News

Turnkey Data Players Crowd Market

5/03/1998 8:00 PM Eastern

The cable industry is on the verge of creating a much
broader footprint in the data business on the strength of several pushes aimed at driving
high-speed access into smaller markets.

This week's National Show in Atlanta marks a
coming-out party of sorts for several start-ups that have been gearing up for a move into
the second and lower tiers of the MSO community as providers of support services in the
complicated data business.

With at least five nationally based operations now in full
swing and a sixth about to make its presence known, cable systems of every size and
description have the wherewithal to dive into a revenue stream that, until now, has
largely been the purview of top 10 MSOs.

"We, like a lot of folks, looked at whether we could
get into this business ourselves, and we have concluded that the better approach is to
contract with a third party," said Pete Smith, vice president of engineering and
new-business development at Denver-based Rifkin & Associates Inc.

Smith described keeping up with the software and hardware
requirements as "a black hole that consumes your resources very quickly."

Rifkin, which manages 73 systems serving 320,000 customers
in 11 states, is one of many smaller MSOs that have either signed up with or are reported
to be close to signing up with suppliers of a wide range of turnkey services in the
high-speed-data business.

Rifkin got started on its own over a year ago in the small
town of Bedford, Va., but it has now turned to Atlanta-based Convergence.com Corp. for
assistance in rolling out high-speed-data services in five more markets -- including its
two largest, Miami Beach, Fla., and Gwinnett County, Ga., outside of Atlanta -- and in
expanding the business in Bedford.

Convergence.com, which has also brought up sites in Half
Moon Bay and Monterey, Calif., for Westar Cable TV Inc., is making its presence known
after four years of preparations.

Other "cable-access nets" are moving to higher
profiles, as well, after long gestation periods, including High Speed Access Corp., Online
System Services Inc., ISP Channel Inc., Internet Ventures Inc. and InterTECH Inc., which
is still a few weeks away from formally announcing its entry.

"We all were born almost at the same time," said
Ron Pitcock, president and chief operating officer of HSA. "If you look at the size
of this market, you realize that there's plenty of room for all of us."

But, as demonstrated in the year-end demise of Community
Networks Inc., one of the early pioneers in this area, the players must have the capital
staying power to afford them a chance to realize the market potential.

Notwithstanding contracts with several smaller MSOs, the
slow sign-up pace that was characteristic of the early rollout phase of data services
failed to generate enough revenue to keep CNI afloat.

HSA and its peers said they're prepared to deal with
the slow-growth reality of the market with ample backing and nationally oriented bases of
operation that can accommodate operator needs from coast to coast. "It's going
to take a little time for the viability of this business to sink in among operators,"
acknowledged HSA CEO Kent Oyler.

He added that the company -- which was created by a merger
of HSAnet and CATV.net -- has "$5 million in the bank" and access to more
capital as it needs it.

"If we reach around 3 percent to 5 percent market
penetration per system, we'll be in positive cash flow," Oyler said. "We
expect to be in the black within two years."

Joining Rifkin in the latest round of smaller MSO sign-up
announcements were Marcus Cable Co. L.P., which has contracted with HSA for high-speed
launches in two systems representing 60,000 homes passed; Sun Country Cable, a
22,000-subscriber MSO contracting with IVI's PeRKInet for two small-system launches
in California; and InterMedia Partners, which is working with OSS in four markets.

For IVI, Sun Country is its fourth launch. The
operator's Groveland, Calif., system will start deploying the service in June,
executives said.

More announcements involving other operators are coming
soon, executives at the third-party companies promised.

By HSA's calculation, independent systems and smaller
MSOs targeted for its services represent at least 20 million homes passed.

"The potential market is actually much higher, because
larger MSOs that own smaller systems are looking for help in these markets, as well,"
Oyler said.

Oyler added that such markets are not necessarily going to
get attention from @Home Network or the soon-to-merge Time Warner Cable's Road
Runner-MediaOne Express entity.

HSA-ROAD RUNNER DEAL

In fact, Pitcock noted, HSA has entered into a content
agreement with Road Runner that will be announced this week, giving it an opportunity to
offer the same level of content quality that larger MSOs are accustomed to.

"We're also looking to talk with @Home in hopes
of being able to offer our customers a choice," he added.

Other providers are talking to these entities, as well,
sources said, and one, citing nondisclosure agreements with Road Runner and America Online
Inc., predicted that it would make affiliation announcements as early as this week.

The level of support offered by these providers depends
largely on the operators, with options including full turnkey supply of hardware,
technical support, customer service and such services as e-mail and Web hosting, or
various combinations of these pieces.

"No two contracts that we sign are alike," Oyler
said, noting that a full-turnkey level offering a 75-25 revenue split, with 25 percent
going to the operator, is a starting point for negotiations.

Even at the fullest level of support, the split changes
over time, Oyler added.

"We bear a lot of upfront capital costs, so as capital
is paid off, savings go back to the operator, and the share changes," he said.

Similar approaches can be found elsewhere.

