Small Ops Must Tackle Big Tech Issues11/26/2000 7:00 PM Eastern
Most small, independent cable operators are under growing pressure to fend off their direct-broadcast satellite rivals-as well as a growing number of local Internet-service providers-by upgrading their plant.
Systems with 20,000 or fewer subscribers are working to roll out high-speed data, interactive TV, or, at the very least, the Headend in the Sky digital-cable service, with a heightened sense of urgency.
"Increased channel offerings, data and Internet access give small operators a huge competitive edge," said Matt Polka, president of the American Cable Association, the small cable-system lobbying group. "They know they have to do these services in the next two years."
Upgrading small legacy systems-some of which are still at 330-megahertz capacity-to at least 550 MHz with two-way capabilities, high-speed data and other advanced services presents a new set of challenges to smaller operators, who've historically struggled with issues such as securing the capital needed to upgrade or rebuild their systems, reaching palatable economies of scale and a host of other business issues associated with simply being small.
Small operators need to recruit labor to upgrade plant, integrate sophisticated new billing, dispatch and network management systems and find the capital to pay for them. These needs have forced many to reinvent their businesses, launch entirely new lines of service and, in some cases, break a 50-year tradition of going it alone by seeking new partners.
"Years ago, in was unheard of to talk about partners," said Martin Brophy, president and CEO of Shen-Heights TV Association, Inc., a 50-year old, 450-MHz cable system with 4,000 subscribers in Shenandoah, Pa. "Now, you must discuss business with surrounding systems because the technologies are so complex, like fiber splicing. We're starting to help each other."
Shen-Heights will soon upgrade to 550 MHz. It currently offers 63 analog channels with the help of HITS, and high-speed modem service through High Speed Access Corp.
Its goal, Brophy said, is to be entirely digital.
"We're living in an analog world, but it's really digital," he said. "Our goal is to get rid of analog services, but slowly. The costs are just too prohibitive to do otherwise."
Funding for equipment, software and the systems that enable new services is hard-found for small operators. Most banks simply aren't interested in loans under $5 million, or the companies that need them.
"Access to capital has always been an issue and more banks are recognizing small cable systems as a good business," admitted Polka. "But it's a tough question, because they don't have the access to capital and usually have to go to local banks to fund their business."
In most small-system scenarios, it gets down to economies of scale and costs.
"The costs for programming, technology, software, equipment and such are escalating, and many smaller operators can't get to 750 MHz because of their economies of scale, which makes it even harder to get financed," said Pat Thompson, senior vice president at Daniels & Associates, a telecommunications and cable brokerage firm.
Small, rural systems are especially victimized by economies of scale. They must amortize capital investments over wide areas with few subscribers-a less-than-compelling business case for most lenders.
"Small operators just can't go out and do capital intensive upgrades because they can't get the [return on investment]," said Mike Goodman, senior analyst for The Yankee Group, a Boston-based media research and analyst firm. "So, they have to do it very economically and be technically creative."
They must do it right the first time as well. For most small operators, testing new equipment is essentially done by the seat of the pants, with little or no room for error.
"It's difficult because we can't test anything, so we have to be very cautious that the system is technically and economically feasible," said Bob Gessner, president of Massillon Cable, a 50,000-subscriber system in Ohio.
Even if a small operators wants to upgrade its plant, finding the equipment and contracting the labor to do the job poses another thorny problem.
"Contract labor goes to the big, steady contracts. With us, it's a little job here and there," said Gessner.
Yet bottom-line upgrade costs are smaller operators' main concern. Amortizing those costs across far fewer subscribers than the big, well-heeled operators have is a huge, expensive issue.
"Capital costs for a digital launch include $350 for a set-top box per customer, $350,000 or more for a headend, $25 per customer for a computer," said Gessner. "I have to spread those costs over fewer subscribers and the cost remains the same, whether [for] 100 or 100,000 subscribers."
Securing capital for upgrades, particularly to handle high-speed data and Internet access, may be easier for smaller operators once those services begin showing signs of consistent revenues, and are understood more clearly.
Said Brophy: "Most lenders don't understand high-speed access and other services, and they don't know where the revenues will come from. Our customers are now demanding these services."
Most small operators are answering the call for new services, Polka said. And despite the mountain of issues that confront them-from regulatory hassles to financing-most are changing with the times, whether they like it or not.
"Despite the challenges of economies of scale, etcetera, many are" moving to new services and upgrading plant, Polka said. "It's amazing to see the number of companies deploying new services to a few thousand subscribers."
Among the major challenges for small operators, in Polka's view: gaining access to capital, the direct-broadcast satellite threat, the specter of government regulation with respect to open access, ensuring access to programming and the rising cost of doing business.
The question to smaller operators is not whether they should be doing business in new services, but when, how and at what cost, with the alternative being no business at all.
"It's not an easy decision. DBS is rolling out new and interactive services and people see and want them too," said Goodman. "Small operators have to get new services to their customers and be creative and economical in how they do it."
Help may be on the way, though. Set-top box prices are falling and a growing number of smaller operators are leaning towards cooperatives as a means of pooling their resources to achieve some sort of economy of scale.
"We couldn't have done our upgrades to new services without the help of the NCTC," Brophy said, referring to the National Cable Television Cooperative. "They've been very helpful in ordering equipment and hardware and working with programmers, who are very difficult to work with individually. It's taken a lot of pressure off us."
The solutions aren't likely to come easy. New speed bumps, such as the rising costs of advanced technologies and software, construction of upgraded plant and equipment and the age-old issue of lack of access to capital continue to gnaw. Yet most small operators remain steadfast in their commitment to the business, with most having traveled the bumpy road before.
"It's a competitive jungle out there, and we know what we have to do," said Gessner. "We have to protect our business with new services and revenues."