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Winning The Battle
And The War: What Does It Take? Bundling. Convergence. Private Broadband. Call it what you would like. Just be sure you begin calling it "necessary", because it is. Cries from the Multi Dwelling Unit (MDU) industry are being made loud and clear, but few private operators are listening and acting. MDUs are saying that the long term survival for the private cable operator depending on the MDU market as its bread and butter must evolve with not only the new technologies but also the demands of today's new apartment resident. The line is drawn in the sand. It is critical for private cable operators to become the new breed of private broadband service providers if they wish to assure the success of a long term, viable business plan. The battle is long and the challenges are many, but victory can be achieved as a few private operators are already proving. Know Thy Enemy Well By now you have read enough articles discussing subjects such as Internet super highways, massive bandwidth and download speeds of 50-100 times greater than a standard modem. You have also most likely had your fill of new terms, definitions and deployment strategy stories for broadband services. Yet somehow, you are no further down the road with understanding options or implementing a strategy for offering high speed Internet service now, than you were a year ago. For a few operators, becoming a provider of high speed Internet access and other Internet related services are already critical weapons in their arsenal of competitive services. However, many operators still doubt the need for such services. For those who doubt, they need only look to the status of today's private cable operators who are not providing such services, as well as the mounting competition from franchise cable operators, incumbent Local Exchange Carriers (LECs - the local Bell companies), Competitive Local Exchange Carriers (CLECs), local Internet Service Providers (ISPs) and the new generation of wireless service providers. Finding the winner is not a difficult task. The Battlefield Step back in time and recall playing the once popular game Battleship© before GameBoy© changed the world forever. The key to Battleship is strategically launching an attack on your opponent, while at the same time keeping a poker face as your ships are getting hit. The objective is to sink your opponent’s battleship but with his positions shielded from view. Unfortunately, private cable’s business strategies, marketing approach and operations are no longer shielded from their opponents view. Recent bankruptcies by OpTel, SkyView and CablePlus, in addition to the dissolution of ICS and ResNet, the selling of Mid-Atlantic's assets to Comcast, all followed by Global Interactive's placing most of its assets up for sale to local franchise providers, as well as the industry's latest black eye, Brix Communcations' searching for a buyer after being on the market less than a year, have afforded franchise cable the opportunity to see what private cable may be made of. It has made all competitors to private cable much less concerned about their competitive impact. More importantly however, it has created a very weary and cautious market with MDU owners. Attack In the face of private cable's recent and public failures, the MDU industry is besieged with powerful marketing campaigns and aggressive sales strategies from local franchise cable, telephone and ISP companies. These companies are seeking exclusive service or marketing agreements for all broadband services; voice, video and high speed Internet access. And while their own performance has been less than acceptable in the past, many have improved service greatly, while at the same time upgrading their systems. Of course, these upgrades are much slower than projected, leaving franchise systems lacking in their delivery of digital video, voice and high speed Internet services. These facts, coupled with today's average private operator's failure to offer Internet services have greatly impacted the private industry's MDU market share. The portfolios of both large and small MDU real estate companies have continually reduced the percentage of their properties being served by private cable. Increasingly, they have sought contracts with incumbent franchise cable operators. But this trend is on the horizon of reversing and there is light at the end of the tunnel, for those who are willing to finish the journey to the end. Counterattack A market reality is that the competition to private broadband from local cable and telephone companies continues to evolve rapidly and aggressively. However, the Bell companies have failed to do much more than strike deals with DirecTV, which is not a well-accepted product in the MDU marketplace. In some cases, companies like BellSouth are delivering video using wireless technologies. However, these are in very isolated instances. As for the franchise cable operators, the upgrading of their systems for the provision of digital video and high speed Internet access is moving at a snails pace, nationwide. While their press releases convince analysts and investors they are on the cutting edge, the truth is they are not near an edge at all, and will not be for quite some time. Their failure to meet obligations for upgrading services has left many MDU owners seeking alternatives once again, despite some of the more recent failures in private cable. The impetus for this trend is that MDU owners are also under a mounting level of pressure. For the past five years and still today, records have been set and broken with new construction for MDU properties. Concurrently, the market is seeing its greatest level of investment in upgrading aging properties. The foundation for record levels of new construction and the upgrading of existing properties rests in the diverse and growing demographic of renters. And now that most have clubhouses, swimming pools, tennis courts and exercise facilities, there is little left to make a property stand out. Enter bundled broadband services; digital video and high speed Internet access. Enter, opportunity for the new private broadband operator. Forward March At no time has the market demand for private broadband services been greater. At no time has a more substantial menu of technology options and strategic alliances been available to the private operator than today. For digital video, there is finally an alternative to EchoStar and DirecTV. For high speed Internet, the field is wide open to strategic alliances with equipment manufacturers and service providers as well as web site designers and content providers. WSNet has recently launched a long awaited solution to providers who are not able to maintain a viable business model using DirecTV or EchoStar. In concert with this, several equipment manufacturers have made