Data Gains Speed with Small Ops

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Once considered a blue-sky technology with little
applicability for smaller cable operators, cable modems are now quickly working their way
into the business plans of small to midsized systems.

Smaller operators contacted last week said they're
feeling the pressure to add cable modems as both a defensive measure against
direct-broadcast satellite and an offensive measure to prepare for a high-speed future.

A case in point is Bill Bauer, president of Windbreak
Cable, which serves a few hundred subscribers in Lyman, Neb. Bauer is embracing the idea
of cable modems as a viable means to additional revenues, and he is months away from
launching a high-speed-data model for other smaller operators.

'I knew that I had to build a business around cable
modems and the Internet and try to find anything I could that existed, but it wasn't
out there, so I had to build it myself,' Bauer said.

Next month, Bauer will launch an Internet-access network
using a high-speed satellite headend link and a VSAT (very small aperture terminal)
satellite antenna for the return path.

'Technically, there are some challenges, but it's
economically feasible, and it works,' he said.

The systemwide network, Bauer said, required him to
coordinate the network operations center, T-1 lines, various hardware and satellite-time
contracts.

'We built the system to customize each customer, and
the long-term advantages are that once the system is built, we can do long-distance
telephony, true video-on-demand, ad insertion and other things that come along,' he
added.

Bauer's journey to Internet access, which began in
1995, hasn't been easy, he said. It wasn't until Zenith Electronics Corp. and
Bay Networks Inc. 'got operational,' he said, that his version of Internet
access became a reality.

'I was pushing ahead with new modems and what they
would mean. I knew that I wanted high-speed connections to my interconnect backbone, but a
T-1 modem was $4,200. I had 100 subscribers, so, with the assumption of a 10 percent
penetration, if I'm selling it at $42, that's 10 subs at $420 per customer. That
doesn't work,' he said.

His next consideration: a telephony-return model, which
also proved too costly. That's when Bauer modeled the use of a high-speed VSAT
satellite link.

'The system will allocate bandwidth right down to the
individual customer, and it allows lots of flexibility,' Bauer said. 'The
hardest part is the start time, because there's no revenue coming in and T-1s are
expensive. You have to be real creative to get the financing to survive during the
start-up period.'

Once through the 'nonprofit' period, however,
Bauer is confident that similar networks can be significant revenue sources for smaller
operators.

'We were profitable seven months after our first
customer in 1996, and in the next few months, our penetration should be 30 percent to 35
percent,' he projected.

Bauer is working with Zenith and Bay to lower costs, which
could go a long way toward convincing other small operators to follow in his footsteps.

'Smaller operators are watching what we're doing.
We don't have the luxury of doing it wrong: It must be profitable,' he said. And
so far, Bauer said, it is in his own two systems.

'Four years ago, I knew that I'd lose some
revenues to DBS [direct-broadcast satellite]. The revenues that we've gained from
Internet access have replaced the DBS losses, and Internet access is a cost-effective
solution,' he said.

Bauer said more than 250 operators have contacted him
regarding the system.

Vendors such as Zenith are a key to profitability for small
operators and Internet access, Bauer insisted. 'The reality is that vendors like
Zenith and Bay Networks are getting the proprietary hardware and economics to a point
where it's a business.'

Zenith, which is selling its HomeWorks Universal cable
modem for $399, has seen the modem take off in the past year, despite scant publicity,
said Mike Scott, national sales manager for cable-modem systems at Zenith.

'There's a learning curve for return-path
maintenance and managing the modems, but lots of people are getting into cable modems
because they can't afford to wait. And the market won't wait,' Smith said.

Smith said Zenith is seeing increased interest in modems
among small cable operators.

'There are lots of smaller operators who don't
have fiber, so there is more noise. Our modems favor smaller systems that might not have
the carrier-to-noise ratio that fiber-based systems might have,' Scott said.

Antonette Goroch, senior analyst for consultancy The Carmel
Group, said the traditionally entrepreneurial, pioneering spirit of cable operators is
surfacing through the addition of new services.

'Providing new services and partnering are important,
and that's what the small operators have to do,' Goroch said.

'The big story has been [big MSOs like] Time Warner
[Cable] and TCI [Tele-Communications Inc.] in cable modems. But the smaller operators are
beginning to implement a variety of methods for cable modems that are scaleable, as far as
Internet access is concerned,' Goroch added. 'There's a new breed of
communications companies emerging.'

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