Telco TV

Sign of the Times: Rural Telcos Take on TV

11/25/2005 7:00 PM Eastern

Bright yellow lawn signs dot neighborhoods in Kalona, Iowa. This is how consumers declare their allegiance to a local video-programming provider.

The signs don’t bear the name of Mediacom Communications Corp., the Middletown, N.Y., company that is the local-market cable incumbent.

Instead, they declare, “I switched to Kalona TV,” and end with the number to dial for the local phone company’s new digital-TV service.

“We ran out quite a while ago,” said Justyn Miller, CEO of the broadband provider trumpeted on the signs. “People are leaving them up, mowing around them.”

The signs were a low-tech way of getting out the word that the Kalona Telephone Cooperative Inc. began offering video services in August, said Miller. Half of its 2,100 phone lines have been upgraded to handle video transmission. The other half will be capable of delivering video images by the end of next year.

MOVING FAST

The word also is out that small phone companies are going after the video business faster than larger brethren. Plans by telephone giants Verizon Communications Inc. and AT&T Inc. may dominate coverage of the collision between cable, satellite and telephone companies for video subscribers. For months — and, in some cases, the past four years — smaller telcos have been moving aggressively into the video-services arena.

Just like the industry giants, small telephone companies feel pressure to add products to the bundle of services they offer customers. As cable companies and other providers enter the telephone business, small communications providers are fighting back with video services.

“Small telcos are faced with the challenge of finding ways of delivering more enhanced services. They have found a real opportunity by looking over the transom at another business,” said Dwayne Goldsmith of the Daventry Group LLC, a technology-merchandising firm that advises some small-communications businesses. “They see [video delivery] as a new revenue source to develop — double, triple — their current revenue sources.”

The companies tend to be local to regional telephone providers of long standing in the communities they serve, according to interviews conducted by Multichannel News. They also tend to have very strong customer bases — sometimes 95% of the homes in an area — and access to bank financing for expansion.

Rural telcos in underserved areas have even received help from a federal agency. The Rural Broadband Access Loan and Loan Guarantee Program, administered by the U.S. Department of Agriculture’s Rural Development Division, has offered grants and low-interest loans to help the local-exchange carriers expand into TV.

In the last round of funding, announced Aug. 18 by the agency, $39.4 million in grants and loans were approved, such as $8 million to Allband Communications Cooperative of Hillman, Mich. That firm will build fiber-to-the-home infrastructure to deliver broadband services in four counties, the agency said.

Most of the local telephone companies with big video plans hearken back to humble roots. Kalona, for instance, started as a local-switchboard company in 1905. SureWest Communications Inc., which is about to deliver HDTV services in the Sacramento area, is a 90-year-old operator of phone systems in California. In Kingfisher, Okla., a 50-year-old phone company last year began delivering television to its customers using Internet-communications protocols — a task still on the drawing board at AT&T Inc. (known until last week as SBC Communications Inc.)

In some ways, the small telcos resemble their cable counterparts. Like rural operators, the small phone providers obtain programming comparable to their cable-incumbent rivals from the National Cable Television Cooperative, which makes programming and hardware deals on behalf of its 6,500 members.

But there are cases in which some programmers, like local broadcast-television stations, require separate rights negotiations. One executive for a small telco in Iowa said he needed to negotiate retransmission consent from a local Hearst-Argyle Television Inc. station — and that the deal became linked to carriage of the station’s cable sibling, Lifetime Television.

Compared to their larger telephone-company brethren, the small outfits are moving quickly. They’re refining techniques to deliver very-high-speed digital subscriber line (VDSL) and ADSL (asymmetric DSL, in which a single phone line can be split to carry voice and data at the same time); video-over-Internet communications protocols to the set-top box and hybrid fiber-coax, where telephone companies use a combination of technology, including copper wire, with fiber-optic lines to gain additional bandwidth for delivering video and other new services.

But in the end, they are getting into the game for the same reason as other cable and phone companies, large or small: The bundle. Phone and video services now go hand in hand.

Video services “are a competitive must,” said Carl Murray, strategic technologies director for SureWest Communications. “Customers really want bundled services. It’s much easier for them to get services paid with a single bill.”

SureWest got into the cable business in 2002, when it acquired bankrupt overbuilder Western Integrated Networks LLC. To deliver programming to customers outside of its fiber network, it split its signal into data packets and shipped them via Internet protocols.

As far as a digital network of servers and switches is concerned, the use of packets and Internet protocols makes digital television just another application. “We have the ability to add new services much easier,” Murray said.