"We offer an a la carte menu that allows operators to
build their own business arrangement," said Terry Wright, co-founder and chief
technical officer of Convergence.com. "In one market where we're doing the full
turnkey, we're getting about two-thirds of the revenue, but amounts vary
widely."

ECONOMIES OF SCALE

One of the benefits that suppliers like Convergence.com
offer to their customers is the economies of scale of their purchasing power. They also
provide valuable knowledge about the pluses and minuses of the vendors' systems,
affording operators the option of buying the equipment directly or through the service
provider.

"We have relationships with 30 different suppliers,
including most of the major modem manufacturers, so our customers can pick technology in
accord with their particular market situation," Wright said.

The primary message of these service providers is that
high-speed-data is a business that no operator can afford to ignore.

"We see an opportunity at even the smallest system
levels," said William Bauer, CEO of tiny Windbreak Cable, which is expanding from its
two-system base in Nebraska with its acquisition of two systems in Colorado's Adams,
Douglas and Elbert counties, near Denver.

Bauer speaks from experience, having seen penetration climb
to 20 percent in the two years since it launched high-speed services in its 170-home
Harrison, Neb., system.

"We're in a community where ranchers and farmers
rely heavily on computers and the information that they get online," Bauer said.
"What we've learned is that smaller cable systems have a tremendous role to play
in making a success of the cable-data business."

There are 8,600 cable systems with 5,000 or fewer
subscribers, representing 11 million homes passed nationwide, Bauer added.

"This is a very significant market, where online
services are a vital part of the economy," he said.

BAUER'S NEW TURNKEY

Now, Bauer, an engineer who helped to draft the MCNS
(Multimedia Cable Network System) modem specification, is putting together InterTECH. The
new company will not only offer turnkey support to small operators, but it will also
supply a satellite-based national backbone connecting headends to the Internet, using
proprietary technology that overcomes the latency problems that are typically associated
with satellite transport of Internet data.

The satellite link, substituting for landline T-1
connections between headends and the Internet, was the means that Bauer found for getting
Harrison's service off the ground in lieu of contracting for a $4,300-per-month T-1
line from the telephone company.

"The costs of getting dedicated T-1 access go way up
as you move into the rural markets, which is especially restrictive, given the low
population densities in these locations," Bauer said.

InterTECH is using a transponder on Loral Corp.'s
Ku-band SkyNet to supply dedicated downlink connections, which are allocated in
1-megahertz segments to support scaleable expansion as more backbone bandwidth is needed.
For the return path, Bauer will use VSAT (very small aperture) links to the same
satellite.

This setup connects with a network-operations center in
Nebraska that is linked via nine DS-3 (45-megabit-per-second) microwave channels to
Internet-backbone interfaces in Denver. Bauer said it is designed to accommodate a very
large national subscriber base that could include customers of other turnkey providers.

Bauer calculated that the InterTECH backbone support will
be cost-competitive with T-1 rates all the way down to $1,500 per month, which encompasses
some fairly large markets.

With 20 small and midsized operator affiliates locked in,
ISP Channel is also considered a big contender in the race to serve second- and third-tier
MSOs with high-speed-data services.

ISP Channel emerged in March, and it has already signed on
cable-modem-equipment manufacturers 3Com Corp. and Com21 Inc. as partners.

Sandy Gordon, vice president of marketing for ISP Channel,
said it is taking more of a distribution and marketing stance for operators, positioning
itself as a channel for carriage.

ISP Channel's plan is to provide Internet and
telecommunications services for operators, while offering equity financing for those that
need to upgrade their plant to two-way capacity before they can take the data plunge.

Gordon said ISP Channel's links to MediaCity -- its
parent, and one of the first Internet-service providers in the Silicon Valley area --
gives it immediate access to Web applications and content.

At this week's National Show, ISP Channel will
announce content agreements and

discuss the number of homes passed with its service, but
Gordon was mum on details at press time.

CASH-FLOW POTENTIAL

The important thing for operators to recognize as they
weigh affiliation with these new service providers is that they don't have to
relinquish control over their businesses, Smith said.

"We look on our involvement with Convergence.com as a
partnership, where we are very much in control of the decision-making process, including
the side of the business devoted to serving commercial customers," he said. "I
think that data can be right up there as a segment of our business, as a significant
contributor to the bottom line."

The growing sense that this is true is the driving force
behind the appearance of so many turnkey suppliers, said William Cullen, chief operating
officer of OSS.

"I don't think that there's ever been an
opportunity like this presented to the cable industry," Cullen said.

Excluding upgrade costs and assuming an eventual
penetration level of 9 percent in a system with 50,000 households, the cost of providing
high-speed data works out to about $30 per month, per customer, he said. At a monthly
price of $50, this means that "$20 goes to the bottom line."

At a cash-flow rate of $240 per customer, per year, and a
valuation of customers at a cash-flow multiple of 11, this business, at 9
percent-penetration, would add $12 million to the sale value of a 50,000-household cable
system, he added.

Leslie Ellis contributed to this story.

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