No Country for Old Systems

Author:
Updated:
Original:

Rural cable operators such as Steve Neu aren’t just bracing for the transition to all-digital signals from local broadcasters a year from now. They’re also worriedly trying to chart their companies’ futures.

Neu is owner and manager of Mountain Zone Cable Systems, which operates five systems in rural West Texas, combining to serve about 2,000 video and Internet subscribers.

In fact, Neu owns the cable system in Marfa, Texas, the small town in the Chihuahan Desert where two Oscar-nominated films — There Will Be Blood and No Country for Old Men — were filmed, as was the 1956 epic Giant.

Neu is at a crossroads, facing the same dilemma as many small-fry cable operators: Without upgrades that will allow him to provide digital-TV service or high-definition channels, as his satellite-TV competitors do, Neu could lose video customers.

Under pressure, he may have to turn his company solely into a provider of Internet access and phone service — to homes that buy their TV service from Dish Network or DirecTV.

Neu would have to invest hundreds of thousands of dollars to make his video services competitive in an era of digital and HDTV. Just to be able to offer at minimum a digital tier — one with a robust number of the HDTV networks his customers are clamoring for — in all his systems would entail installing equipment that runs roughly $30,000 per headend, as well as deploying $250 digital set-top boxes in every home. Those boxes represent the real killer cost, according to Neu.

So tiny operators like Neu will be making some hard choices in the next few years. Some will sell. Some will shut down. Others will bite the bullet and spend money on upgrades. Some, like Neu, will likely refocus their businesses to concentrate on profitable non-video products.

“You’re asking me what am I going to do? To be honest, I’m not sure yet,” he said. “There may come a time in the next five years I may just have to completely abandon my video service and just go strictly with having an Internet platform, just using my cable system as a Internet-delivery system and for VoIP.”

NONWORKING NUMBERS

Last week, Neu was one of 327 small and midsized operators who attended the National Cable Television Cooperative’s Winter Educational Conference here, where he could meet with vendors to get a bead on how much it would cost him to upgrade his systems.

The technology and equipment is available, but the numbers don’t seem to work yet for Neu to invest in the digital set-tops and headend gear for his tiny 450 MHz channel-capacity systems, the smallest of which has 125 subscribers.

Last week, the Comcast Media Center, teaming with Motorola, announced it has developed an integrated, turnkey system that will permit small operators to inexpensively offer such digital services as HDTV. Another vendor, Transparent Video Systems, pitched what it claims is a low-cost digital turnkey option, designed for systems with as few as 2,500 subscribers.

Transparent, for instance, said its systems can deliver “DVD-quality video with stereo audio” for as little as $2,500 per “program” and putting as many as 100 channels on 100 Megahertz of bandwidth.

But Neu said he didn’t find the perfect answer for his systems yet.

“Even within our own industry, they’ll look at guys like us and go, 'We’re just really sorry. You guys were dinosaurs 10 years ago. We don’t really know that we can help you,’ ” he said.

The two-day NCTC confab, entitled “Digital Decisions: Roadmap to Change,” kicked off almost exactly a year away from the date of the transition to all-digital TV broadcasting.

“This is why we’re here, to make some sense out of the chaos,” NCTC president Jeff Abbas told his members.

During several presentation the NCTC and American Cable Association, a lobbying group for independent operators, outlined the questions and concerns their members should be thinking about now as the Feb. 17, 2009, digital deadline looms.

A day after that cutoff, cable systems will also face the burden of fulfilling the Federal Communications Commission’s dual-carriage mandate, which requires operators to deliver both the analog and digital signals of must-carry local TV stations for three years.

Those regulatory mandates have rippling ramifications that are burdensome for bandwidth-constrained rural operators like Neu.

“I am always amazed when I come to an event like this that is technology-focused, how each and every one of the technology issues that we discuss has a clear regulatory or policy aspect to them,” ACA president Matt Polka said at the NCTC conference.

The same day Polka was speaking, the National Cable & Telecommunications Association joined the ACA in asking the FCC to give small cable systems — those with a channel capacity of 552 MHz or less or with 5,000 or fewer subscribers — a blanket exemption from dual-carriage. Right now, systems that are all-digital will be exempt from dual carriage.

Without a waiver or being all-digital, small systems have to free up bandwidth to make room to carry the additional broadcast signals.

That could mean having to move popular cable channels off their program lineups to make way for an extra feed of a religious station, or investing in the gear necessary to make a cable system all-digital.

'ZERO LUCK’

As for the Feb. 17, 2009 analog cut-off date, “Like it or not, it’s coming in 364 days and what are we going to do about it?” said ACA lawyer Chris Cinnamon, who described the digital transition as “an unprecedented intrusion of government into multiple industries.” (See Access, page 39.)

Cinnamon said that in preparation for the digital transition, cable operators need to ask themselves three questions.

Those are: How will my system deliver the signals of the Big Four broadcasters, ABC, NBC, CBS and Fox, after Feb. 17 next year? How will my system meet the regulatory dual-carriage and HDTV carriage requirements? And if I can’t meet the digital must-carry requirements, what relief do I need to get?

NCTC officials recognized that some of its members, facing the burden of fulfilling regulatory mandates and combating competition from satellite and telcos, will look to sell.

