Cable-TV networks ready to expand
During the next decade, cable-TV`s hybrid fiber/coaxial-cable networks are expected to expand from one-way broadcast to two-way interactive systems
LARRY J. YOKELL
CONVERGENCE INDUSTRY ASSOCIATES
The cable-TV industry is working fast and furiously to transform itself into the nation`s premier full-service network provider of interactive video, voice and data services. To this end, cable operators have been cutting deals with long-distance carriers, regional Bell operating companies, computer hardware and software companies, telephone companies and cable equipment providers, consumer electronics vendors, electric utilities, movie studios, Internet providers, and numerous other players rushing to converge on the information superhighway.
Like moths attracted to a bright light, strategic partners are excited by cable`s broadband distribution networks that will eventually be capable of delivering multi-gigabits of information, access to a vast customer base, high gross margins (typically greater than 40%) in the existing video entertainment business, and opportunities to profit on the industry`s enormous growth potential, nationally and internationally.
According to Carmel, CA-based Paul Kagan Associates Inc., the domestic cable industry could grow from today`s $23 billion to $63 billion within a decade. Kagan projects that this growth will come from traditional cable services as well as new services, such as telephony and video-on-demand.
The cable business in 1995
There are more than 11,000 cable headends and associated cable systems throughout the United States. The cable industry has installed more than 1 million network miles, including more than 41,000 miles of amplitude-modulation, fiber-optic cable. There are more than 7,000 systems serving 3,500 or less subscribers, approximately 2,000 systems serving between 4,000 and 50,000 subscribers, and more than 200 systems serving 50,000 or more subscribers.
While many of these systems are independently owned and operated, the majority of the subscriber base is controlled by the top 10 multiple system operators. The two biggest MSOs, Tele-Communications Inc. and Time Warner, serve more than 20 million basic subscribers. Consolidation of the subscriber base into fewer, but bigger operations is occurring at a dizzying pace.
Other factors driving the cable-TV industry include regulation, competition, near video-on-demand and cable telephony.
In 1992, Congress re-regulated the cable-TV industry through the Cable Television Consumer Protection and Competition Act. First and foremost among its numerous impacts, this law has triggered two rounds of Federal Communications Commission-mandated rate cuts--totaling 17%--for regulated items (including basic and expanded basic services, set-top boxes, remote controls and additional outlets). One Wall Street analyst claims these cuts decreased the average monthly customer cable-TV bill (including regulated items and unregulated premium services), from approximately $34 to $32. This translates into an annual industrywide revenue loss of $1.44 billion.
The 1992 Cable Act also forced cable-TV operators to make their programming networks (e.g., CNN, The Learning Channel and MTV) available to competitors; touched off a conflict between the cable-TV industry and broadcasters over "must carry/retransmission consent" provisions; swamped MSOs and municipal franchising authorities with vast quantities of new paperwork; and has led to continued wrangling between operators and the FCC over so-called "going forward" and "a la carte" rules that dictate program tier structuring and cost recovery.
With the demise of Senate Bill 1822 (S.1822) last September, cable-TV`s plans to enter the local telephony business on a nationally regulated basis rather than state-by-state were dashed. Therefore, the industry is now lobbying public utility commissions of the approximately 40 states that do not currently allow local loop competition, and pinning its hopes for Cable Act regulatory relief and national entry into local telephony on several new Republican-sponsored bills making their way through Congress.
Concerning competition, cable-TV operators face a variety of rivals, including direct broadcast satellite providers such as DirecTV, United States Satellite Broadcasting, PrimeStar (which itself is owned by a consortium of cable-TV operators) and several others; approximately 35 proposed telephone company video dial tone networks; two flavors of wireless cable-TV operators, including multi-channel multipoint distribution services and local multipoint distribution services; and existing cable-TV operators` plans to "overbuild" one another.
Since their launching last spring, DirecTV and USSB have captured more than 500,000 subscribers; they expect to reach 1 million subscribers by mid-1995. DirecTV offers between 40 and 50 channels of near video-on-demand movies, 20 to 40 live sports/major-attraction channels, and more than 20 cable-TV channels.
Another driver is near video-on-demand. In an attempt to protect their core businesses and counter-punch against DBS, telephone company, and wireless cable-TV competitors, cable-TV operators are moving aggressively to add NVOD to their systems.
On the NVOD front, TCI has recently spent more than $75 million to create its suburban Denver-based National Digital Television Center, a state-of-the-art facility that is capable of digitizing, compressing, authorizing, and distributing movies and other programming via satellite to TCI and other MSO-owned systems throughout the country.
