"They always say that time changes things, but you actually have to change them yourself.”
— Andy Warhol
Over the last few years, cable operators have tried to cajole, prod and poke their basic customers into leaving analog television service behind and trading up to higher-priced digital packages.
But there may be 19 million or more U.S. cable customers unlikely to go digital voluntarily. They’ve been repeatedly offered digital service — touting expanded channel lineups, better picture and sound quality, video-on-demand and HD programming — and have remained content to keep their existing basic service.
Now, cable operators are looking to close the gap by installing bare-bones signal converters in the homes of customers who are balking at giving up their analog TVs and services.
These boxes would take in digital signals from the coaxial cable coming out of the wall and convert them to analog signals.
Key to the approach: The conversion takes place in the customer’s home, not the cable operator’s headend. Once every subscriber has a digital-to-analog converter or digital set-top, all signals to all homes would be transmitted digitally — even to the analog holdouts.
The converters could cost $50 or less, compared with $70 to $100 and up for entry-level digital set-top boxes.
COMCAST IS IN
Among the chief proponents of these analog-signal zappers is Comcast, the nation’s largest cable operator, which had 8.68 million analog-only video customers as of March 31.
Comcast plans to use digital-to-analog boxes, or “DTAs,” as the main way to free up near-term capacity, chief operating officer Steve Burke said, disclosing the project on the Philadelphia-based operator’s first-quarter earnings call May 1.
“We’ll be rolling out [digital-to-analog adapters] pretty aggressively in the fourth quarter,” he said.
“We’re going to begin the rollout in 20% of our markets during 2008 and then do a lot more markets in 2009,” he added, but did not specify costs or other details.
The idea, Burke said, is to capture at least 40 analog channels per system — which would yield around 240 Megahertz of spectrum — and use that capacity “for more high-def local channels and faster Internet speed.”
What are these cable DTAs?
They’re similar to the over-the-air digital-to-analog converter boxes that the U.S. government is subsidizing with $40 coupons, but include a cable tuner, instead of an ATSC tuner for over-the-air signals. (Another difference: The government coupons can’t be redeemed for cable boxes.)
Cable operators don’t have to shift to all-digital signals in their networks by Feb. 17, 2009, the date when local broadcast stations must stop transmitting analog signals. But they see an opportunity to piggyback on the awareness generated by the digital-TV transition, to get more customers to convert to taking in digital signals from all their cable outlets.
Broadcasters are “spending a billion dollars to tell people they need to 'do something’ to keep getting TV,” Massillon Cable TV president Bob Gessner said. “We can use that to our benefit, since consumers are already expecting a change.”
Companies developing the zappers include the two major set-top suppliers, Motorola and Cisco Systems, as well as a small Centennial, Colo.-based outfit, Evolution Digital, which is procuring devices through Asian manufacturers.
DTAs, which ideally will cost $50 or less, are being designed simply to replicate the feel of surfing an analog lineup. They have cable tuners, analog video outputs and an infrared remote control — but no guide, no video on demand and no HD.
“These boxes really don’t have a lot of frills to them,” said Dave Clark, director product strategy and management for Cisco’s Service Provider Video Technology Group (the former Scientific Atlanta).
Cisco doesn’t have a DTA product available today. According to Clark, no customers have placed orders for them yet and “we’re not doing a speculative build right now.”
Clearly, operators large and small are closely examining the concept.
“We’re getting a lot of questions about it from the cable community,” Clark said, adding that Cisco plans to show a prototype this month at The Cable Show in New Orleans.
Motorola senior vice president and general manager of digital video solutions John Burke said manufacturing and delivering a product aren’t the hard parts. “First and foremost, [operators] need to figure out the [deployment] models and the business case,” he said.
According to industry executives, Comcast is in the midst of deciding some of the key details of what its DTAs will look like.
Jim Henderson, Comcast’s vice president of strategic procurement, is said to be spearheading the DTA project. Comcast senior director of corporate communications Jenni Moyer said Henderson is “part of the team working on the all-digital transition” but declined to provide additional details beyond COO Burke’s statements.
One question still to be hashed out is whether or not the converters will incorporate conditional access. Some programmers insist that any digital transmission of their programming — even in a tier that simply replicates expanded-basic analog — be encrypted.
But integrating conditional-access decryption capabilities would add about $10 to each unit. For a converter without any security features, Comcast is reportedly hoping to hit a $35-per-unit price.
Another issue: Comcast is concerned that integrating conditional access into the adapters might run afoul of the Federal Communications Commission’s ban on set-tops with integrated security functions, according to an executive at a cable set-top developer.
“It’s not technical for Comcast,” the executive said. “It’s quite political. They’re wondering if they should wait for a new administration.”
The FCC, after all, rejected Comcast’s request for a waiver on low-end, limited-capability set-tops like Motorola’s DCT700 and Cisco’s Explorer 940. Comcast is awaiting a ruling from a federal appeals court on the agency’s waiver denial, following April 8 arguments in the case.
As a general concept, the digital-to-analog adapters promise to push cable systems over the all-digital goal line for notably less than the up-front investment needed to supply regular digital set-tops boxes to basic subscribers.