Thus, the co-op offered its members a reality check during a panel called “Leveraging Assets,” by providing examples of the kind of prices small operators can realistically expect to get if they put their systems on the block.

“Can you afford what the FCC is demanding you to do?” said panel moderator Dan Mulvenon, the NCTC’s vice president of corporate communications. “Selling may be a viable choice for some companies. It may end up being a forced decision for others.”

Last year, several small cable systems, with only 1,000 subscribers and capacity of 300 MHz to 330 MHz, sold at relatively low prices, equating to between $200 and $300 per subscriber, according to Pat Thompson, managing director of cable mergers and acquisitions firm RBC Daniels.

“You always read in the papers about the big deals — all of them for $4,000, $5,000, $6,000 a subscriber,” she told NCTC members. “All systems are not created equal. … All systems don’t sell for $5,000 a sub.”

That’s if you can find a buyer.

“I had zero luck,” said Steven Inzinna, president of the cable company Trust Communications.

As part of a bankruptcy-protection proceeding for CableSouth, Inzinna was operating six of its systems outside Dallas and Lafayette, La., with about 1,000 subscribers total.

Inzinna had an option to buy or sell those 330-MHz CableSouth operations, and he ran up against the same financial conundrums that Neu is facing.

“I had to make a choice over whether I was going to take them over or close them,” Inzinna said. “We are shutting them down. … You can’t upgrade them. It’s the death of a 330-MHz, 450-MHz system, in my opinion. The economics of it — they don’t exist.”

Potential buyers passed on the CableSouth properties because they, too, realized that the rebuild costs didn’t make prudent financial sense, according to Inzinna.

In order to simulcast analog and digital broadcast signals for dual carriage, Inzanna’s 330 MHz systems would have had to go digital to free up bandwidth. In CableSouth’s case, that would have required an investment of $50,000 to $60,000 per headend, as well as deploying CableCard set-tops to each subscriber, according to Inzinna.

“I’ve worked the numbers, and it doesn’t work,” Inzinna said. “They had a chance to work before the [satellite] competition, but the writing’s on the wall.”

Only one of Alpine, Texas-based Mountain Zone Cable’s five systems has a digital tier. Overall, Neu offers a $42 a month 50-channel analog package, which can also be bundled with Internet service for about $57. Neu is testing VoIP as well.

His assessment of the numbers was similar to Inzanna’s. “If you’ve only got a couple thousand subs, and we’ve got five headends, that’s going to run into some serious money,” he said. If upgrading five headends costs $30,000 each, and you need one thousand digital boxes at $250 each, that’s $400,000.

SAVED BY THE NET

At this point, Neu credits his Internet service, which he also offers on a standalone basis, with keeping Mountain Zone Cable in business.

Of his total 2,000 subscribers, about 70% are video or bundled video/Internet, with 30% Internet only, Neu said.

“There is no question that for small operators like me, if it wasn’t for Internet, we wouldn’t be in business right now, because the customers that have been migrating off of our video over to Dish [Network], we have been replacing with Internet customers,” he said. “That’s how we’re making it right now.”

In fact, Neu pointed out that his system provided Internet service to the movie crews who lived in Marfa while they were filming There Will Be Blood and No Country for Old Men.

The key to survival for a small operator today is to have at least 1,000 video subscribers, “and probably 500 Internet subscribers,” according to Inzanna.

The pressure from Dish Network and DirecTV has really ratcheted up because of their extensive HD packages, and Neu said his customers keep asking when he’ll start offering HDTV.

“What we have to understand is that the satellite people, they’re like video Wal-Marts,” Neu said.

“They’re all over the country, and each of these little systems we have, they’re basically standalone systems. The headend costs, the infrastructure costs that you have, are the same whether you have 100,000 subs or you’ve got 100 subs.

“So that’s what makes it prohibitively expensive for us to keep adding those additional services that people want, like HD,” said Neu.

Neu has even branched out to launch a wireless Internet service, seeing an opportunity to serve consumers in a region where some people don’t even have dial-up — they only have Internet access via satellite.

At the NCTC conference, even operators larger than Mountain Zone Cable said digital is essential in order to combat satellite’s HD and multicultural packages.

“If we’re going to compete, we need HD and a lot of it,” said Robert Gessner, president of Massillon Cable TV, which has 47,500 subscribers in Ohio.

The municipally owned cable TV system in San Bruno, Calif., won an FCC waiver to deploy set-top boxes without separate security. That will allow it to cost-effectively go all-digital, starting now with digital simulcasting. Such boxes cost only $85, including a remote control. San Bruno Municipal Cable TV made the move after it saw it subscriber base erode from 12,000 in 1998 to 9,900, according to Tenzin Gyaltsen, cable TV director for the city. In particular, San Bruno had lost market share to a triple-play bundle that included AT&T phone and Internet service; and the Dish Network, he said.

According to Neu, small operators may have to change their business model by focusing on providing Internet service to rural areas. Just as cable TV was created as a method to deliver broadcast TV to remote regions, now it can provide broadband to rural areas that have a hard time getting reliable Internet service, according to Neu.

“So we’re sort of seeing our business migrate over to another technology that people have a tough time getting, just like they did with television,” he said.

Related