The much anticipated migration of analog to all-digital networks is not only prompting a flurry of creative new business models and technology strategies, but also a wholesale re-evaluation of cable systems themselves.
Capital expense questions, operational issues and a tricky bandwidth balancing act are dominating the all-digital landscape, but the upsides of an all-digital network are gaining appeal both from a revenue and operational perspective, experts maintain. And there’s plenty at stake.
Research group SNL Kagan estimates that cable and satellite high definition (HD) subscribers will penetrate 66 percent of U.S. multichannel households by 2012, while more than a third of homes already have HDTV sets, with potential HD revenues from HD networks expected to reach $2 billion by 2012.
And Comcast, the nation’s largest cable company, has already completed all-digital launches at its Chicago and Calaveras County, CA, systems, with 20 percent of its markets projected to be all-digital by year-end 2008. And more cable companies are expected to follow.
"Data shows cable operators sell more services to digital customers, with a $17 a month gain over analog video. And any capacity they can free up is important. All-digital is costlier, so operators must make up the investment. But the model for all-digital makes sense for larger operators. There really is no upside to keeping analog," said Pete Dailey, senior research analyst for Frost & Sullivan. What to do? Just what to do with the lame duck analog systems, or portions of them, is puzzling to many in the cable industry and is pushing cable operators, both large and small, into making key strategic decisions about all-digital migration.
"We have an all-digital strategy. But at what point does the benefit of all-digital services face off against operational efficiencies of an all-digital network? It’s interesting and customer-friendly, but analog is, too. So all-digital will be about quality of service (QoS) and operational services, not just making space. It’s not an arbitrary goal to be all-digital," said James Kelso, vice president of video engineering for Cox Communications.
The ultimate goal, Kelso maintains, is to reduce the price of set-top boxes. That represents 57 percent of an operator’s capital expense, according to SNL’s Dailey.
"When you look at the set-top boxes, they’re more expensive than what the telcos can deploy. And no matter what cable does, set-top boxes will cost more. It’s scary," he said.
Scary enough to get the attention of the two primary set-top providers, Cisco Systems and Motorola, who insist they’re looking at all the options for large and small cable operators alike, and touting all-digital.
"We’ve been pushing the importance and benefits of all-digital and launched three host set-top boxes last year for HD and DVR. There will be even greater emphasis on all-digital this year. The startup cost for going all-digital is expensive, and there are different needs from small to large operators, so it’s a challenge. But once you’ve crossed that threshold, there are benefits," said Rob Folk, director of product management for Motorola Home Network Mobility.
The answer, he said, could be the DCX series of set-tops, the company’s first MPEG-4 set-top. Added Folk: "Some of our customers are committed to go all-digital by next year. That’s ambitious. And some have petitioned the FCC for waivers. But all-digital makes sense, so we have to offer a range of products from lower cost, limited capacity, to high-end, full feature set-top boxes." Speed bumps Yet for small-to-mid-size cable systems that lack the resources to put a digital box in every room housing a TV set, the march to all-digital isn’t without its speed bumps.
"The technical challenges aren’t large, just numerous. We know the problems we face installing converters, but mostly, we’ll have household wiring problems and return path issues. It’s the customer awareness and logistics that are the bigger challenges," said Bob Gessner, president of Massillon Cable (see sidebar case study, below).
For others such as Bresnan Communications, the move to all-digital is literally a work in progress.
"We’re looking at all-digital systems as not having to upgrade plant, and our first market to deploy all-digital is Gillette, WY. We’ll use smaller headends and take the plant to 625 MHz to free up bandwidth to support HD deployment. It’s not a trial, but we’ll look at it as a key technology to take to our other markets, with some lifeline channels in analog," said Pragash Pillai, vice president of strategic engineering for Bresnan Communications, which recently was granted an FCC waiver to go all-digital.
Bresnan’s goal is to be all-digital, Pillai maintains. But not immediately. "We’ll take expanded basic to digital first, then to all-digital, and HD is the driving factor. We have to offer competitive HD service and find a cost-effective CPE solution, which will be very hard," he noted. One solution There may be a viable solution already, at least for the tier 2 and 3 cable operators. Evolution Digital has combined conditional access, video transport and a set-top with MPEG-4 technology as an alternative for tier 2-3 operators.
"For us, it’s alliances and partnerships, like our partnership with Conax, a leading provider of conditional access. We are also supporting OCAP (OpenCable Application Platform). We want to create a set of tools they’ve (smaller operators) never had before because they can’t continually upgrade their systems. So the investment is in the headend and set-top boxes, not in building out plant," said Brent Smith, president of Evolution.