substantial progress in the research, development and manufacturing of more cost effective equipment for a digital headend. As such, the cost of installing a digital headend is much less, placing operators in a more aggressive position to take advantage of using capital for adding to and improving their current menu of services. However, other than digital video, one such improvement must be to add high speed Internet access. Understanding The Mission Putting all debates about what is the best way to connect to the Internet aside ("the Net"), it is important to understand what the Net has become. While it is still largely comprised of several million web sites doing little more than simply sitting stagnant, waiting to be looked at or read, these are not the parts of the Net fueling demand for broadband, faster access as well as the capacity to download more "stuff". True broadband web sites are revolutionizing everything from software, computer design, networks and connections. Broadband web sites are crashing down the mountain like a landslide toward the franchise cable providers and local telephone companies. Because if they miss a step, and they are missing many, in the race for providing access to this aspect of the Net, local ISPs, CLECs and private broadband operators will steal the show. And in many cases, they already are. Since nothing can replace hands on experience, take a trip on the Net and visit sites like musicsite.com, listen.com, mp3.com and of course, the most raging and controversial MPS download site on the Net, napster.com. Get a first hand look at what is really putting momentum in the Net and demand for both speed and bandwidth. Download a single soundtrack file. Unless you have a high speed, broadband connection this task will take a frustrating eternity to accomplish. Worse yet, visit sites like movieweb.com and planetclick.com and try downloading a movie. These are the reasons why an increasing number of consumers are seeking high speed Internet access. For the first time in Internet history, there is a search term that is ranked higher than the top 10 terms. Since the inception of search engines, the top 10 search words have been "sex" or subjects related to sex. The most frequently searched word today is "MP3". MP3 has redefined the use of the Internet. It has forced regulators to rethink how the Net is regulated, courts to study how to make new laws and manufacturers to invent new consumer music devices. In short, MP3 is the format used to digitally compress music into a file that can be tossed around on the Net and downloaded. The downloads go to computer hard drives, onto CDs and into handheld listening devices. The amount of visits to the literally millions of web sites available for downloading digital music files from virtually every recording ever made can not be measured. From the federal government to high priced research firms, no one is capable of doing more than guessing. But one thing is understood. The downloading of music from the Internet is so pervasive that it is slowing connection times on even the fastest university campus connections to a crawl. And the downloading of complete movie files results in an even greater congestion of high speed networks. Understanding the nuances of Net crazes like MP3 or movie and interactive games is not important. However, it is critically important to understand that all ages and all income levels are tapping into the Net for accessing these and many other things at a historical pace. As such, MDU owners are forced to identify service providers who severely needed solutions for bringing high speed Internet access, broadband access to their residents. Charge! Until recently, the battle for the MDU market share between incumbent franchise and private cable operators is like watching a movie with scenes combined from Gladiator and Top Gun. The Gladiator is tossed into the ring with nothing but a sword, shield and his strength. He charges toward his opponent. He positions in a battle stance and prepares to strike what he believes to be a horse drawn chariot. He miscalculates his enemy (by a few centuries) only to see that it is an F-14 fighter jet greeting him with a Tomahawk missile. Private operators have been fighting incumbent operators with lesser channel lineups, worse service and no hope or intention of offering broadband services such as digital video and high speed Internet. In addition, the challenges to overcome regulatory strongholds such as mandatory access, inside wiring and perpetual contracts are no less than daunting. When placed in concert with poorly designed business models and limited funding, these circumstances have laid many private operators to rest. But finally, the reinforcements have arrived. For the traditional private cable operator who is willing and prepared to become this new breed of market warrior, a private broadband operator, the options for strategic alliances and support are substantial. But it is important to realize that entering into a partnership with a local ISP offering simple 56K (or worse yet, 28K) dialup service is no longer an adequate solution. It is important to continue reviewing how MDU residents in specific market areas are being aggressively pursued with large ad campaigns from the incumbent cable and phone operators. They are bombarded with television commercials, radio spots, newspaper ads, mail campaigns and billboards. A private operator’s marketing budget will never permit this level of presence. However, unlike the incumbent providers who are only as capable of approaching a market like an aircraft carrier trying to turn around in a lake, the private operator makes his strategic approach to a very specific market niche, with a very specific product. And while the incumbents are lagging severely in the upgrading of their systems for deploying digital video and high speed Internet, the private operator now has the resources to facilitate these services, almost overnight. The highly publicized system upgrades by incumbent cable and phone companies for digital video, cable modem and DSL (Digital Subscriber Line) services are misleading, and often prevent private operators from entering certain markets. To learn that AT&T is currently upgrading Dallas and Seattle, or MediaOne is upgrading Atlanta or Boston represents very little. In each of these cities, large sections have been on the schedule to be upgraded for literally years. In many cases, several sections of these cities are still not upgraded. Even more favorably, even if a given section of a city has been upgraded, MDU properties are often times passed, as the owner refused to sign a long term agreement until he is afforded more time to review the situation. These are opportunities for private broadband operators to acquire new contracts. Other valuable markets often not upgraded, are suburbs and new communities.
