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Cable Independents: Rough Ride for the Little Guys

Feb 28, 2005  •  Post A Comment

Ben Hooks readily admits that as a small-market cable operator, he has been experiencing some pain in recent months.

Mr. Hooks, president of Buford Media, a Tyler, Texas-based operator that owns 69 small-market cable systems under the Allegiance Communications banner, is staying competitive against satellite operators by rebuilding several analog systems into digital two-way networks offering advanced services such as high-speed data and video-on-demand.

“I have 1,400 miles of upgrade to deliver, and I’m struggling,” said Mr. Hooks, who has a number of antiquated 35-channel systems that are getting beaten up by satellite services that tout robust program options at discount prices.

Still, he’s pressing on with his upgrades, expensive though they may be. “Once you get the broadband network, it stabilizes the business,” he said. “The future is really bright, but the pain is getting up to speed.”

Welcome to the world of the small-market cable operator. Mr. Hooks is one of hundreds of such operators spending big bucks to retain customers and offer the kinds of high-margin advanced services promoted by the big boys-Comcast, Time Warner Cable and Cox Communications, to name a few.

In many ways these operators have no choice: With satellite providers DirecTV Group and EchoStar Communications growing at a healthy clip and the Regional Bell Operating Cos. poised to offer video service by the end of this year, cable operators large and small are being forced to offer services that go well beyond video to attract new customers and keep the ones they have.

Those operators who choose to sit on their hands do so at their own peril, industry players warn.

“We are at a crossroads,” said Matthew Polka, president of the American Cable Association, a Pittsburgh-based group that lobbies Washington on behalf of small-market cable operators. “It’s a question of are we prepared to upgrade our systems so that we can compete effectively?

“Those systems that have made that decision are in a position to be able to slug it out in the marketplace. [The others] have serious choices to make about whether it’s appropriate to find a buyer willing to [upgrade and compete] or ultimately cease the business,” he said.

Or as Patrick Knorr, general manager of Sunflower Broadband, which provides cable service in and around Lawrence, Kan., put it, “If you are not deploying advanced services, the clock is ticking down.”

Industry players said small cable operators can do an adequate job of beating back satellite if they have an advanced two-way network. The cost of equipment and labor have come down enough that even a system with just 800 subscribers can swing it.

“These guys can be very competitive,” said Michael Pandzik, CEO of the National Cable Television Cooperative, which buys equipment and programming for small cable operators. “These guys are not selling out, because they don’t want to sell out. They’re hanging in there, rebuilding systems and bringing them along.”

The United States has about 1,300 cable operators, with all but the top seven multiple system operators generally doing business in small towns or rural communities. Many are family-owned businesses, while others were created after large MSOs sold off systems that were considered noncore, couldn’t be clustered easily or were too inefficient to bother upgrading.

Bill Bresnan, CEO of Bresnan Communications, which owns several systems in Colorado, Montana, Utah and Wyoming, said anyone running a cable system in smaller markets usually follows a distinct business model.

“With smaller systems, you’re a lot more hands-on. You’re in the field, and you have [many fewer] layers of management between the top and the system level,” he said. “What happens is you get very involved in the community. We get ourselves embedded and interwoven into the communities, and that serves us well.”

But even with strong community ties, smaller operators can’t afford to slouch on services. Luckily for them, the cost of upgrading continues to decline, especially now that larger MSOs have completed their upgrades, creating a glut of idle technicians. Equipment prices are falling too.

Smaller operators are beginning to take advantage of the favorable economics. According to a survey conducted jointly by the ACA and industry newsletter Independent Cable News, 86 percent of cable systems with more than 2,000 subscribers were providing cable modem service, while 63 percent of systems with between 1,000 and 2,000 subscribers were offering the service. Fifty percent of systems with fewer than 1,000 subscribers offered the high-speed Internet service.

Digital television showed similar figures, with service available to 100 percent of respondents with 10,000 or more subscribers, 75 percent of systems with between 3,000 and 10,000 subscribers, and 40 percent of the systems whose subscribers number fewer than 1,000.

The NCTC helps smaller operators by striking master agreements with content providers and allowing the operators to purchase programming at wholesale prices.

Many smaller operators also are finding it cheaper to supply digital programming, thanks to Headend in the Sky, a satellite-based service. Deployed in as little as eight weeks, HITS helps these operators avoid the high costs and long lead times required to rebuild cable plants with digital headends. This month, HITS plans to introduce a service that will enable cable operators to offer video-on-demand.

“A fully digital headend used to cost half a million dollars, but HITS headends are costing $70,000 and are going down,” the NCTC’s Mr. Pandzik said. “It provides methods for smaller systems to head into the digital age.”