Small Ops Find It Rough Going Alone

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The never-ending search for operational and programming efficiencies has led small cable operators to craft strategic alliances and partnerships with local companies, prompting a fundamental shift in the way they've historically done business.

Several moves intended to reduce programming and hardware costs have gained momentum, including sharing fiber-installation costs with adjacent operators or other local businesses, developing marketing alliances with hometown Internet-service providers and utilities or tapping into cooperative strategies.

All of these techniques have helped small MSOs to meet the pressing problem of launching new services.

Market pressures and shrinking margins have added to the sense of urgency many small operators now feel with respect to rolling out digital cable and high-speed data services quickly — and at a reasonable cost.

"Strategic alliances and co-op arrangements are happening," said American Cable Association president Matt Polka. "We're getting more requests by smaller operators to look into strategic alliances, and it's forcing companies to do business in another way. It's something we'll see more of."

It could make a lot of business sense, industry observers said.

"Why couldn't a small operator go to a utility or telco and lease a line, or become partners with an adjacent system and install fiber together?" asked Pat Thompson, senior vice president at Denver-based cable brokerage Daniels & Associates.

Operators might consider such a move if selling out isn't an option and they can't afford to upgrade. Already, some are.

Shen-Heights TV Association, which runs a 4,000-subscriber system in Shenandoah, Pa., struck an alliance with neighboring Service Electric Co. to share in the installation of fiber plant, a move that boosts economies of scale and lowers costs.

"We purchase fiber and equipment together for economies of scale and if either of us need fiber splicing assistance, we'll help each other," said Shen-Heights president and CEO Martin Brophy. "Smaller operators who can strike these alliances really cut down on capital costs, like ad insertions and headend equipment.

"We pay for fiber and construction and we rent Service Electric the fiber at a reasonable price and they rent to us," he added. "There's a significant cost savings with the fiber tie-in, especially when you can eliminate the problem of microwaving."

Most small operators have minimal access to capital markets, and an annual service-rate increase is often their only means of increasing revenue. So cost-saving measures are crucial, and new-service launches are a must.

"The business models are changing for small operators, so they must look for added revenue streams because their core business margins are being squeezed," Polka said.

Strategic alliances can help redirect capital to critical areas. For smaller operations, such as Shen-Heights, they can also free up some much-needed cash.

"With two or three different companies consolidating headends and sharing resources, it has allowed us to free up capital for digital projects," Brophy explained. "It's also helped with our financial institutions. They were very pleased to hear we had a partner and that we were getting greater economies of scale."

But forging alliances with local businesses isn't a slam-dunk proposition. Many smaller operators remain reluctant to ally themselves with potential competitors.

Said Thompson: "There's a pride of ownership, and many small operators are still nervous about giving up any territory, unless it makes sense financially." Picking the right alliances can be tricky. It requires both good business sense and the right relationship.

"It must be situation-specific," said Neal Schnog, president of Uvision LLC, an 8,400-subscriber system in Sheridan, Ore. "An alliance with a local ISP sounds like a great idea, but that model probably doesn't work for us, since we can become our own ISP.

"However, we will enter into a marketing alliance with our local ISP when we launch cable-modem service," he added. "Those types of alliances will help us."

Many operators have already found suitable allies in other small operators.

"Small operators just can't keep up with rate increases by some programmers, and they're losing ground, even with the discounts we can bring to them," said Dan Mulvenon, vice president of member services for the National Cable Television Cooperative (NCTC).

The NCTC has become the most important strategic alliance for an increasing number of cable operators. It bargains with programmers and equipment manufacturers for scaleable fees based on its universe of 13 million subscribers and about 1,000 cable-operator members.

"We'll negotiate master agreements with programmers and hardware vendors and do wholesale billing on programming," said Mulvenon. "For operators, that's worth at least as much as the savings on the program side."

The NCTC also has a hardware-advisory committee that critiques manufacturers' cable-modem demonstration and prevents vendors with volume-purchase numbers collected from its operator members.

"Membership will tell us how many modems they'll need and the vendors will submit sealed bids, which are sent to the membership," Mulvenon said. "They'll determine which bids meet their conditions and, we'll choose a preferred vendor for the modems."

The process is a lifeline for smaller operators seeking alliances, which aren't always on a vendor's radar, he added.

Yet successful strategic alliances don't just happen.

"You need a harmonious relationship," Brophy insisted. "Many small operators are really strapped with the public demanding more services, and it's very capital intensive. Strategic alliances are very relationship-driven. If you get along, there's a much better chance of enhancing your services."

Making nice with local businesses could be mean additional revenues from unlikely sources, as well.

"More people are coming to us with questions on how to use our technology for other uses," such as tapping line transmissions to stimulate the water-purification process, said Polka. "Those alliances with utilities and power companies interest our members because of the potential revenues."

Reaching those revenues will require alliances and partnerships, and an even greater emphasis on cost efficiency.

Concluded Mulvenon: "Small operators tell us they need a resource, an ally, for programming and hardware. They're looking for not only cost savings through alliances, but a resource to guide them through their business."

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