Meanwhile, many MSOs have issued purchase orders for millions of next-generation digital set-top boxes that will decrypt and convert the digital NVOD data streams into analog signals transmitted to customers` television sets. Cable-TV had hoped to deploy digital set-top boxes in major quantities by year-end 1994. However, various technical and pricing issues may delay this deployment until late 1995 or mid-1996. (Reportedly, manufacturers are having difficulty producing the set tops to meet cable-TV`s $300 per unit requirement. The current price for a basic digital set top is more like $800 or more per unit, while prices for more powerful models start at $2,000 and go up.)
The final driver is cable telephony. The cable TV industry is uniquely positioned to capture some of the $25 billion in access charges the interexchange carriers pay to the local exchange carriers each year. By upgrading to two-way transmission and new switching equipment, and by providing lower-cost access and service than the LECs, the cable-TV industry estimates it could eventually siphon off at least $5 billion of the LECs` existing revenues.
A recent Arthur D. Little survey projects that cable TV could take away 16% of the telephone companies` customers--even if there were no price break, and 25% if the cable-TV companies` prices were lower than the telephone companies` by 10% to 20%. In their most optimistic projections, cable-TV operators speculate that within five to seven years, their telephony service could achieve a 30% penetration rate of basic cable-TV subscribers. However, this is not a one-way street. The survey also gave the telephone companies encouraging news: If telephone companies offered cable-TV services, they could get 27% of cable-TV`s subscribers at the same price and 45% if they offered discounts of 10% to 20%.
During the last three years, the quadruple whammy of re-regulation, competition, cable-TV system acquisitions, and the necessity of either upgrading or rebuilding cable-TV systems to carry new services has cut in to cable-TV`s profit margins, depressed stock values, and required an already debt-ridden industry to seek additional sources of capital.
While cable-TV systems have recently sold at prices averaging $2,160 and as high as $2,900 per subscriber, the industry`s current median net market capitalization (the total value of outstanding common and preferred stock, plus total indebtedness, less the estimated value of all non-cable-TV assets, all divided by the number of basic subscribers) has recently been estimated to be approximately $1,625 per subscriber. Meanwhile, the maximum that banks have been willing to lend cable-TV operators for ongoing operations in recent years has been in the range of 5.5 to 6 times cash flow, which amounts to $1,000 to $1,100 per subscriber.
While many MSOs are already fully leveraged at six times cash flow, total cash requirements for planned system rebuilds for NVOD and telephony could amount to $2,000 or more per subscriber. Therefore, cable-TV operators are employing a number of creative tactics to meet their needs for cash, including working with banks to restructure and extend their existing debts; raising additional capital in the public and private markets; and obtaining cash from strategic partners outside the industry. In an intriguing attempt to pump up stock values, TCI has recently announced that the company will partition into four new business units--domestic cable-TV/telephony, international, programming and technology. Each will have its own separate class of "tracking stock."
Network evolution issues
The evolution of one-way, analog cable-TV systems to two-way, digital full-service networks is far from straightforward and involves a diversity of technical issues. "A major issue is that these full-service networks are going to be complex and the equipment is going to require an operational support system that is as good or better than those currently deployed by the telcos," according to Ron Cotten, chief executive officer at Engineering Technologies Group, an Englewood, CO, company that specializes in cable-TV system design and construction.
"The skill levels of the people running these networks is going to have to be dramatically improved," says Cotten. "The cable-TV industry has never really embraced training, and this has to change because these full-service networks are going to be even more complex than existing cable-TV systems or the telephone network. When networks get so complex that they`re very expensive and unreliable and you can`t make a business out of them, then you`ve hit a wall."
Other technical issues Cotten identified include:
Increasing the memory, processing capabilities and intelligence built in to digital set-top boxes at a cheaper price. "The VLSI guys are doing a marvelous job, but they`re going to have to keep working on improving integration even more."
Improved software standardization for asynchronous transfer mode switches and file servers. "We`re going to need more compatibility between components that must talk to one another. This isn`t there yet because these technologies are in a pioneering state."
Solving critical network transport issues. "Once you get into full-service networks, the deployment of regional networks and hubs will be important. Some services will require local transport and functionality, while others will require more regional transport. With video-on demand, storage and access to commonly watched shows may be distributed, while the not-so-commonly watched shows will be more centralized."
Providing user-friendly customer access to services. "Is the consumer able or willing to spend a lot of time to get services that are technically difficult to access? To get a lot of people to take these services, which is required to make this [full-service networks] economical, [providers] need to make the services appealing, simple and easy to use."
Ed Callahan, vice president of technology at Antec Corp., a Rolling Meadows, IL, company that specializes in providing broadband network products and systems integration expertise to cable-TV operators and telephone companies, concurs with Cotten on several issues. "Digital set tops with open architectures are very important for interoperability and they need to be cost effectively implemented," he says. "People are going to be hard-pressed to justify set tops [that cost] more than $350 in the next two-year time frame."
He also said a faster and more streamlined standards process is critical for ensuring interoperability. "The cable industry can`t wait four to five years for standards development. If that`s how long it`s going to take, then you`ll see proprietary solutions. Cable TV is a purchase order-driven business. Once the engineers are told to do something, it gets done."
