Despite Cost, Hassles, New Rollouts Are Key

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Deploying advanced new services is complex and costly for most cable operators. Failure to add them, however, could be far more expensive, in terms of future lost revenue and customers, and could hamper operators' competitiveness, experts said.

"If operators are going to grow their business and seek new revenue opportunities, they must deploy new technologies and services," said Mark Snowden, senior analyst for GartnerGroup Inc. "There's no growth left in the pay TV industry unless you have new technologies to offer."

Cable's growth has remained stagnant at 65 percent penetration, while the satellite industry has grown to 11 percent, adding to the urgent need for introduction of new technologies and services.

Said Snowden: "The whole pay-TV market has grown by 11 million households, but cable's market has been flat. Meanwhile, satellite is cherry-picking its best customers."

Cable operators have been spending to enable new services. In the past three years, they've averaged $200 per subscriber each year to upgrade their systems, GartnerGroup reported.

"The pace will drop off from the capital-intensive side to the service side. Now, the upgrades must pay off," added Snowden.

By 2004, interactive TV portals are expected to generate $228 a year, per subscriber, with $94 going directly to a cable operator's bottom line. That number doesn't include revenues from high-speed data and video-on-demand, which could account for even more, according to GartnerGroup.

Most industry experts agree that new services will eventually produce a healthy return on investment. But when and how that will happen remains up for debate.

"The consequences of non-deployment of new services isn't dire right now," said Chris Dyrek, vice president of Cable America Corp., an 80,000-subscriber cable system in the intensely competitive Phoenix market. "But in the future it will be. You have to have these services to compete."

Dyrek has seen DBS eat into Cable America's customer base, prompting the operator to launch new services to protect his core market.

"Internet access and high-speed data are big parts of our future, and we have to have 200 channels to compete with DBS," he said. "If we don't do this, we'll lose a step with our competition."

The twin threats posed by overbuilders and the loss of core customers to DBS has prompted small operators to deploy new services, albeit with different business strategies than the big MSOs.

"We've rebuilt to 750 megahertz, launched cable modems and advanced analog boxes," said Bob Gessner, president of Massillon Cable TV, a 50,000-subscriber system in Ohio. "Our next step is digital cable. We don't even calculate penetration and [return on investment] for new services, because we have to do them."

Deploying advanced new services is difficult, especially for smaller operators who lack resources, technical expertise and capital.

"We can't test anything so we have to be very cautious that the services are technically and economically feasible," Gessner said. "But we can focus on one system, not hundreds, and that helps."

A lack of materials and skilled labor head the list of challenges.

"Contract labor goes to steady contracts and big projects," said Gessner. "When you're paying by the foot, they lose money with smaller operators like us."

Capital costs are high, too. "Headends cost $350,000 and above, no matter how many subs you have, and equipment is backlogged so that slows down our deployment," Gessner said. "The real problem is having to spread the costs over fewer subscribers than a bigger MSO."

The challenges hit bigger MSOs as well.

"It's very difficult to get labor in the field and fiber products are difficult to obtain, but cable is still aggressive with deploying new services and size can work to their advantage," said David Eng, senior vice president of the Americas for

C-COR.net, a headend equipment manufacturer.

As vital as size can be in new-service deployments, large MSOs such as Cox Communications Inc. share some concerns with smaller operators.

"Do we have the right people? What are the technology integration issues? Do we have enough resources to offer new services?" said Cox senior vice president of strategy and development Dallas Clement. "As we prioritize our new service deployments, there are lots of tactical issues."

At the end of the day, competition and the bottom line compel deployment.

"To compete with satellite on the video side, we must offer digital and VOD-type services," said Clement. "Fundamentally, if we don't roll out these services, we don't get back our return on capital investment. We must maintain and grow our core business."

And that core business must include the deployment of new services and the elimination of the non-deployment mentality, Snowden insisted.

"DBS has countered cable's digital services with interactive services, but that's where cable is very strong," said Snowden. "They can do it seamlessly and locally and press their advantage.

"They have to do that to keep pace and assert their competitive advantage because each day, it becomes harder to move forward. It's a lot tougher to get someone to change than to upgrade."

The deployment of telephony and IP services will test the mettle of the cable industry and its new-service deployment mindset.

"Telephony is a different animal because of bundling capabilities and IP," Dyrek said. "We're in trials now and hope to get added revenue from it.

"The only way to survive in this business is to change, keep on the leading edge of technology and turn on a dime. If you don't, you're hurting."

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