Small Cable Operators Take On DBS

By Jimmy Schaeffler

The competitive landscape between satellite and cable operators brings to mind the old adage, “Know your friends well, your enemies better.”

If the U.S. satellite TV providers consider cable operators as their competitive enemy, then this adage is apropos. However, as tough as it is to be one of the two U.S. direct broadcast satellite (DBS) operators in today’s fiercely competitive environment, the challenge is even greater for cable operators. Those with the roughest road are small-to- medium-sized cable system operators. They have concerns with piracy, costs, financing, program access and enhanced competition.

The Carmel Group recently addressed these issues in a study entitled “The Telecom Future of Independent Cable.” More than 1,000 small- and medium-sized cable members of the American Cable Association (ACA) shared their opinions about opportunities, risks and the future of their businesses.

ACA’s Feisty Members

The study, commissioned by the ACA, showed that the association’s average member-company had approximately 8,000 subscribers. For the cable industry, a subscriber consists of a home served, while a potential subscriber who may or may not take the service represents a home passed. Roughly, 51 percent of ACA members pass between 1-2,499 homes per system; about 33 percent pass 2,500-9,999 homes; 64 percent serve 2,500-9,999 subscribers; and 93 percent operate 1-9 head-ends.

The study also found that program access issues pervade the industry. ACA members are most concerned with access to: 1) programming, 2) advanced services, 3) new revenue sources, and 4) funding. ACA members equate success on each of these fronts to success in their businesses.

Far and away the greatest concern of ACA members is access to programming. The clout of programmers cannot be overstated. Certain programmers have become aggressive in insisting that cable operators carry content in package deals to ensure their channels are widely distributed. At the same time, cable operators face increasing programming costs, as well as issues involving retransmission consent of local channels that are often owned or controlled by the same programmer, e.g., ABC, CBS, NBC or Fox. Often, confidential programming agreements make the cable operators pay for and offer additional programming that is not popular with viewers. The viewers, in turn, often object to these forced programs, blaming the cable operator, when, in fact, the operator is simply the “middle man” between the programmer and the viewer.

Advanced Services

Access to advanced services is another challenge confronting ACA’s members nationwide. Digital cable, high-speed Internet, high-definition TV (HDTV), video-on-demand (VOD), and subscription VOD (SVOD) are important innovations for cable operators to be competitive with other service providers and to retain customers. The challenge for small cable operators is not to let their rural subscribers suffer from the consequences of the “digital divide” – the unavailability of advanced services offered in urban areas. Increasing operating costs – a large percentage of which emanate from the demands of programmers – and decreasing profit margins make it hard to deploy such advanced services.

Another challenge for ACA members involves generating revenues from the deployment of new advanced services. Those services could reduce churn and increase the all-important average revenue per unit (ARPU). The inability to rollout these new advanced services could mean small-to-medium-sized cable operators would not have access to badly needed revenues. The fallout would be that a significant percentage of them would go under or be sold to another provider.

Smaller cable operators encounter more difficulties than larger cable TV operators do in accessing capital. Thus, system upgrades and deployment of new services are often stalled.

The Carmel Group-ACA study also revealed that 36 percent of the respondents had not invested any money to upgrade systems to digital; 35 percent had spent up to $250,000; 10 percent had spent from $250,000-$750,000; and 10 percent had spent more than $1 million.

Competitive Disadvantages

If smaller cable operators cannot compete with the prices and services of other multichannel video service providers, they will lose existing subscribers and miss out on a chance to entice new ones. That view was expressed by the ACA members, who said their ability to compete was hampered by 1) skyrocketing programming costs, 2) rising operating costs, and 3) a lack of capital to launch the new services.

ACA members were asked to suggest solutions to these challenges. They responded: 1) decrease the monopolistic power of the “programming cartels,” 2) allow programs to be purchased a la carte or on specialized tiers and 3) provide easier access to funding, e.g., through the use of trade association combinations and their inherent bargaining power. Ultimately, ACA members aspire to provide the best content, advanced services, customer service, marketing and distribution, technology, pricing and management. In that way, the small- and medium-sized cable operators are no different than their larger cable brethren and their satellite TV counterparts.

Jimmy Schaeffler is a subscription TV analyst at The Carmel Group, a publisher of industry databooks and monthly newsletters and a consultancy based in Carmel-by-the-Sea, Calif. (http://www.carmelgroup.com). The company specializes in telecommunications, computers and the media. He can be reached by e-mail at [email protected] or by phone at 831/643-2222.