2002: A Year of Challenges
Throughout 2001 and continuing to the present day, independently-owned cable system operators have faced the same challenges as their "Top-10" MSO brethren. In a sense, when Wall Street catches a cold, Main Street contracts pneumonia. And when Wall Street gets pneumonia, Main Street heads for the doorway marked "intensive care".
Access to capital remains one of the biggest problems for National Cable Television Cooperative Inc.'s member companies. Since you can't very well lend money to yourself, access to the capital markets remains to the rebuild and upgrade of cable properties. You have to convince lenders that your operation will continue to grow and prosper so that you will be able to repay your debts in full and on time.
The aggravating thing about shrinking capital markets is that small-cable business fundamentals remain basically sound.
As for the Cooperative, our bad debt continues to remain a tiny fraction of 1 percent of our revenues. Our retail customers continue to love their cable television, and surveys show that is among the last forms of entertainment our subscribers would abandon.
While operators have tried for many years to finance expansion plans via their monthly cash flow, the higher price of new technology and the "all-or-nothing" implementation it takes means operators need access to capital to finance their expansion plans, including the move to digital.
This situation will only turn around when Wall Street takes the steps necessary to restore Main Street's confidence in American business.
Since 1984, more than 1,450 cable companies have joined the Cooperative. But our monthly members-billed number today is right at 1,000. What happened to the missing 450? A few have been sold to major national MSOs, but most of them remain in the NCTC as part of another member-company.
Where consolidation hurts the smaller operator is not within the NCTC, but outside our ranks. The programming side of our business has consolidated to the point where five major media groups — The Walt Disney Co./ABC Inc., NBC, Viacom Inc./CBS, AOL Time Warner and Fox Broadcasting Co. — control a vast majority of the programming horsepower.
This consolidation makes it easy for them to bundle their services, forcing cable operators to take expensive packages of networks that years ago would have been purchased on an individual basis.
It's hard to remember, but the digital revolution in the cable business is barely 10 years old. Many member companies have bitten the "digital bullet" and rebuilt their systems to handle digital signals — especially those provided by Headend in the Sky (HITS) and WSNET. More needs to be done, but some of this will have to wait until the capital markets catch up with our expansion plans.
When digital technology first became available, the costs of new digital headends and plant equipment limited the benefits to big-city systems. Over time — especially with the advent of HITS — it has become possible to provide retail customers with the benefits of digital transmission in ever-smaller cable systems. As competition drives component prices lower and lower, it will eventually become possible to "go digital" in systems with fewer than 1,000 basic subscribers. (But keep in mind, our median system size is only 225 subscribers. That means that fully two-thirds of our member systems would still be too small for digital using that yardstick!)
SHRINKING MEMBER POOL
The shrinking pool of potential NCTC members contains both good and bad news. The good news is that most of the independent operators in our industry who are eligible to join the NCTC have already done so. Our steady growth over the years confirms that fact.
The bad news is that there are few good prospects left to expand our ranks. If we are to continue to grow and continue to meet your needs through enhanced services and lower prices, most of this new growth will have to come from within.
We currently bill over 210 million "billable subscribers" (the total of all services subscribers in all of our master contracts) per month. I think that number — if every member bought every service from us — can grow over time to between 400 and 500 million.
We intend to do our part — by bringing you the best services at the best and fairest rates — and in return we want you to do your part, by participating in our master contracts and launching these services.
Our mission is to reduce your operating costs by providing the programming, equipment and services you need to run your business at better prices than you can achieve by yourselves. While we are certainly paying close attention to the national regulatory climate, that mission is better served by our friends at the American Cable Association and, for some issues, the National Cable & Telecommunications Association.
When we do weigh in on a particular issue, our influence is usually reserved for programming-access and network wholesale-pricing issues. Our mission in this area is the same as it was 18 years ago: We don't need better prices than everybody else, but we do want parity with other MSOs of our combined size and purchasing potential.
The only exception to the above might be those few hardware-oriented issues that translate into what we feel are unnecessary financial burdens. The best current example of this is the Congressional decision to require virtually all cable television systems — almost regardless of size — to provide Emergency Alert Service warnings.
While EAS may be a "no-brainer" for big-city cable systems (at least in terms of what it costs to acquire and install the required hardware), its implementation is a huge burden for small operators.
NCTC members own and operate about 7,750 cable systems across all 50 states and every U.S. territory. While our mathematically average system serves about 1,800 subscribers, the median system size is about 225 subscribers. It simply doesn't make any sense at all to require small cable systems to install EAS capability. In small towns, the money would be better spent upgrading siren systems.
It's probably too late to re-think this issue, but the better and more efficient way to provide emergency alerts would have been to place them at each network's uplink site.
Finally, if EAS capability was so all-fired important to Congress and the White House, why was this national system never activated on Sept. 11, 2001? I wonder if the President even knows that this capability exists?
Are cable systems "better" for having had the competition of EchoStar Communications Corp. and DirecTV Inc.? Of course they are — but that competition has come at a frightful cost for small-town cable ops.
Direct-Broadcast satellite services don't pay franchise-granting authorities a 5 percent franchise fee like cable operators do. At least for the moment, they're not required to meet the same rules and regulations that burden cable television. And their customers pay at least a part of the costs of in-home equipment, while cable operators bear the entire burden.
Many of DBS' best customers used to be our best customers, and once lost, they're hard to win back. But we can do it by working together to provide better customer service, expanded channel offerings, and the highest-quality digital pictures.
You have counted on us for 18 years to provide you with lower operating costs through group purchasing. Stick with us, buy through us, and together we'll ensure that this industry always has a healthy constituency of independently owned cable operators. As Benjamin Franklin said at the dawn of our Republic, "We must hang together, or we shall surely hang separately."
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