Increase Your Cash Flow by Delivering Digital Service
by Mark Sherman, Executive Vice President for Business Development, WSNet

Success in the private cable industry depends on giving customers what they want: a larger selection of video programming at a competitive price. Now, private cable operators (PCOs) can simultaneously increase their cash flow and satisfy consumer demand by offering digital service. By taking a few simple steps PCOs can make going digital a reality, and in doing so they can for the first time level the competitive playing field with both franchise cable and Digital Broadcast Satellite (DBS) companies because:

* Digital is a service that consumers are demanding and few companies can provide;
* Technologies like Quadrature Amplitude Modulation (QAM) allow PCOs to offer digital service to subscribers in multiple dwelling units (MDUs) cost-effectively;
* Digital service generates a much greater cash flow than analog due to a larger channel offering and additional services like premium multiplexes and pay-per-view (PPV)

Increasing Supply to Meet Demand
Over the past few years, there has been an undeniable shift in cable television away from traditional analog service and toward digital service. The Carmel Group tells us that as they predicted last year, analog-only services will continue to wither. This trend toward digital has been driven in large part by a seemingly insatiable consumer demand for more programming alternatives. DBS, for example, which came on the scene as late as the mid-90's, already tallies more than 15 million subscribers nationwide thanks to the competitiveness of its programming offering versus franchise cable's analog product. Franchise cable, on the other hand, responded aggressively with its deployment of digital cable. Meanwhile, consumers have spoken with their wallets: they value digital service, regardless of the source, because digital service gives them the choice and the quality they want at a price they are willing to pay. Industry analysts predict that more that half of all video subscribers will receive digital by next year. Digital isn't tomorrow's technology. Digital is now.

Digital Service in MDUs
Private cable operators can now create long-term, profitable business relationships by offering digital service. This opportunity is particularly evident in the Multiple Dwelling Unit (MDU) market, traditionally one of the most underserved residential markets. Currently, in the approximately 25 million MDU households nationwide there are roughly 700,000 to 800,000 DBS subscribers. In addition, SkyTrends cites analysts forecasting the potential market value of this audience at $20 billion. With this much room for growth, clearly this is an untapped market that PCOs serving MDUs are well positioned to exploit.

New programming and technology providers are eliminating many of the roadblocks to digital service in the MDU marketplace, making it easy for PCOs to mine the gold in the MDU market. For example, WSNet, the leading business-to-business (B2B) wholesale provider of direct-to-home (DTH) digital video programming to PCOs serving MDUs, allows its operators the opportunity to transmit digital content via a building's existing cable wiring by using Quadrature Amplitude Modulation (QAM) technology, a method which saves the provider hundreds of dollars in installation expenses and the owner and tenant the inconvenience of cutting through walls and ceilings to replace old wiring. QAM is compatible with 330, 450, 550 and 750 MHz CATV systems. Using QAM, PCOs can avoid having to put a satellite dish atop each building or on balconies, since only two one-meter dishes at the headend are all that is required.

With a technology that supports a property owner's existing MDU infrastructure, getting connected is easier than ever. WSNet's scalable platform is flexible enough to balance capital concerns, operational expenses and consumer demand so that a PCO can afford to transition from an analog video offering to digital video service in a manner that makes solid economic sense.

How Digital Increases A PCO's Cash Flow
Analysts agree that digital service offerings produce higher revenues than analog cable service. For example, DBS average monthly revenues per subscriber jumped from $33 in 1994 to $56 in 2000 - an increase of $23 - nearly 70%! By comparison, average monthly analog revenues per subscriber increased from $31 to $43, or 39%, over the same time period. It's easy to see the potential for larger margins and increased cash flow by going digital.

The revenue advantages of offering digital subscribers versus analog subscribers are:

* Higher value from expanded basic line-ups of $3 to $4 per subscriber;
* Increased premium multiplex buy-rates of more than $2 per subscriber per month;
* Average PPV revenue of more than $4 per subscriber per month; and
* Potential for monthly digital receiver fees of $1.50 to $5 per subscriber

This results in a $10.50 minimum increase per subscriber in net revenue for an operator who goes digital. When cash flows are calculated, PCOs may have a lower operating margin on a percentage basis ? but more net dollars ? by offering digital service.

The digital model for PCOs serving MDUs requires less marketing than analog services since that road has largely already been paved by others. The two biggest DBS companies, as well as the large multiple system operators (MSOs) of franchise cable, have spent several billion dollars creating a brand presence for digital service. This does not mean a PCO should rest on its laurels, but it does mean selling a subscriber on the feature and benefits of the digital product is much easier.

By generating cash flow and growing a valuable subscriber base, the digital cable model enables a PCO to begin growing revenues and cash flow in relatively short order. Also, it's important to keep in mind that the name of the game isn't just controlling costs, it's also growing your business to increase your cash flow, and for PCOs the only sustainable way to accomplish this goal is to go digital as soon as possible. Don't let your business get trapped into being penny wise and pound foolish.

Extracting Revenue from the MDU Market
By following three simple steps, successful digital launches in MDUs can be a reality for many PCOs:

1. Find a scalable, private label digital satellite platform;
2. Offer a competitive digital programming package of 200 channels; and
3. Partner with proven industry leaders who provide solutions for a changing market

A Scalable, Private Label Platform
Remember: one size does not fit all. In the MDU arena, it is critical that a system be adaptable to all selling opportunities, whether you serve two units per building or 1,000.

Having the ability to market the digital product under your own label (or brand) means you can build your own thriving business for many years to come where you serve your own customers directly, rather than simply acting as a reseller for someone else.

A Competitive Programming Package
Providing the choice of programming consumers are demanding will become increasingly critical to all PCOs. Offering a digital package also allows a PCO to access the additional revenue possibilities presented by premium multiplexes and PPV services, all of which provides further "stickiness" to help keep existing subscribers and attract new ones.

Partnering with Industry Leaders
Good relationships and experienced business partners can make the difference between success and failure. WSNet's partners include Motorola's Broadband Communications Sector, AT&T's Headend In The Sky (HITS(r)), Loral Skynet and Blonder Tongue.

By switching to digital service, PCOs across the nation are positioning themselves to be able to negotiate from a position of strength which will serve to benefit the entire industry. By investing in a few affordable system upgradesPCOs can now leverage their digital video service to increase their cash flow, expand their customer base and satisfy both the MDU owner and the MDU subscriber. Clearly, you can make your business a thriving success by giving your customers what they want: digital service. The time to deliver digital service is now.