Who Should be in the Driver's Seat in Delivering Broadband Services: Business or Technology
By Mor Allon, Ikusi Telecommunications Inc.

Life can seem like choosing between a rock and a hard place for the operator that wants to provide cost-effective broadband services to residential customers. There is an abundance of leading-edge technological solutions that can help the operator deliver broadband services to Multiple Dwelling Unit (MDU) customers. However, operators must make one fundamental decision before selecting technological infrastructures and other equipment. Who will be in the driver's seat in delivering broadband services to end-customers - the business operation itself or the technology that facilitates service delivery?

To profitably deliver broadband services to consumers, operators must:

* Realize that business needs should dictate which technological solutions are used to deliver broadband services. Business should drive technology, not vice versa.
* Be able to reconcile the need to satisfy customers with the requirement for fiscal restraint. The operators must meet customers' demands for broadband and other advanced communications services, but do so with minimal financial investment. Offering broadband services must improve, not compromise, the provider's bottom line.

In this article, we will look at the problems system operators face in cost-effectively delivering broadband services. We will examine more closely the benefits of using an existing infrastructure as the basis from which to offer advanced communications services. It's no secret that capital is tight in today's business environment, especially for the non-franchise system operator. The operator's best option, in order to cost-effectively deploy broadband services, is to utilize an existing technological infrastructure.

First, let's define what is meant here by broadband services. Throughout the industry, definitions of broadband services are as wide and different as the number of people offering definitions. As used here, broadband services include two types of service - broadband video and broadband data. Broadband video refers to an operator's ability to provide a multitude of video services. The operator's typically delivers expanded basic TV service, usually consisting of 30 - 40 channels, and a Direct Broadcast Satellite (DBS) service or digital tier on a cable television system. By broadband data, we refer to the system operator's ability to deliver a high-speed, always-on Internet access that is faster than telephone dial-up service. Future broadband services which consumers are likely to want include video on demand (VOD), remote meter-reading, home security and closed-circuit television (CCTV).

The MDU Market: Fraught with Challenges

In the United States, there are an estimated 20 million MDU residential units. As of a few years ago, this market represented a $20 billion annual revenue opportunity for service providers that could meet both consumers' and MDU property owners' needs, according to a Yankee Group report ("Residential MDUs: A Market Yet to be Tapped"). Only nine percent of U.S. MDUs are passed by broadband services, and five percent presently receive these services, according to the Carmel Group's "2001 U.S. MDU/MTU Study."

The MDU market holds great promise, but it is also fraught with challenges for the operator. Challenges include:

* Competing with franchise cable operators, which are usually better financed, have larger operating and marketing budgets, and possess extensive sales staffs. These larger operators have comprehensive marketing and sales strategies that allow them to consolidate and enhance service offerings by sheer economies of scale.
* Needing to upgrade an out-of-date existing infrastructure in order to maintain the contract to service the MDU property. Typically, both the infrastructure and the services the operator offers to subscribers need to be upgraded. Often, the smaller provider's existing infrastructure was designed to carry only television signals, and only 20-30 channels at that. The typical MDU resident now wants a choice of many more basic and premium video channels as well as high-speed, always-on Internet access.
* Integrating multi-disciplinary technologies over a single platform in order to achieve business goals and deliver broadband services. The operator must learn how to integrate both access and distribution technology, and partner with the right service providers to support these efforts.
* Obtaining financing for these efforts in a capital-constrained market. The system operator must be constantly vigilant regarding the profitability of each service it offers.
* Identifying new properties that the operator could service profitably but which require minimal investment.

On the other hand, the operator has at least four strengths to play to in the MDU marketplace. These assets include:

* Existing Rights of Entry (ROE) to the property.
* The existing technological infrastructure (even if it sorely needs to be updated).
* Established relationships with both tenants and the property owner.
* The ability to react quickly to meet new market demands.

By being smaller and more attentive to each MDU property owner, the operator can develop the right service delivery package to meet each property owner's needs.

