Following-up on a subject that has arisen in these articles more than once during the past year, Petaluma, CA-based Castle Cable has presented itself repeatedly as a good part of the answer to the age old question, How Do We Get DBS and MDU Together To Produce Profits? (See, e.g., Private & Wireless Broadband, August/September 2001, vol. 20, No. 6, pages 28-30).

Sporting key financial data that would impress even the most pessimistic of today's venture capitalists, the 35-employee northern California start-up appears to be finally getting property owners and managers to take a second look. On its Website, Castle Cable describes itself as, "…a leading provider of digital satellite entertainment TV systems for mutifamily communities." Castle Cable claims over 12,000 subscribers today who call EchoStar their multichannel video provider via connections that are engineered, built and installed by Castle Cable.

For example, in high-end multiple dwelling unit (MDU) properties like San Francisco, CA's Avalon Towers, owned by Avalon Bay Communities (which is 35 miles south of Castle Cable's headquarters and right off the SF-Oakland Bay Bridge), penetration of the Castle Cable/DISH Network service registers above 90%. In thousands of other units centered in the San Jose, CA area, the average penetration rate (i.e., the number of subscribers vs. the total multichannel video passings in a given building) measures above 75%. The rest of the Castle Cable system boasts MDU buildings served in Seattle, WA, Portland, OR, San Diego, CA, Phoenix, AZ, Salt Lake City, UT, and a soon-to be established center in Denver, CO.

Eighty percent of the Castle Cable units are located in the San Francisco Bay Area. Four of its MDUs are in the Seattle, WA region, and Castle believes it is the second largest provider of its type in the Los Angeles basin. Like Dallas, TX, Denver is proving to be a positive new expansion choice for companies like Castle, because of 1) favorable demographics (i.e., age, income and a preference toward MDU living opportunities), and 2) the manner in which developments are built in the city. Moreover, Denver is thought to have less competition for a company like Castle, and it is a few miles away from Castle Cable partner EchoStar's base of operations, the south Denver suburb of Littleton, CO.

Estimates by The Carmel Group of the typical MDU revenue split in a Castle Cable-controlled MDU include 20% for the building owner, 40% for Castle Cable, and 40% for the DISH Network. Typical average revenue per unit (ARPU) per month comes to $53 in Castle Cable's all-digital systems, and $42 in the handful of remaining analog systems. To enter into any MDU complex, Castle Cable and EchoStar insist that their service is the only multichannel video service provider available to tenants in that MDU. This exclusivity is deemed necessary in order to ensure the success of the EchoStar-Castle Cable business model, and in order to be able to properly serve the unique needs of multiunit properties. Castle Cable claims it is presently running at "breakeven," plowing all additional revenues back into R & D. This method of perfecting the business model is also part of the reason Castle Cable has deployed relatively slowly thus far.

Subscriber acquisition costs (SAC), unlike the multichannel service industry, are usually not measured by Castle Cable. Rather, the real measurement for this sector is the return on equity (ROE), which is a basic $500/unit measurement. Relying on EchoStar's Quadrature Amplitude Modulation (QAM) infrastructure, Castle Cable states it can build an underground distribution unit and what's required for the in-unit head-end for a sum that is "around the $500" figure. In addition, the real costs of time and effort by Castle Cable are in getting a deal with the property owner or manager. After that, the hook-up to the customer requires much less marketing effort, because MDU penetration rates tend to be so high.

Churn for Castle Cable (and for the entire MDU industry) typically comes in at almost 36% annually (which is almost double the 1.5%/month average single-family churn for the U. S. DBS industry). As is the case with the core of the EchoStar subscriber base, Castle Cable's customer service representatives tend to be very aggressive, typically contacting subscribers after they disconnect, in order to ensure they stay with DISH Network through their move.

Competitively, local cable multiple system operators (MSOs) are Castle Cable's primary rivals. In many of its markets, this MSO is AT&T. Surprisingly, not many overbuilders, such as RCN, have been particularly competitive in the space. Also, compared to older, more established models in the Satellite Master Antenna TV (SMATV) realm, Castle Cable believes its DBS model bests SMATV because 1) a big dish installation is not necessary, 2) the smaller dish is easier to maintain and less cumbersome, 3) it is less expensive to add an additional channel, and 4) the DBS service delivers a much more competitive product.

For the future, Castle Cable will be using its 860-Megahertz coaxial distribution networks system in the interactive TV space, as well, once some solid iTV business begins materializing. Most observers believe that in order to be competitive not too far in the future, just about every multichannel service will have to carry robust data-type services. In this vein, Castle remains confident that the Internet Protocol (IP) business model can work in any building greater than 300 units, if penetration meets or exceeds 20%. Additionally, Castle is confident that it can continue to add any and all additional channels that make their way into the DISH Network system. Personal video recorders, such as those produced in EchoStar's 501 and forthcoming 721 set-top box models, are expected to also play a significant part in the Castle Cable-EchoStar plans for America's 25 mil.-30 mil. inhabitants of America's MDU communities.

Key personnel at the Castle Cable today include its president, Robert Speicher; and three vice presidents, Michael Manfredi, Anne Walker and Robert Grosz. All three VPs and Speicher have a combination of real estate, finance and telecommunications industry experience. For contact, address Anne Walker, VP, Business Affairs, tel: (707) 769 6000, Website: www.castlecable.com

About the Author

Jimmy Schaeffler researches, analyzes and writes this regular report for Private & Wireless Broadband magazine. He is a subscription TV, broadband, and consumer electronics analyst at The Carmel Group (www.carmelgroup.com), a consultancy based in Carmel-by-the-Sea, CA that also publishes a monthly industry newsletter and analysis, titled DBS Investor. The company specializes in telecommunications, computers and the media. He can be reached at (831) 643 2222.