User-friendliness is also a must, according to Callahan. "You can solve all the technical issues, but if the systems are not user-friendly, you can build it, but they [customers] won`t come. Remember, we are selling these systems to people with flashing [numbers] on their VCRs."
Callahan identified a number of other critical technical issues, including:
Deploying fiber deeper into the hybrid fiber/coaxial-cable infrastructure. "Smaller node sizes allow effectively more usable return-path bandwidth for two reasons. A smaller number of drops associated with smaller nodes collectively adds less noise to the system. Also, more bandwidth is available for frequency reuse. The advantage in the forward [downstream] direction is the capability to narrowcast telephony and other services tied to node location."
Addressing system powering issues. "These are more crucial than in the past, especially once telephone and other services are deployed, it`s much more important to have a highly available network."
Providing new network management capabilities that were not needed in the entertainment content delivery business. "Operational support systems and bandwidth management become very critical. [This is] something cable-TV operators really don`t do today. It`s got to become a mindset as we move into these new service opportunities."
Continued testing of digital modulation schemes. "Performance of various methods have to be assessed, both in the HFC environment and the customer premises. Testing on QAM, AM VSB, QPSK and spread spectrum techniques is not definitive yet and further testing is needed. Network architectures of the systems need to be matched with the appropriate modulation schemes to maintain signal quality."
Enhancing network reliability. "We must have highly available networks that are orders of magnitude more reliable than what we have today."
Implementing software protocols that integrate voice, video and data. "We need to look at these as integrated services, not as standalone services, and match the creation and deployment of these protocols appropriately. ATM might be one way to do it."
Building a decoder interface consensus among subscriber equipment providers. "All potential service providers--cable-TV, broadcasters, DBS, VDT and wireless cable-TV--need a full-range of commands from the user remote control to the set-top or set-back box to effectively future proof the user-to-device communications arena. We need to have a rich set of commands that don`t artificially limit these communications."
Implementation time line
Based upon the new services the cable-TV industry wishes to provide and the current state of the technologies that will be required to implement them, there could be an evolution to cable-TV-based full service networks during the next decade. Cable-TV systems already deploy fiber down to neighborhood nodes, and substantial upgrade and rebuild construction has already begun. In addition, many systems are being interconnected with regional hubs and various NVOD/VOD and full-service-network trials are well underway.
By the end of 1996, first-generation digital video compression and associated NVOD services will be rolled out. Asymmetrical upstream interactivity via the cable-TV system or the public switched telephone network for the purpose of making NVOD buys and downloading software or video games will also be available. By 2000, most cable-TV upgrade/rebuild construction should be completed; NVOD could be a maturing business; more symmetrical upstream interactivity capabilities should be in place; and cable-TV-based plain old telephone service, personal communications networks, video telephony and high-speed data services should be a reality.
Ubiquitous full-service networks based upon ATM and Sonet technologies and including true VOD on media servers, HDTV-like services, and sophisticated, but easy to-use, full-motion user navigation should be a reality in 2005. That`s assuming key technology, systems integration, marketing, financial and regulatory issues are ironed out. q
A Typical Cable-TV System
Today`s cable-TV systems "pass by" within a few hundred feet of more than 90 million television-equipped households, nearly 60 million of which subscribe to basic cable-TV service. Thus, cable-TV service penetrates approximately 60% of TV households and passes by 98% of them. One back-of-the-napkin calculation also estimates that cable-TV systems are within economical striking distance of 90% of the suburban business parks.
Most of the currently deployed cable-TV systems are designed to deliver one way (i.gif., "downstream"), analog entertainment video services to the residential market. Typically, these systems are based on classic 450 or 550 megahert¥"tree and branch" hybrid fiber/ coaxial-cable architectures that can support between 62 and 78 channels of analog 6-MH¥National Television Standards Committee video. When existing smaller-capacity 300, 330 and 400 MH¥systems are factored in, approximately 95% of all subscribers have access to between 30 and 54 channels.
From the "headend," which is a facility that houses equipment used to originate, receive and distribute television programming, multiple amplitude modulation fiber trunks are connected to neighborhood fiber nodes. Thirty or more combined channels per fiber may be transmitted. At the fiber node, optical signals are converted to radio frequency, and transmitted to the home via coaxial cable-TV distribution plant and drops.
The distribution plant includes several types of amplifiers (typically spaced every 2,000 feet) and is powered from the commercial power grid. In most systems, the coaxial cable-TV plant "passes by" 2,000 or more homes for every fiber node, with variations dependent upon the home density (usually between 75 and 100 homes passed per mile) and the degree of service penetration. The drops pass RF to the home, but no power. Typically, the home wiring is connected to a locally powered, analog set-top box, which may provide tuning, descrambling and pay -per-view addressability.