Building on What You've Got

When people talk about broadband service delivery platforms, they usually think of fiber-optic systems. The provider that installs a new fiber-based infrastructure capable of delivering broadband video and data services is making a huge capital investment. This kind of infrastructure will certainly be adequate to deliver enhanced services today as well as services of the future. However, the high price tag of this investment is likely to put the operator out of business, or require "deep pockets" to finance a substantially longer ROI (return on investment).

A better option for the operator is to avoid expensive investments when they are not crucial to the longevity of the business. Operators must be creative and innovative in approaching their business in order to survive, and indeed, thrive, in these difficult times.

If a new fiber infrastructure is out of reach financially for many smaller providers today, keep in mind that an existing coax plant is, after all, a broadband pipe. An existing coax plant is suitable for deploying enhanced services today and tomorrow. By utilizing new technologies that capitalize on an existing coax infrastructure, the service provider can reduce the capital requirements needed to transform an existing coax plant into a modern "broadband pipe."

Before choosing a technological platform and upgrading the infrastructure, the operator needs to determine:

* What will be required, in terms of labor and equipment costs, to upgrade the existing system?
* Will the property owner agree to the rebuild or view the rebuild as an inconvenience,
making the system operator more vulnerable to competition?
* Will the system operator make money at this property if the upgrade is undertaken?
* How can the system operator maintain its right of entry agreement long enough to obtain the ROI and also profit from the investment?

To succeed, the operator must capitalize on its business assets, and identify the technology needed to implement that strategy. The provider must analyze its business requirements, make necessary business decisions regarding its service offerings, and then apply technology to implement the business strategy. Business first, technology second, is the key to success.

Coax for Broadband - Really?

If we argue that coaxial cable really is a broadband pipe, we must ask why coax has only been used to deliver 2 GHz of bandwidth over limited distances. Generally, 2 GHz is considered to be the bandwidth needed to provide a full line-up of analog and digital video; a DBS offering such as through DIRECTV(r); and high-speed Internet service using cable modems, all delivered over a single network.

Coax can carry a 2-GHz broadband signal without difficulty. The reason coax is not used today over longer distances is that the technology has not yet become widely available that overcomes the physical attributes of the coax cable, such as attenuation at high frequencies. Coax cable, at 2 GHz, acts like a huge attenuator. To minimize attenuation, high-power, low-noise, and very linear broadband amplifiers are required. New technologies, such as GaAsFET power amplifiers, offer a solution to coax's attenuation problem. These fully broadband coaxial amplifiers, which operate at 54 MHz to 2150 MHz, providing an active return path, high gain and high performance.

By replacing the active and passive elements in an existing coax plant with devices based on new technologies, the operator can upgrade even an out-of-date infrastructure at minimal expense. No expensive trenching is required that can threaten the service provider's ROE or lead the property owner to look at competitive providers.

New broadband amplifiers now on the market enable the operators to consolidate all amplifier needs into one broadband device that offers high gain, low noise and very linear amplification. These amplifiers are suitable for cascading, meaning several amplifiers can be connected in series, one after the other. This cascading feature creates a broadband distribution platform similar to a cable television network, only with 2 GHz or more capacity. The result is a two-way, 2-GHz distribution platform that will provide all anticipated services today as well as unforeseen services of tomorrow.

A Closer Look at Costs

Let's look at the costs involved in upgrading an existing 450-MHz coaxial distribution system in a 150-unit, garden-style MDU property. The provider's goal is to upgrade the coax system so it can support a 30- to 40-channel analog television line-up, DBS service, two-way capacity for high-speed Internet services, and future services such as CCTV, Video on Demand, home security and remote meter-reading.

Assumptions

Basic service penetration:
60%
Premium service penetration of basic subs:
25%
DBS service penetration:
15%
SMATV headend channel line-up:
45

Revenue

Basic service income per month:
$27.00
Premium service income per month:
$10.00
DBS service income per month:
$36.00
IRD rental per month:
$5.00
DIRECTV one-time sales commission per customer:
$100.00

Expenses

Operations per customer per month:
$5.33
Marketing per customer per month:
$1.83
Billing services per customer per month:
$2.00
Prop. owner revenue share from gross revenue:
7%
Basic service programming cost:
30%
Premium service programming cost:
50%
DBS service programming cost:
81%

To provide the capacity needed for analog TV today and for digital terrestrial television service tomorrow, the operator can upgrade the current 450-MHz distribution system to a two-way 860-MHz plant by replacing all active and passive devices.

