Small Operators Like New Services

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The promise of incremental revenues from technology-driven
new services is allowing savvy, creative smaller cable operators to drink from the same
revenue trough as big, deep-pocketed MSOs.

Being selective and strategic in their decisions to carry
Internet and data services while adding digital-video technology is beginning to pay
dividends for a growing number of smaller operators, albeit on a smaller scale than their
big MSO brothers.

Data and Internet services are the current darlings of most
small operators' suites of services for both residential and business customers, with
digital-video services -- provided via AT&T Broadband & Internet Services'
Headend in the Sky -- close behind.

"People are paying five times more for modem service
than they would for dial-up in the business sector because they have to have it,"
said Gary Shorman, president of Eagle Communications, a 13,000-subscriber system in Hays,
Kan.

"It" in this case means speed and
"always-on" connectivity, especially in the emerging business market. "The
expectation of business is for you to provide 100 percent service all of the time.
That's a big challenge, but the business is out there, and we're signing up
customers as fast as we can," Shorman said.

Eagle charges $50 to $300 per month for its Internet
service and $15 to $20 for local dial-up telephone service. "Data and Internet growth
will challenge our ability to provide service. There's more demand than we can
handle," Shorman said.

While the core video side of the business remains healthy
for most smaller operators, the business-customer side of data and Internet service is
creating the most interest.

"Our business customers are now 25 percent of our data
business. Small business is where our market is. People want their own domains," said
Byron Cotton, vice president of data services for Bend Cable Communications Inc., a
25,000-subscriber system in the central Oregon town of Bend.

Cotton said Bend Cable is deploying gigabit technology --
which is 10 times faster than Ethernet technology -- over its fiber ring, allowing the
company to provide additional advanced services. "We will aggressively move into
reservation systems," he added. "We want to be a mini-Ticketmaster for events
and be in every hotel room."

Bend also is launching digital-video service, which Cotton
said was essential for retaining customers in the face of competition from
direct-broadcast satellite services.

Bill Jenkins, president and CEO of Mallard Cablevision LLC
in Fort Worth, Texas, agreed on the need to offer digital video, but he added a caveat.

"We're in deep conversation with HITS because we
have to do something like this, and clearly, we are upgrading our plant to allow for
Internet," he said. "And we're considering telephony. But [smaller
operators] have to be careful not to get into too many businesses at the same time."

Operators must also be smart about adding new services,
according to Dean Peterson, president of Southwest Missouri Cable TV Inc., a
14,000-subscriber system that was recently sold to Cox Communications Inc.

"There are lots of opportunities for small
operators," Peterson said, "but they need to be strong technically, they must
have good financial support and they must be aggressive. Our strength is in quick
responses, timely decision-making and engineering expertise. Those are the only ways we
can compete."

Competition is a major motivator for smaller operators to
add new services, especially operators such as Cable America Corp. in Mesa, Ariz., near
Phoenix.

Cable America must fend off competition from DBS and local
phone companies -- U S West has begun a trial of digital video over subscriber lines -- as
well as responding to well-publicized offerings from regional giant MSO Cox.

According to vice president of operations Chris Dyrek,
Cable America is offering multiplex, pay-per-view and Discovery Communications Inc.'s
Discovery Showcase" programming through its digital service. So far, the company has
seen an 8 percent penetration rate, he added.

"We've been very happy with the rates, so
we're rolling out the service to three additional markets that cover 85 percent of
our company," he said.

But Dyrek is cautious about adding Internet services.
"Until modem and backbone-line prices come down, Internet isn't there for us
yet," he said. "We're all new to this technology, so we're selling to
those who want it, but it hasn't caught on yet like digital. But long-term, it will
be important."

For the short-term at least, Dyrek said, digital services
will provide stellar results. For other services, such as video-on-demand and telephony,
the future is less certain.

"VOD technology is capable and expensive, but it will
be there because it's not a new business -- just new headend equipment," Dyrek
said. "Telephony is different. Our plant is capable of it, but it's a very
different business."

For most smaller operators, data and Internet services for
both the business and residential markets are expected to bring growing revenues and lead
to additional services down the road.

"Lots of our new revenue is from the data-business
side, which is now at the 5 percent penetration level for data services. But we will
aggressively go after both business and residential markets," Cotton said.

At the end of the day, however, small operators face some
nagging problems.

Peterson admitted: "We try hard to implement new
technology, and we're in a position to move into telephony. But it's very
difficult when you're small to go to a banker for $8 million to $10 million to offer
telephony."

Mix in competition, expensive capital investments and
complex technologies, and it's no wonder that most small operators are learning how
to incorporate creativity, savvy and strategic thinking into their new-service launch
plans.

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