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Television over the telephone lines.

When cable television first hit the scene in the mid-80s, it didn't take people in rural America long to figure out the equation that cable operators used in determining whether an area was a potential target market.

"If there are more cows than people, don't expect to get cable anytime soon," was the standard equation, and lamentation. Satellite dishes--first in the form of giant monstrosities and then smaller, more discreet dishes--eventually arrived to fill the gap, but they have drawbacks, such as not offering local channels and only working in certain terrains.

Even the cable offerings in small towns often are restricted to 30 or so channels of fuzzy analog service. But in the last few years, independent telephone companies and cooperatives have started to provide a new and better alternative--video content services (VCS) delivered over the existing phone lines via digital headends and broadband networks.

By the end of last year, 100 independent telcos were offering digital VCS, said Michelle Abraham, a senior analyst at Cahners In-Stat Group, a market research firm based in Newton, Mass. "We expect to see another 60 this year," she said. "Within five years, expect to see 500 to 600 telcos offering digital video."

Reed Majors, vice president of marketing and business development for Minerva Networks, a video networking solutions provider (Santa Clara, Calif.), pegged that number even higher, estimating that 800 independent telcos will be offering VCS in three to four years. These optimistic forecasts come as no surprise to many in the industry, because rural telcos are uniquely positioned to offer VCS. "Rural telcos providing VCS fare very well, because they are the local telephone provider, and customers are familiar with them," Abraham said. "Getting people to switch over is not a problem, even where there is competition."

Cable vs. VCS

Talk to some early adopters, and they gladly point out the advantages of VCS over cable or satellite service. For starters, they say their digital service provides a clearer, sharper picture, and telcos often can offer two or three times as many channels as the local cable operator and more local channels. In addition to pay per view, VCS also is capable of providing video on demand (VoD).

Perhaps the most compelling feature that telcos offer is VCS caller ID service. "The phone rings and the number flashes up on the television screen so you can see who it is," explained David Dunning, general manager of Polar Communications (Park River, N.D.), which is in the process of building a digital headend. "The customers love it. Plus, all the caller ID information is logged on the television so you can see who called at what time. This is another way we differentiate from cable."

Cahners' Abraham also noted that better customer service is a huge draw. "Most people are more comfortable going with a local company versus a national company," she said. "With a national company, if a customer has a question, it's a matter of calling an 800 number that is based hundreds of miles away. Whereas with the local telco, it's a matter of walking down to the office and talking to someone you've probably known a long time."

The Benefits of Bundling

Another advantage that independents have is the ability to bundle their VCS offering with other services, such as high-speed Internet and long-distance or wireless services, also known as a "triple play"--voice, video and data. This allows for customer discounts on certain services, as well as the convenience of one bill.

Twin Valley Telephone (Miltonvale, Kan.) began offering VCS last June under its subsidiary Twin Valley Communications. President Mike Foster said it was a natural extension to the broadband network the company previously had installed.

"In order to create more revenue on that investment, we bundled several regulated and non-regulated services in our video offering in exchange for customers signing multiyear contracts," he said, adding that there was some trial and error to getting the right package. "We made some mistakes with the packages and had to change them three or four times before we got it right," he recalled.

Foster cautioned against giving any service away for free, however. "We offered free voice mail in one of our packages, and it was so popular that we soon had to invest $70,000 in a new box," he said. "That was not our smartest move. We had to go back and start charging a dollar to recoup that cost."

Rod Olson, general manager of Vernon Telephone Cooperative (Westby, Wis.), like many VCS providers, offers his service at $5 less a month than cable, while offering 20 more channels. "We're not losing money on this, and we don't have to subsidize it," he said, explaining that the company's VCS offering is run out of its subsidiary, Vernon Communications.

