Small Ops Finding Good Deals on Set-Tops


Those broken-down set-top dinosaurs are finally
disappearing from subscribers' homes as smaller operators snap up analog boxes being
discarded by larger MSOs rebuilding their systems or converting to digital.

Observers predict the flow of analog boxes into secondary
markets are likely to become a gusher as the digtal age accelerates.

As that happens, dinosaur hardware responsible for many of
the poor pictures that plague secondary markets' systems will finally head for the
scrap heap as smaller operators pick up the analog set-tops -- often at substantial

Equipment refurbishers and resellers report a booming
business these days.

"Product lines that should have gone away years ago --
Z1000, DRZs, DRXs -- now operators are just dropping them," said Dena Bradshaw, vice
president of national accounts for Contec LP.

Smaller operators have often been unable to repair their
aging hardware because parts are often scarce for the 10-year-old equipment.

Indeed, if Tele-Communications Inc. keeps to its stated
digital goal of converting 8 percent of its 10.5 million cable homes to digital by the
year 2000, that MSO alone will displace 840,000 analog boxes.

That's the good news for the short term, but long term
the domestic market will become saturated. Sources have different projections on how long
that will take: Some still have confidence that European and Asian markets will absorb the
superseded technology; others stress that many international markets will make giant leaps
to technology comparable to the level of sophistication of the United States, possibly
bypassing advanced analog.

As a result, equipment vendors urge operators to begin
making plans for the disposal of displaced analog boxes, if they hope to make the most of
their inventories. It is unknown how long it will take to saturate the market but most
sources estimate between five and 12 years.



Manufacturers of the advanced analog equipment stress that
they will continue to develop and support that product line, adding they haven't seen
much going to the resale market yet.

"There's no indication of displacement yet,"
said John Burke, vice president, marketing, advanced network systems group, General
Instrument Corp.

GI makes the DCT1000 through 5000 series used by TCI and
many of its affiliates.

"We're seeing the analog boxes moved to the
second and third set in the home ... the advanced analog market is increasing," Burke

"Our market strategy, for 10 years and beyond, is that
there will always people who want basic only. Advanced analog and digital can coexist on a
single network," said Yvonne Jordan, director of marketing communications for
Scientific-Atlanta Inc.

Time Warner is a top customer for S-A's Explorer 2000
digital set-top. Jordan, too, said displacement has not yet become an issue.

Operators said much of the flow of digitally displaced
equipment can still be handled in-house. For instance, Daniels Cablevision in Carlsbad,
Calif., is repairing analog boxes it has removed from its 4,000 digital homes and uses
them to improve programming in an affiliated Desert Hot Springs, Calif., system.

But some operators are selling off their pre-rebuild cast
of headends and other line gear.

"Our resale [business] on analog is spectacular,"
said Bob Porco, vice president of sales for Cable Link Inc., adding first-quarter 1998
sales set a company record.

"We're selling a lot of 450 and 550 megahertz
line gear," he said.


Because of the displaced hardware on the market, a system
with 40,000 or fewer customers that can't afford to rebuild can add channels with
discounted equipment.

For the resale customer, "the news is all good,"
said David Green, president of Quality Cable & Electronics. His company's orders
are up 20 percent in each of the last three years, with sales last year of more than $1
million for the first time.

"Now a trapped system can buy relatively new
converters to become addressable and closer to state-of-the-art. That makes them more
salable and easier to run," Green said.

Addressability allows a rural operator with a spread-out
system to eliminate $100 truck runs, he offered as an example. Addressable converters,
$130 from the factory, can be had for $60 to $75 through the resale market.

Modulators used to add each channel normally sell for
$1,200 to $1,800 per channel, but refurbished ones can be had for $500 to $600, Green
said. Scrambling hardware is sold for less than half of its original price.

"Down the road even more, traps from XYZ Cable
won't even get thrown out -- they'll be sent overseas," he predicted.

Refurbishers recognize that some people shy away from
secondhand equipment, but Green defended his market niche.

New set-top hardware can have as high as a 2 percent
out-of-box failure rate, he said, but boxes handled by the refurbisher "were all
working when we got them," he said, and are reliable in the aftermarket.

Some cable operators and resellers are already developing
converter banks, to match buyers with sellers. But in Bradshaw's opinion, the window
for opportunity for sellers is short to peddle to operators who desire the best price for
their hardware. Overseas markets "have dried up," and selling to the
slower-moving MSOs won't last long, either, she believes.

"MSOs don't realize how quick the market will get
flooded. They need to make a decision now if they want to get value from their
assets," she said.



Operators should think twice about one option -- just
throwing the boxes away without trying to recycle or reuse the components. There are
repercussions for dumping large quantities in landfills, from both public policy and
corporate standpoints. To maintain Environmental Protection Agency standards, companies
need to find electronics recyclers.

"There have been cases where the EPA has gone after
companies years later to fine them for waste. Due to piracy issues, operators have smashed
hardware up, but that means nothing to the EPA," Bradshaw said.

Cable companies must also recognize that sloppy box
handling will contribute to an already booming business -- set-top piracy.

GI provides due diligence assistance to operators who are
reducing their analog inventory. As the industry upgrades, the advanced analog boxes
don't lend themselves to cannibalization for the digital generation of hardware, so
operators need to focus on finding new and appropriate homes for outmoded hardware.

"We're pressing the point that being cavalier
about disposal will not create a short-term problem," but a long-term dilemma, said
Stan Durey, security director for GI.

Operators are not anticipating all-digital operations until
more than a decade into the future, and stray analog boxes could come back into their
franchises to haunt them.

The good news: Analog boxes can't be used to steal
digital signals.

"They have absolutely no value as a digital theft
tool. The difference is so vast that ... there's absolutely no value," he said.

But thriving piracy could be a substantial barrier to the
all-digital age. Consumers won't want to pay for digital signals if they can get all
the analog frequencies for free with an altered set-top. Judging by Internet solicitations
by pirate firms, set-top prices have dropped to the $125-to-$150 range, from the
$300-to-$400 span just a few years ago. Greater supply to illicit businesses could mean
even further price reductions.