Transparent Video Systems is another emerging player in the all-digital space, using a system that bypasses many of the satellite methods of delivering content such as HITS (Headend In The Sky). "We’ve taken all of the capabilities of DirecTV and satellite and put them into a headend, but not like HITS. We’re also demonstrating products where the TV and computer can directly access the set-top box with no decoder," explained Norm Gillespie, president and founder of Transparent Video Systems. Cost Yet what most cable operators admit to being their biggest hurdle to all-digital is the cost of set-tops. "Even with a CableCard, we still have to justify the cost of all-digital. And the biggest cost is the set-top box," Pillai said.
The commercial market, he noted, remains an issue as well. "The technical hurdles to all-digital are not a problem. But where we have commercial business, the challenge is significant. There’s no effective solution for commercial currently for all-digital, like in hotels. A box in every room doesn’t make sense, so we need something to re-encode digital signals back to analog without a set-top box. We’re working on that," Pillai said.
Set-top manufacturers are also working on the cost issue, albeit not fast enough for cable operators’ liking. "Cost reduction is our biggest challenge. We’re figuring out ways to reduce the cost of manufacturing and how operators can move from 1.8 boxes per home to over two. That is a key challenge," said Luis Avila, vice president of strategy for the service providers group at Cisco.
And a challenge that spills over to cable operators as well. Said Kelso: "Over time as set-top boxes get to where we want them to be regarding price and features, we’ll move to all-digital. It’s our largest capital expenditure, and is a factor." Main factors What factors most in deciding whether to go all-digital, however, are HD, bandwidth constraints and competition. "From a pure technology standpoint, HD is a critical driver for all-digital, but it’s really all about bandwidth utilization and competitive pressures," said Chris Polis, Motorola’s director of product line management for conditional access products.
Most of those competitive pressures, he admits, are being felt by the smaller cable operators, who many believe are being ignored when it comes to the all-digital migration.
Not so, said Polis: "Small operators are extremely important to us. In fact, we’ve teamed with Comcast Media Center for network support of HITS affiliates. Total cost of ownership is crucial for smaller operators, so operations and capital expenses must be low, with low risk and little maintenance. We want to enable smaller operators to move to all-digital."
Moving to all-digital will require some hard decisions. One of them will be crafting a cost structure to compete with the telcos. "The key need for cable operators is a competitive cost structure vs. the telcos. As an operator, I’d be concerned about that," Dailey said. Payoff The payoff is likely to lessen those concerns. Added Dailey: "Everyone agrees that analog recovery presents a good opportunity to recover capacity. And this year there will be 70 million digital multichannel subscribers. Most feel that if you make the transition to all-digital, go full-out to offer all the digital services."
And full-out to Kelso of Cox could mean a whole lot of HD channels. "We’re expanding and adding content. That’s the nature of the game. By the end of our careers, we could see 500 channels of HD, so it makes financial sense to take digital deeper vs. analog. In the meantime, our mission is to make sure technology is out of the way of the business," he said. Craig Kuhl is a contributor to Communications Technology. Reach him at firstname.lastname@example.org. Sidebar: Small Op, Big Decision Massillon Cable TV serves 48,000 subscribers in Massillon, OH, 35 percent of whom are digital. Its president, Bob Gessner, decided to make that 100 percent.
"We investigated four options for increased bandwidth: spectrum overlay, switched video, traditional upgrade and all-digital," Gessner saaid. "Each has their tradeoffs, and we made the decision to be all-digital with no analog. We would have preferred to keep some analog, but the FCC won’t allow it as part of an integrated-security waiver. That’s the tradeoff. You can use less expensive converters, but you must agree to be all-digital by Feb. 17 in 2009."
• Cost to equip every set with a converter varies.
• Critical factor is FCC waiver.
• Using separable-security, the cost to put a converter on every set far exceeds the cost of a traditional upgrade and probably equals the cost of a spectrum overlay.
• With a waiver, putting a converter on every set is only about 75 percent of the cost of a traditional upgrade.
• Capital investment is clearly known from the start.
• Mostly household wiring problems, return path issues
• Converter installations
• Correcting old splitters, fittings, wire
• Customer awareness and logistics
• Moving lots of converters in a short period of time
• Massillon will begin an intensive customer awareness campaign and introduce some new delivery and installation initiatives.