Comcast’s Burke told Wall Street analysts the adapters will cost less than half the operator’s cheapest digital set-tops.
At the same time, according to Comcast, it will actually decrease total capital spending in 2008 — with capex as a percentage of revenue declining to approximately 18% for 2008, from 20% last year.
The DTA concept works because many customers evidently don’t demand anything more than no-frills TV. Operators have tried to drive up digital-cable penetration, but millions have declined to take the bait.
At the end of 2007, 19.2 million subscribers of the five largest operators — 38% of their total video subscribers — were content to continue receiving basic cable in analog.
The problem is, analog eats up a disproportionately large amount of spectrum compared with digital video. And operators are in dire need of new shelf space.
Each 6-MHz analog channel is at least enough space for two HD feeds. Operators with 70- or 80-channel analog tiers are ogling an enormous chunk of bandwidth they could potentially reclaim.
“Competition for HD has driven them to be more aggressive in reclaiming analog,” Motorola’s Burke said.
The bandwidth crunch is especially acute for smaller operators, according to Al Johnson, vice president of marketing at BroadLogic Network Technologies, which designs digital-to-analog converter chips.
Small operators “have very high competition from satellite, which is offering a wealth of video services’’ in standard and high definition, Johnson said.
To go “all-digital,” some cable systems have already used low-cost digital set-tops, which are between $70 and $100 per box.
But providing subsidized set-tops to subscribers — most operators aren’t charging the customers they’re forcing to go digital additional fees, at least initially — is a much more expensive option than a digital adapter. And it’s even pricier when factoring in the $50-plus CableCard needed to comply with the FCC’s integrated set-top ban.
FREED UP IN OHIO
Massillon’s Gessner ran the numbers on different options for increasing capacity. The digital-to-analog adapter came out on top.
Mainly, he is looking to retire Massillon’s approximately 75 analog channels to bulk up a digital lineup of 25 HD channels, in order to fight growing competition from satellite as well as AT&T U-verse TV, which Gessner expects to launch in his market shortly.
“People are going to expect everything to be in high-definition,” Gessner said. “The only way to meet that expectation is to start now.”
The northeast Ohio operator found that using adapters to go all-digital would be the most cost-effective way to unlock as much as 500 MHz of bandwidth — enough space, using conservative estimates, for at least 150 new HD channels.
Other strategies were less attractive for Massillon, which has about 45,000 basic-video subscribers and around 25,000 existing digital set-tops.
To upgrade from 750 MHz to 1 Gigahertz, Massillon would have to spend $10 million. But that would add just 100 MHz of usable capacity, according to Gessner, since the operator’s existing digital set-tops tune to 860 MHz.
Meanwhile, buying the cheapest Motorola boxes with integrated security for customers to attach to their analog TVs would have run $7.5 million, he said.
The operator ended up picking Evolution’s adapter, a 4.9-by-4.9-inch box that includes a power cord and remote control manufactured by South Korean-based HomeCast.
The cost of 100,000 adapters, supplied by Evolution Digital? Around $5 million, Gessner estimates.
Centennial, Colo.-based Evolution has 35 full-time employees. Its chairman, John Egan Sr., started the cable networking company Arris Group and ran it for 20 years. Evolution was founded and is owned by his sons John Egan Jr. and Chris Egan, with their partners Brent Smith and Sat Gill.
According to Egan Sr., the two cable-technology incumbents have no incentive to deliver low-margin adapters. Instead, Motorola and Cisco push more expensive alternatives, such as upgrading the outside plant or implementing switched digital video.
“The question from them is, 'Dear Mr. Customer, Where do you want to spend your money first?’ ” he said.
Motorola’s Burke countered that the company will deliver on operators’ requirements for adapters: “Certainly, we want to help our customers.”
Evolution sees the adapter as a potential foot in the door to sell its other set-top boxes, which are based on the international Digital Video Broadcasting (DVB) standards for conditional access. “We don’t have a desire to lock anyone in,” Egan Sr. said.
The adapters for Massillon will use conditional access from Conax, a subsidiary of Norwegian telecom provider Telenor, rather than the Motorola conditional access the operator currently uses for digital cable. That’s because Motorola doesn’t currently have a DTA offering.
The dual encryption will require the operator to simulcast digital channels with both conditional-access systems.
“I was ready to do it without conditional access, but some programmers objected,” Gessner said.
To facilitate the all-digital transition, Massillon secured an FCC waiver in March to the common-reliance CableCard mandate, on the condition that it phase out analog services by February 2009.
Gessner is confident that the adapters meet the FCC criteria as a digital set-top with limited functions. “It’s not interactive, it can’t do HD, it can’t do DVR,” he said.
Massillon announced the adapter program last week, but won’t have the boxes in inventory until the end of June. At that point, it will begin shipping the adapters, which will be free to subscribers until March 2009, after which Massillon will charge a subsidized rate of 25 cents per converter per month (including remote).
In any case, Gessner knows the move will be an all-consuming project for the next few months.
“Change is hard,” he said, “no matter how good the story is.”
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