Small Ops Seek New-Service Alliances

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Small, independent cable operators -- some of which are
scrambling to enter the Internet and high-speed-data service markets -- are seeking new
strategic alliances as costs for advancing technologies and operations mount in the new
era of competition and expanding services.

Rarely is the shrinking group of smaller cable operators
labeled as risk-averse. In fact, they've often defined the term "risky
business."

Regulation, lack of access to capital, competition and
single-handedly shouldering the expense of new technologies and equipment are driving some
of cable's entrepreneurial operators into the arms of unlikely partners such as local
utilities, phone companies -- and even archrival direct-broadcast satellite services.

The growing popularity of new services such as Internet,
high-speed data, cable modems, Internet-protocol telephony and others -- as well as the
sometimes prohibitive costs of entering those start-up markets -- are daily reminders that
alliances and partnerships can be real assets to small operators' business models.

"We've been approached by a couple of local utilities
in our rural areas. There's lots of upside potential to alliances," said Dean
Petersen, president of Southwest Missouri Cable, a 37-year-old cable system.

With partners, however, comes a big caveat. "Once you
take the step, your partners better mind their manners, because at the end of the day, you
must respect your partner and manage like you've never managed before," Petersen
said.

And for traditional small cable operators, managing
unfamiliar businesses such as Internet access or high-speed data can be puzzling, and it
may require an uneasy dependence on newfound partners, dazzling technologies and
network-management providers.

"We didn't have any expertise in two-way services, so
we launched HSA [turnkey Internet-service provider High Speed Access Corp.] in
April," said Neil McHugh, president of Vista Communications, a 28,000-subscriber
system in Smyrna, Ga.

"We were very busy doing our upgrade to 750 megahertz,
and at the same time, we knew the time to launch new services would be faster if we had a
partner," McHugh added.

Yet partnering with a utility, a local telephone company or
a noncompatible business isn't in Vista's plans.

"I don't see how a utility company could help us to
run our business," McHugh added. "But if you're looking at data, and there's a
local company using fiber, that might be helpful. If it's a business we haven't been in
and it speeds us to market, it would be helpful, too," he said.

For thousands of small rural systems scattered around the
country -- such as those of Blackstone Cable, a 20,000-subscriber cluster of 182 systems
in Idaho, Utah and Oregon -- teaming up their business with partners familiar with
Internet access, data services and telephony would be helpful, but doing so is unrealistic
in the short term.

"It makes sense, but when 90 percent of your
subscribers don't even have personal computers, there's not a big demand for new
services," said Tom Tupper, controller of Coeur d'Alene, Idaho-based Blackstone.

Alliances and new services, Tupper admitted, are probably
more appealing to systems located closer to metropolitan areas, where exposure to
technologies and services such as cable modems, IP telephony, Internet access and
high-speed data is more prevalent than in rural systems such as Blackstone's.

"[Alliances and Internet/data services] will happen in
some rural areas, and we're considering it, but our focus is just to upgrade our current
systems to 450 MHz," Tupper said.

For others -- like Eagle Communications in Hays, Kan., a
13,000-subscriber system currently offering two-way high-speed-data service -- forming
strategic alliances makes sense if a system has quality upgraded plant. And it helps if
the big boys are doing it, too.

"When you see big guys like AT&T [Broadband &
Internet Services] looking for partners, we probably should, too," Eagle president
and CEO Gary Shorman said.

Before a small cable operator begins the search for a
partner, however, Shorman strongly suggested putting quality plant in place.

"Because we've put a system in place to offer Internet
services, I think we're more appealing. And by the end of the year, we'll have digital
service and be partnered with a telco to offer telephone services," Shorman said.

"But to go out and form an alliance tomorrow would be
premature, and I doubt you'll see the Eagles of the world blazing the telephony
trail," he added.

That trail, most industry experts agreed, is reserved for
the likes of AT&T Broadband and other major players in the telecommunications
industry. In the meantime, small systems such as Eagle are more concerned with upgrading
their plants in preparation for future services such as digital and Internet, and for
potential partners.

"There are some good local telephone companies that
want to expand their businesses into our area," Shorman said. "But if we want a
partner, we must have a quality system in place."

Small cable operators' dilemma of whether to form strategic
partnerships; to launch Internet, high-speed-data or other new services; or to sell out is
a serious one. Add to the mix the time and cost of preparing for any of those scenarios,
and alliances become even more attractive.

"It's not easy to clean a small plant to sell, because
there are few buyers," said Bruce Leichtman, senior analyst for The Yankee Group, a
Boston-based multimedia-research and consulting firm.

"Smaller operators should look into partnerships,
because their plants can't [upgrade to new services] as they are," he added.."
But timing is everything. Is now the time for alliances and new services? And maybe
they're not a high-speed-service provider. With low PC penetration in rural areas, it may
be better for them to just improve video services."

At the end of the day, however, most small operators agreed
that the decision to bring in a partner must be based on sound business principles, and
this means exploring for a compatible partner with similar goals.

Concluded Petersen: "There's not a small operator in
the country that isn't watching deals like AT&T's, so we can't be afraid of each
other. We've got to cut through that. Once you can trust each other and have a good track
record, there is lots of upside potential to partners."

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