Other applications under consideration include gaming, video on demand and on-screen caller ID, he said. Last month, SureWest announced its plans to deliver HDTV.

SureWest now has 84,500 marketable homes in the region, where it competes against giants Verizon Communications Inc. and Comcast Corp. As of Sept. 30, the company claimed 19,245 subscribers, a penetration rate of 22.5%. Its churn to competitors is 1.6%, down from 1.8% at the same date last year.

CAVALIER CAMPAIGN

Cavalier Telephone in Richmond, Va., is launching an Internet protocol-based TV service in December. Its reach: 200,000 homes from New Jersey to Virginia.

Cavalier’s service areas include parts of Richmond, Hampton Roads and Fredricksburg, Va.; the greater Baltimore area and parts of Washington, D.C. (business customers only); the greater Philadelphia metropolitan area; Sussex, Kent and New Castle counties in Delaware; and Atlantic City, N.J.

The service will make use of ADSL’s latest iteration, ADSL2+, which doubles the distance that the service can extend from a telco’s exchange office and increases the speed of data transfer. Combining that with MPEG-4 (Moving Picture Experts Group) compression will allow the company to do “cooler things with less bandwidth,” said Vanessa Robert, Cavalier’s broadband-project coordinator. For instance, twice as many HD channels can be squeezed into the same amount of standard TV channel space (see “Looks Great, Less Filling,’’ page 24, Nov. 21, 2005).

Initially, Cavalier plans to offer a voice, video and Internet triple play for $95.95, plus taxes and fees. That includes two set-top video boxes, DSL service with a free modem, unlimited local phone service and long distance calling for 5 cents a minute. Roberts contends that rate is about one-third below the cost of services bought from competitors; and that 500 customers reacted to the news of Cavalier’s video plans by placing themselves in an order queue at the company’s Web site.

The need to protect a company’s customer base is key to the decision to add video.

“Even as a rural independent, we have to protect our subscriber base,” said Scott Ulsaker, video-products manager at Pioneer Telephone Co-op Inc. in Kingfisher, Okla “Customer research showed video was the No.1 desire.”

The 50-year-old cooperative added video, transmitted over copper phone lines, using Internet protocols, in July 2004. The conventional cable properties Pioneer acquired from Cebridge Connections will be converted to run on the same Internet technologies. And the packets that Pioneer transports will be cut into consistent, small sizes, using a coding technology known as asynchronous transfer mode. This system of breaking up data chops all information into standard-sized chunks of 53 characters apiece.

That will mean more customers can be served with more services, because electronic pipelines can be packed most efficiently by packets of a consistent and small size.

Pioneer began Phase One of an eight-phase network upgrade two years ago, and says all 50,000 customers in the 72 Western Oklahoma towns it serves will be able to get its video services in 2006.

The co-op offers 64 channels of video for $42.95 and 169 channels for $47.95. Video can be bundled with phone services at different price points depending on how many combined services a consumer orders, he said.

Ulsaker said the company has not seen much response from its cable competitors, Cable One and Cox Communications Inc.

That’s not the case, however, in Kalona.

Kalona started with a 60-channel offering for $29.95, including multiple ESPN and Discovery Networks U.S. services, Miller said. By comparison, the co-op itself used to pay $48 per month for Mediacom’s basic service.

For $55.95, customers get 160 channels, including Starz Entertainment Group movie channels, which other cable operators commonly sell as premium services.

Discounts are contingent on the services ordered: If a digital subscriber line customer orders video, that consumer gets a free boost in Internet speed, for example.

How is the yard voting going? Miller printed up hundreds of those political campaign-look- alike signs and offered new subscribers a discount on Home Box Office if they’d stick them into their lawns. So far, the service passes 860 homes; 200 consumers have subscribed to video service.

Mediacom has door-to-door salesmen in its communities, including Kalona, on a regular basis, said Jon Koebrick, vice president of government relations for the north central division. The offers contained on the fliers are identical to those publicly advertised in the market, he added, though the fliers bear the number of the individual employees who earn commission on the sales.

Kalona TV is just the latest addition to a crowded marketplace, he added, noting that many of Mediacom’s Iowa markets have been deregulated by the federal government because of effective competition.

Mediacom itself is crossing over into Kalona’s core business, as it is launching telephone service. The communities where it is hardest to launch, Koebrick said, are small towns like Kalona. He added, state regulation was designed to give greater market protection to independent phone companies like the Kalona Co-op than there are for more dominant providers like Qwest Communications International Inc.

September