Justyn Miller, general manager of Kalona Cooperative Telephone Co. (Kalona, Iowa), said his company has been looking into VCS for the past two years. "If we can't match or beat competitors' rates, then we won't roll it out," he said. "Our goal is to provide it for 10 to 15 percent less--that's the jump point." But Cahners' Abraham pointed out that many telcos offer VCS at the same price as does the cable operator. "Many have not had to reduce prices, even in some cases when the cable operator lowered its rates," she said.

Some in the industry suggested that another way to make VCS more appealing to customers is to study the competition's packages and put one or two of its premium channels into the telco's basic package.

Partnering to Reduce Costs

Vernon Telephone built its digital headend in 2002, and soon found willing partners that wanted to share in its cost and service. "We built it for ourselves, but it's expensive," Olson said. "It's smart to take advantage of opportunities when they come along."

For Vernon Telephone, that meant partnering with its Midwest Tel Net consortium members, 11 telcos and co-ops that came together to provide Internet service. "Providing video seemed like the next logical thing," Olson said.

Polar's Dunning noted that his company is in the process of partnering with three or four other telcos. "That's the only way to do it," he said. "We couldn't do it financially alone--they'll help share the cost." Kalona's Miller said his company is exploring partnering with the Iowa Network Services (INS), another consortium with its own headend.

"It makes good business sense to partner at startup and use an established headend," he said, adding that not having your own headend may have some disadvantages. "If there's an outage, we have to rely on someone else to fix the problem rather than our own staff; you lose control."

Miller said his company may partner at first and consider investing in its own headend in the future, if it makes sense. "The price of headends has decreased considerably," he said. "It's dropped from several million [dollars] a few years ago to less than a million today."

Cahners' Abraham agreed that partnering is a smart move in this arena. "A number of partners helps to share the risk," she said. "If you want to build the headend yourself, can you still make a business case and absorb the cost of this?"

In addition to INS and Midwest Tel Net, Abraham noted that MBO Video is another video consortium that supplies service to telcos in Arkansas, Kansas, Oklahoma and Missouri.

Negotiating Content Licensing

While a digital headend pulls down the signals, telcos still need to arrange the licensing agreements with the video content providers--the ESPNs and HBOs of the world--before they can distribute the signal to their subscribers. Many opt to go through the National Cable Television Cooperative (NCTC), a programming and hardware buying cooperative in Lenexa, Kan., which has master agreements with 140 to 150 programmers and can command a lower rate for its members.

"At this point, the easiest and cheapest way to go is through NCTC," Abraham said. "You'll get a better rate than if you went to the content provider and negotiated on your own."

Dan Mulvenon, vice president of NCTC's member services, agreed, saying that on average, its members save $12 to $15 per subscriber on an annual basis. "While we have agreements with the majority of programming, there are some channels that we do not, like Lifetime, USA Network and TV Guide," he said. "In those cases, telcos have to negotiate on their own."

Twin Valley's Foster laughed at the term "negotiating." "There's no true negotiating," he said. "The rate is what it is, and the cost of content keeps going up."

Kalona's Miller agreed that the programmers are a tough crowd. "If you're unhappy with the price, they say, 'Try to find another replacement for ESPN'; they know you can't," he said.

Pricing Strategies

Several general managers said they'd like to see the Federal Communications Commission (FCC) step in and cap content prices, which according to the commission, has gone up five times faster than the rate of inflation. Some also are hopeful about the possibility of a la carte pricing schemes, which several lawmakers have introduced to Congress to allow customers to pick individual channels rather than pay for packages. (The FCC released a public notice in May seeking comments on a la carte video programming.)

"Certain networks have a bunch of channels, and if you want one, you have to take them all," explained Vernon's Olson, adding that the rates are based on penetration. "There could be one rate if you have 90 percent penetration, but it goes up if it falls below that. That's why we have to have 40 or 50 channels in our basic package--just to keep costs down."

Cahners' Abraham said she highly doubts if the FCC or Congress will step in to either cap content prices or enforce a la carte pricing. "The content prices rise each year because the salaries of the actors, actresses and athletes rise," she said. "It's a free market--that's not something the FCC can easily cap."

