Declarations of Innovation - Multichannel

Declarations of Innovation

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Those with a penchant for staying connected as much as possible have benefited from the proliferation of wireless Internet “hot spots” installed by companies like Verizon Inc., Sprint Corp. and the ever-trendy coffee retailer Starbucks Corp. But if your travels take you alongside Interstate Highway 70 near Lawrence, Kan., chances are you will do your connecting via a relative newcomer to the category: Sunflower Broadband.

The Kansas cable company owned by the publisher of the Lawrence Journal-World newspaper has planted wireless hot spots in roughly 20 retail and civic locations around the city. Patrons of The Cup coffee shop, the College Corner Library, the Applebee’s restaurant on Iowa Street and other locations can hook up for free to Sunflower’s broadband Internet network running on the 802.11 Wi Fi family of specifications.

Sunflower’s leap into Wi Fi represents an unusual move in a cable industry where most operators are concentrating on digital video services and wireline telephony. But for Sunflower, it’s just one more example of technological innovation.

Last month, the independent cable operator became one of the first cable systems in the country to go “all digital” when it introduced a simulcast video service that renders all of its channels in digital format. During a second-quarter earnings call July 13, executives of Tandberg TV, which is supporting Sunflower’s all-digital migration, described the multimillion dollar conversion as a “very significant” development in the North American cable market.

And to top it off, Sunflower drew an admiring review from The New York Times, which published a June 26 article labeling Sunflower’s broadband-content collaboration with its sister company as an example of “the newspaper of the future.”

Sunflower’s embrace of new digital technology calls attention to the role that America’s independent operators play in bringing powerful communications capabilities to the nation’s heartland.

“It is independent cable companies like mine that provide broadband services to small towns throughout the country,” said Sunflower general manager Patrick Knorr in testimony before a U.S. House Energy and Commerce Subcommittee hearing in May. “Large companies will never come rushing into these communities because of the cost and difficulty of providing service in rural America.”

As members of the National Cable Television Cooperative meet this week for their annual conference, they’re likely to hear variations on the same theme. Small, independently owned cable companies, once dismissed as also-rans in the converged broadband communications era, are displaying a surprising range of innovation by embracing new technologies and occasionally leaping ahead of larger industry peers. For example:

  • Armstrong Utilities’ cable TV unit announced July 19 it will use multiplexing and rate-shaping technology from Terayon Communications Systems Inc. to support a transition to an all-digital service that appears likely to precede similar conversions from larger MSOs.
  • Alaska cable operator General Communications Inc. already has vanquished analog channel distribution entirely in several markets where it’s now fully converted to an all-digital platform.
  • Vista III Media in Mississippi is preparing a fiber-linked master headend architecture that will enable it to deliver video on demand and voice-over-Internet Protocol telephony across a range of geographically isolated systems that once were relegated purely to delivering TV channels.
  • Bresnan Communications of Wyoming will launch digital telephone service this summer in Cheyenne, challenging Qwest Communications International Inc.’s longstanding wireline phone monopoly.

Matching the Big Boys

The aggressive embrace of new technology suggests that in some markets, independent operators will be able to match the offerings of even the largest industry peers. Independent operators like Sunflower Broadband and Massillon Cable of Ohio “are very much putting out the type of product the larger MSOs are,” says Randy Wells, a managing director for cable industry investment firm Daniels & Associates.

Part of the motivation for the leap into advanced services is survival. For years now, direct-broadcast satellite TV providers have mounted a fierce competitive challenge to small-market operators, sending a handful into bankruptcy proceedings. But independent operators are now fighting back with a growing array of services — like VOD, high-speed Internet access and digital telephony — which their DBS rivals can’t easily match. “They’re doing everything DBS can’t do to differentiate themselves,” says Mark Bishop, vice president of hardware for NCTC.

In some cases, that means challenging traditional assumptions about the cable business.

Nixing the Networks

In one small market in Missouri, the St. Joseph Cablevision unit of the News-Press Co. is doing the unthinkable: abandoning network cable-TV programming altogether. After acquiring a nearby property that had long suffered subscriber losses to satellite, St. Joseph general manager Bill Severn decided to surrender the satellite-delivered video market to DirecTV Inc. and EchoStar Communications Corp.’s Dish Network.

Severn shut down a 27-channel video package priced at $28 per month, created a $7.95-per-month lifeline package of over-the-air signals, and added a wireless data link that connects cable-modem customers to a cable-modem termination system at the St. Joseph headend.

Demand for the $40-a-month high-speed Internet service Severn launched has been more than enough to make up for the lost video revenue, and Severn has even seen a small upswing in video customers who want nothing more than clear over-the-air TV reception.

The eastern Missouri market is tiny, with fewer than 200 homes. But Severn, who will present findings at the NCTC conference this week, says there may be economic justification for dumping satellite-delivered programming to concentrate on the data segment, even in larger markets.

“The satellite-delivered side is where all your costs are,” says Severn. In contrast, he says there are better profit margins in the data business, and there is pent-up demand among underserved rural communities for high-speed Internet connections that cable operators uniquely can supply.

“It’s still a much better data platform than anything out there,” Severn says. He believes a key to making broadband Internet work for smaller systems is wireless microwave transmission that eliminates steep local-loop data transport costs.

Retreads and Upgrades

That sort of creative application of technology and careful attention to capital spending is common among small MSOs and single-system operators. Many make effective use of hand-me-down equipment that has been replaced by larger companies, according to NCTC’s Bishop. But some newer industry entrants also are investing significant amounts of capital in broader upgrades and new technologies.

For instance, Kirkland, Wash.-based Wave Broadband has just completed a $2 million upgrade of the Ventura, Calif., system it acquired last fall from Avenue Cable TV Services Inc., a family-owned operation that began in 1951 but was forced to seek bankruptcy protection in 2003. Following its upgrade, Wave Broadband plans to introduce VOD and digital phone service to the 9,000-customer system.

Wave Broadband is one of more than a dozen new entrants with the confidence — and capital backing — to make a run at building value by buying, upgrading and operating systems once deemed too small or too isolated to show much promise.

Another newcomer, Klip Interactive of Madison, Ga., last month closed on the $5.25 million acquisition of a handful of cable systems serving 3,500 subscribers in several Montana towns. Klip plans to invest fresh capital, link the systems with fiber optic cables, and introduce new data and telephony services over the next 24 months.

But the picture isn’t universally rosy, especially for operators that lack access to capital needed to differentiate their operations from satellite TV. Pat Thompson, a small-system mergers and acquisitions specialist for Daniels, says raising money remains difficult for many operators with isolated properties reaching just a few thousand homes.

“I hear from people with 1,000 subscribers calling all the time and trying to find money in order to do upgrades. Unless they can get it from their local bank, nobody wants to lend to them,” says Thompson.

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