News

Forum: Deciding How to Offer High-Speed Access

11/01/1998 7:00 PM Eastern

Cable isn't just about the television anymore:
It's about broadband and delivering services over the cable pipe that passes 95
million TV households.

The broadband pipe is unlike any other in the amount of
data, video and voice that it can deliver to a customer.

As cable operators upgrade their plants to enhance their
core video offerings, they can leverage the value of that upgrade by adding services that
generate incremental revenue.

That's why new businesses like high-speed Internet
access are so critical because they can drive the value of the broadband infrastructure
and deliver on the investments that operators have made over the last several years.

As the Internet increasingly defines our future as a
society, high-speed access to it has the potential to become a vast source of new revenue,
and a necessary one, in a day and age where operators face increasing costs and pressure
from programmers and regulators and a more competitive environment.

Marketing is the key to making a high-speed-data offering
successful. If a cable operator or Internet turnkey provider can sell the service, then
customers should follow. But to achieve the penetration levels that are possible,
operators will need to invest capital, personnel and time to make this business a reality.

They need to access their financial positions and their
personnel resources to determine if it is more cost-effective to go it alone or with a
partner.

Some operators have chosen to venture into the world of the
Internet on their own to offer the service. An increasing number, however, are opting to
partner with a turnkey Internet-service provider -- a one-stop-shop company that provides
all of the investment capital and handles technical services, customer support and
marketing, in exchange for a share of the revenue.

Careful planning and astute implementation of resources
will yield the most profit. The operator must decide how much capital and people it wants
to devote to high-speed Internet access and if it wants to allocate its own precious
resources to this business.

A cable company can choose to invest several hundred
thousand dollars in cable-modem equipment, necessary personnel and marketing support. A
partnership with a high-speed provider, however, means that the operator doesn't need
to grapple with personnel and capital requirements while benefiting from the ISP's
experience.

In order to decide which route to take, operators must
evaluate three things: capital outlay, engineering experience and personnel.

CAPITAL COSTS

Before a cable operator can even consider the capital
outlay needed for cable-modem service, the plant itself must be upgraded to handle data
transmission.

Once the plant is ready, operators will first need to
consider the cost of the modems. Proprietary modems cost about $350 to $450 apiece,
although operators buying in bulk may be able to purchase them for less. The high end of
modem prices will probably fall down to the $250 to $300 range once modems are available
on a retail basis.

In addition to the modems, a system with about 100,000
subscribers would likely pay at least $200,000 for servers, headend controllers for the
cable-modem systems, networking gear, switches and routers. For smaller systems, the
economics scale down somewhat.

Systems with 15,000 subscribers or fewer would likely incur
costs of about $100,000. These capital outlays can be considerable and often
cost-prohibitive for smaller systems.

To decide which modems to buy, operators will need to bear
in mind various factors, including the size of the system, personal-computer penetration,
online penetration to computers, location of the system, competition and regulation.

The ISP equipment -- which includes operational servers and
commercial Web servers -- can run anywhere from $3,500 to more than $500,000. A system
will need at least one rack space in the headend to store the equipment.

PERSONNEL COST

The provision of high-speed-data services will require
several new hires across many disciplines. Cable operators will be able to rely on some of
their current staffers in RF engineering, marketing, sales, billing, project management,
implementation, operations and general management.

But they will also need new personnel entirely unique to
the high-speed business, such as workers skilled in Internet-protocol engineering, online
customer care, network-operations centers and Web development. If system employees take on
additional data responsibilities, they may not be able to focus well on either the data
business or on the core video business.

Any size system can expect several new dedicated employees
from the start, including project managers, Internet professionals, networking experts,
technicians, installers and at least six to seven customer-service representatives.
Employees with Internet skills will cost more than CATV employees do as a result of market
demand.

Operators can expect to pay $40,000 and up for most
positions. The cost of personnel far outweighs the capital expense.

ENGINEERING COST

Cable companies will need to train their engineers to
handle data traffic on the RF plant, or they will need to hire additional engineers who
are specially trained in data. In addition, the cable plant has to be tightened to
accommodate the data traffic.

Engineers will no longer be able to quickly disconnect the
RF plant for a momentary tweaking, since data service will be interrupted.

Routine maintenance of the cable plant will need to be
carefully planned, since data traffic is much more sensitive than video traffic.

The system will need to notify customers in advance, via
e-mail, about routine maintenance and expected service disruptions.

Ingress also becomes a more significant issue when offering
data service, since it affects the return path. Operators will need to spend more time
chasing down ingress, and they will also need to consider a number of solutions, such as
traps and a general tightening of the plant.

Improper tightening of connector components and improper
connector installation can aggravate ingress. Operators need to make sure that their
technicians are thoroughly schooled in the proper installation of components.

MARKETING MAKES

THE DIFFERENCE

Most residential customers today pay between $39.95 and
$49.95 per month for cable modem service and lease the home package for $10 to $15.

They also usually incur installation fees of about $150 to
$200. To make the most of their sizable capital and operating investment, cable operators
will need to aggressively market their data services.

The amount of monthly revenue generated will depend on the
penetration levels that the operator can achieve. When partnering with a turnkey ISP, most
systems can expect about 1 percent to 5 percent of their homes passed to sign up for
service in the first year, while 5 percent to 8 percent will become customers after two
years.

Those goals will be harder to reach in the
tougher-to-market one-way systems. In a one-way system, either penetration levels or the
selling price may be lower, impacting the level of profitability of the system.

Cable-modem markets that have been properly cultivated can
achieve extraordinary results.

Statistics show that third-party providers can shepherd
cable-modem markets to penetration levels exceeding 8 percent or 9 percent within 18
months. Some markets have even surpassed 8 percent penetration after 15 months.

To reach these levels, providers have implemented
aggressive national and local marketing campaigns consisting of TV and radio ads, kiosks,
direct mail and online and cross-channel promotions.

Cable operators have historically been more heavily focused
on the residential market than on the commercial customer base. As a result, few operators
have the databases or experience necessary to effectively market to commercial accounts.

Third-party providers are, however, skilled in this area.
Commercial customers can often provide the needed subsidies for residential service.
That's because business users often demand services that will be priced higher --
along the lines of high-speed services offered by phone companies. Commercial rates vary,
but they could begin at $200 per month and reach more than $4,000 per month.

MANAGEMENT COST

The monitoring and management of the cable-modem network
and all of the peripheral servers, outers and ancillary equipment marks a significant
investment in personnel and equipment.

The individual cable operator would be hard-pressed to
justify maintaining a 24-hour-per-day, seven-day-per-week staff to handle this
customer-oriented function.

The monitoring that is required to maintain a
high-reliability network for cable-modem subscribers involves more than simply monitoring
system alarms. To keep subscribers' modems "online, all the time," requires
monitoring of Internet traffic, routing, supporting equipment and even the cable system
itself.

To build an entry-level network-management center for these
functions would cost in the neighborhood of $80,000, not to mention staffing costs.

The development of a network-management center to monitor
numerous sites takes advantage of the economies of scale.

We are on the leading edge of a new industry, with new
technology and new competition. But the technology is only a small part of making
high-speed access successful. The business will only thrive through powerful sales and
marketing.

Ron Pitcock Sr. is president and chief operating officer of
High Speed Access Corp
.

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