And while a la carte pricing may sound like a simple solution, Abraham said it may not make any difference to the bottom line. "Content providers get their revenues through advertising," she said. "If very few people voluntarily subscribed to, say, the FoodTV channel, then ad revenue would fall and they would have to raise subscription prices."

Content licensing is one of the main reasons Kalona Cooperative hasn't launched its own VCS offering. "Content providers aren't really interested in negotiating with you until you have a million customers," Miller said. "A couple of thousand access lines doesn't mean anything to them."

Spicing Things Up

Another potentially troubling issue that Miller sees on the VCS horizon is the decision to offer adult channels and programming. "That's a very touchy subject," he said, explaining that the company sent a survey to a sampling of its subscribers. "Some said they would watch adult channels like the Spice channel or Playboy, but we had one negative comment that said we shouldn't offer 'questionable' material."

For Miller, drawing a line between what is and isn't "questionable"

is a tough task. "Personally, I think there are shows on Cinemax that are questionable," he said. "It's a difficult issue for small companies. You don't want to offend people, but you can't censor the world either."

In the end, Miller said he plans to offer adult programming at this point because there are mechanisms to block the channels and titles, as well as to set up parental controls. "In the end, people have to take personal responsibility--watching TV can be a lot like surfing the Internet, you find what you are looking for," he said.

Either way, Miller said he doubts if adult programming would be a significant source of revenue in his area. "In major cities, adult channels bring in 20 to 40 percent of the revenue," he said. "But rural areas tend to have a more conservative, religious atmosphere, and the small-town life would make some people uneasy--they might fear that an employee at the telephone office would see their bill and know they're watching dirty movies."

Vernon's Olson said his company and board struggled with this issue as well, but ultimately decided to offer adult programming, even though one board member was adamantly against it. "One board member said it was immoral, and we shouldn't support that industry in any way," he said.

One thing that made the decision easier was software that allows subscribers to block channels, titles and set up parental controls. "Maybe my opinion would be different if we weren't able to provide all the tools," he said. "Our thinking is that censorship should take place at the home and not at the telephone company."

As it is, Olson said that adult programming has proved very popular. "Among pay per view, it is a very large portion of our total revenues," he said, but added that he's not worried about privacy issues. "How is it any different from looking over a phone bill and seeing a lot of 900 numbers or looking up what sites people are going to on their Internet service? Our employees aren't looking over people's bills to see what movies they're watching. Technically they could, but who has time for that?"

Choosing the Technology

The transport technology choices are nearly as varied as the programming, with options such as fiber and different levels of ADSL (asymmetric digital subscriber line), and VDSL (very high speed DSL). Cahners' Abraham said there's no clear-cut best solution. "It really depends on the network that's already in place," she said. "It's best to go with what works with the local infrastructure."

Twin Valley's Foster said he went with IP (Internet protocol) over ADSL because that was the technology that was closest to going to market. "We didn't want to wait for MPEG4--we'd still be waiting if we had done that," he said.

Polar's Dunning said his company is using VDSL technology. "The technology has advanced over the years so that telcos can use their own imbedded plant or cable to put in video," he said. "It wasn't so long ago that in order to add video, you had to put in co-axial cable."

Abraham added that MPEG compression is getting better and taking up less bandwidth. "Ultimately, that means lower costs to reach more people," she said.

Despite technology advancements and lower costs, most agreed that it doesn't pay to wait to begin offering VCS. "Don't wait on the technology, because you'll never catch up to it," Foster said.

Abraham agreed, and pointed out that VCS also is an excellent way to launch into the competitive local exchange (CLEC) arena. "You can use video as a way to expand your service territory by going into neighboring towns served by companies like Qwest and Southwestern Bell," she said. "Even if that's not your plan, you could be missing revenue today and allowing your competition to get stronger."