To enhance the service offering, the system operator must provide tenants with basic 30-channel to 40-channel analog video service and premium digital tier. The premium service either can be QAM signals, generated at the HE, or a DBS QPSK L-Band digital tier offering. The costs of this second option include purchasing and installing a dish on the roof of every building on the property. The 860-MHz plant is not adequate to deliver the L-Band signal. The operator, therefore, must deploy a local-based building basis L-Band (2-GHz) distribution system, using either multiswitching or stacking technology to distribute signals within each building.

MDU owners often regard DBS dishes on each building as an eyesore that detracts from the attractiveness of the property. In addition, putting a DBS dish on each rooftop creates many individual systems at each building, complicating the provider's system management tasks.

Until now, using either option - QAM signals generated at the HE or DBS QPSK L-Band - to add the digital tier has been very expensive. Neither option has been economically viable at small- to medium-sized properties; on larger properties, the provider's ROI was only marginally improved.

While it is profitable for the provider to offer basic analog television service, the returns are much poorer in offering only a DBS digital tier. The margins satellite companies pay providers are very slim, and the cost of installing the necessary infrastructure was too high to provide the system operator with a good return on the investment.

However, when the analog and digital services are coupled together, the provider maximizes both the ROI and profits.

In a garden-style complex, if a dish is added to every roof for the L-Band DBS offering, it is common to assume that the cost per home passed will be around the $50 mark. This arrangement will enable the operator to provide an L-Band digital service together with a 30-40 analog video offering. If the digital tier is delivered with a QAM solution, the provider must invest between $10,000 and $15,000 in headend gear. For a 150-unit complex, this expense translates to approximately $65 per home passed.

The ROI based on this model will be around 15 percent, with the breakeven point after about 41 months and a profit of $42,000 after seven years.

Now consider what happens if the operator deploys the new broadband amplifiers to upgrade the existing coax plant at the same 150-unit MDU property. The cost per home passed is substantially lower, typically less than $35. The financial results improve significantly. The ROI improves dramatically to 21 percent with a shorter breakeven point of 34 months, and a profit of more than $48,000 after seven years.

In addition to improved financial results at the garden-style MDU property, the operator now possesses the technology to tackle what has been an unattainable goal - upgrading loop-through infrastructures at large high-rise MDU properties that the provider currently serves or can attain the ROE from his competition. These high-rise properties were originally wired with loop-through wiring. Existing coax distribution plants have not enabled the operator to cost-effectively wire these properties for both analog and DBS services. This has left such properties particularly vulnerable to competition from franchise cable operators, which can offer the high-rise MDU property owner better service.

However, the development of new broadband amplifiers offers the operator a solution that does not require rewiring of the high-rise MDU property. Because of their cascading capabilities, these amplifiers provide enough power to distribute broadband signals across the long risers in high-rise buildings without rewiring.

The operator now can offer DBS, analog video and high-speed Internet services, cost-effectively, to high-rise MDU properties from an existing coax distribution plant without costly improvements. The operator is suddenly in a much better position to retain contracts to service high-rise MDU properties and to ward off competition from franchise cable operators.

By realizing that an installed coax network can be viewed as a broadband pipe, after all, the smaller system operator can squeeze more revenue from existing systems with a minimal investment and with maximum results. Clearly, the operator's business, not technology itself, should be in the driver's seat in providing broadband solutions to residential customers. With the business in the driver's seat, it is the operator that deploys cost-effective new technologies to upgrade an existing distribution plant that gets to set the course.

About the Author
Mor Allon is general manager of Ikusi Telecommunications Inc., and is responsible for introducing Ikusi's broad range of products to the North American market. Ikusi Telecommunications' parent corporation is IKUSI, a major international telecommunications provider and the largest electronics company in Spain. The author can be reached with questions or comments via email at: allon.m@ikusi.com.