Defining Strategy The Yankee Group is often quoted as reporting there are over 20 million MDUs in the United States, and that only 5% of these receive communications services from broadband providers. However, 20 million MDUs in existence should not be the determining factor inspiring a new business plan. This number represents all buildings with five or more units. Only 50% of these have 50 or more units. Of the remaining number, there are several categories which are important to understand; inner city public housing, tax credit properties, senior assisted living facilities, college dormitories and the standard garden style MDU classifications of A, B, and C grade properties. Understand your company’s reality zone. Many private operators have over estimated a particular market, under budgeted for marketing, over extended to serving too large of a service area, not provided enough technical or customer service training, or under estimated the impact of competition. Learn about mandatory access and read the inside wire ruling in great detail, particularly sections 39-43 (visit www.multihousing.com). Most importantly, begin researching and thoroughly understanding the options for broadband technology platforms and strategic alliance options. Sword & Shield Protecting the company and its primary asset, the service and easement contract, is becoming more difficult for private operators. With each passing failure of private cable operators and DBS system operators, MDU owners are insisting on more stringent contract language. As the dense fog blanketing the MDU industries understanding of different technologies, services and service providers begins to lift, it becomes more difficult for a property owner to enter into a contract with a private cable operator. The risk vs. reward is often times weighing heavily on the side of risk, particularly when the incumbent franchise provider is offering digital video and high speed Internet service, now or in the future. The risk is for the past record of private cable and DirecTV system operators on MDU properties. However, because incumbent providers have been saying "in the future" far too long, MDU owners have become skeptical of their ability to deliver. As such, with unprecedented numbers, owners are entering into contracts with private broadband operators capable of delivering both video and high speed Internet service. But an ounce of prevention is a pound of cure, for both the operator and the owner. Prior to entering into strategic alliances with high speed Internet service providers specializing in the MDU market (see Table), it is important to understand a number of issues as ultimately, your contract with the owner binds your company to the failure of the Internet provider. A few of these are the company’s current MDU market presence, customer service response capabilities, customer billing practices, capacity of Internet connection to handle heavy broadband traffic, web site and content design capabilities, technical service requirement of their system, the equipment used and training offered to both your staff and the property management team. And of course, complete due diligence on several MDU specific references (always asking for at least one reference where they have been terminated). Be certain that the company with whom you align is capable of rapidly responding to your customers. Even though it is possible for a customer to switch Internet providers with ease, this fact does not intervene for an owner confronted with an angry resident. Several studies have shown that Americans have a lower tolerance for Internet service related problems than for any service other than electricity. Half The Battle Penetrating a large share of the MDU market as a private broadband operator clearly rests in the ability to offer both digital video and high speed Internet access. And while the actual penetration of the Internet access is low for both private and franchise operators, it is a piece of the puzzle to acquiring the contract and long term future revenue. Once the high speed service is established, the path has been laid for not only providing access to the Net in general, but also to corporate offices for apartment residents telecommuting, home office operations, Internet Protocol (IP) telephony, web site marketing and video conferencing (see Private & Wireless Broadband, March 2000, Pg. 20). Providing high speed Internet access is first about acquiring the long term service contract and second, it is about establishing the connection to long term quality revenue. "If you are
not living on the edge, you are taking up too much room." The commitment to becoming a private broadband operator is defining a company’s ability to succeed for the long term. But the truth is, some private operators will never commit the resources required to become a broadband service provider, either by directly providing the services in-house or doing so through strategic alliances. These operators will not succeed in the MDU marketplace. But for those who have begun changing directions or will soon, their commitments insure their ability to stay in the battle and achieve many victories. About the Author Larry Kessler is President of InteliCable. He may be reached for questions or comments via email at lkessler@intelicable.com
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