RELATED ARTICLE: High Demand for Video on Demand

One of the biggest differentiating factors between video content services (VCS) and the competition is video on demand (VoD). VoD operates much like a hotel's in-room movie system, where a viewer can scroll down through a menu, order a movie, and it immediately begins to play (as opposed to pay per view, which has set viewing times). VoD also has pause, stop, rewind and fast-forward features, and typically is available for a day or two.

"Only the local telco has access to true local content--city council meetings, football games, music recitals," said Michelle Abraham, a senior analyst for Cahners In-Stat Group, a market research firm based in Newton, Mass. "Companies could even archive 15 years of past football games--who else is going to do that?"

Justyn Miller, general manager of Kalona Cooperative Telephone Co. (Kalona, Iowa), agreed that local programming is a smart move for VCS providers. "Our plans are to purchase camera equipment for the local school district and let the students film their sports events, theater and possibly even town meetings for credit," he said. "The event could play for free for a few days and then be archived on a VoD server and ordered for a nominal amount ... to see a past game or meeting, and we'd put that money back into the program."

--Rachel Brown

RELATED ARTICLE: VCS Do's and Don'ts from the Experts

Do ...

* have a solid business plan: Consider how many homes you want to reach. Your business plan should include one-, two- and five-year plans for expansion. "Don't expect 100 percent penetration at first," said Reed Majors, vice president of marketing and business development for Minerva Networks, a video networking solutions provider (Santa Clara, Calif.). "Thirty percent is a reasonable rate among subscribers capable of receiving service--that's a profitable number."

* plan to offer HDTV (high definition television): "You don't have to have this to go into the market, but your high-end customers will want this in the future," said Michelle Abraham, a senior analyst for Cahners In-Stat Group, a market research firm based in Newton, Mass. According to her firm's research, 7 million homes had HDTV at the end of 2003; by the end of 2008, 54 million homes (half of all television-owning residences) will have it.

* realize that installation takes time: Figure on installations taking between two and a half to five hours per home. That includes voice, video for two televisions and high-speed data.

* focus on interoperability: "Today, interoperability means handling things like video servers and caller ID systems," Majors said. "In the future, it'll be about handling voice over IP (Internet protocol), voice mail and gaming systems. You want software that has a broad-based programming interface to support third-party equipment."

* take a customer survey: Put a survey in the phone bill and ask: What services and channels do you want? Are you interested in video on demand? Would you be offended if we offered adult channels?

* conduct a trial test: Set up a sample system at a local bank or other public building and encourage subscribers to test it out and give you feedback.

DON'T ...

* ignore vendors' viability: Study the business models of vendors. "Is this a company that will be there in 10 years?," Majors suggested asking, adding that this is more critical with software vendors than it is with hardware vendors. "With hardware, you buy it once and it works, and you don't have to think about it. With software, you have to think about how it'll interact with your network out into the future. You want a long-term company that will be there as you make upgrades, install new set-top boxes, make billing system changes and add new features."

* assume current staff can be VCS experts: "Don't take switch people and expect them to be VCS people," Majors said. "They're too phone-centric for the job. Instead, hire IT people, because they're well versed in handling high-speed data and networks outside of the phone system."

* discount the effect that noise and electricity can have on VCS and DSL systems: "If everything's installed but not working, check to see if the washing machine was grounded incorrectly," Majors suggested. "If the DSL modem isn't working, chances are it's because someone is using a treadmill in the house."

* make your offering only for the younger set: Rural America has a higher proportion of seniors, so think about things like bigger buttons on the remote control, larger text on the screen and easy-to-understand directions.

* forget about support: "Realize you're going to need a 24-by-7 call center if you don't have one already," Majors said.

--Rachel Brown

Rachel Brown is a freelance writer specializing in technology and telecommunications. She can be reached at
COPYRIGHT 2004 National Telephone Cooperative Association
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Title Annotation:Now Playing; video content services vs cable television
Author:Brown, Rachel
Publication:Rural Telecommunications
Article Type:Cover Story
Date:Jul 1, 2004
Previous Article:How do you use your Web site to complement your business?
Next Article:Mapping the customer point of view.

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