line offerings.
"Will everyone increase prices?" O'Brien asks. "Our belief is yes."
ISPs that receive a third of a modem subscription fee would stand to receive one-third of all retail price hikes.
Second, HSA is looking at offering premium broadband content services, ranging from video-on-demand to audio services, O'Brien said. HSA's only contractual restriction with Time Warner is that it can't sell basic or premium cable TV networks, he said.
To further differentiate HSA from EarthLink, Juno, Road Runner or AOL, the company could offer portal content from a Yahoo! Inc. or a Lycos Inc., O'Brien said.
In addition, HSA plans to offer local content in Time Warner markets.
"We will aggregate local and hyperlocal content," he said. In the long run, updating local content on Road Runner may not be cost-effective for AOL Time Warner, O'Brien said.
On the technical side, HSA will likely follow the model Time Warner and EarthLink have developed through the Columbus test. O'Brien said it would make sense for Columbus to be the first market in which HSA launches, given the open-access work already done there.
To start, HSA hopes to have "interim functionality" — basically a "warm transfer" of traffic from Time Warner's cable-modem termination system to an HSA T1 line that's linked to the Internet, O'Brien said. Through time, the MSO may find it more cost-effective to buy a DS3 line or OC3 line and split the bandwidth among all the ISPs on the system, he said.
HSA already serves Insight Communications Co. in Columbus, so it will be able to leverage its staff there, O'Brien said. Insight offers Road Runner service in Columbus; HSA provides that MSO with some support services.
A 1-percent to 3-percent penetration rate would be needed to break even in any given open-access market, HSA said.
