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Switching to satellite TV

Faced with crushing competition from satellite TV, a consortium of owners of cable's tiniest systems is looking to do the unthinkable: partner with the rival medium.

Two Midwestern MSOs, Galaxy American and Anderson-Eliason Cable Group, are assembling a venture that would delete most cable programming from systems sometimes serving as few as a hundred rural subscribers each. To deliver staple networks like ESPN and TBS, the systems would hand out DirecTV dishes to their customers and split the revenues.

The systems wouldn't go dark, but they would largely be reduced to carrying only regional broadcast signals and The Weather Channel, both for their local content, plus home shopping networks that pay operators for carriage. That way, the operators could keep some control of their customers but also get some revenues from DirecTV.

These systems have been prime targets for the DBS companies and their 200-channel packages. They offer just 12 to 30 channels to farm and mountain towns with 100 to 3,000 homes.

Whereas suburban cable systems can sell for $6,000 per subscriber today and bigger rural-town properties can get $2,000 to $2,500, these properties might get $600 to $800 per subscriber.

Residents may be as hungry for video as their suburban counterparts, but there are too few of them on each system to justify a substantial headend upgrade, much less a full-blown rebuild. "I've never placed an order for fiber in my life," said the manager of one group of rural systems. Some systems have lost 20% to 50% of their customers to DBS in the past few years.

So rather than watch DBS drain their customers away slowly, operators are looking to use DBS service to expand. The venture is small now, but Galaxy, an affiliate of larger MSO Galaxy Telecom, and Chicago-based Anderson-Eliason have greater ambitions. They are in the process of converting systems serving 10,000 subscribers to DirecTV dishes and plan to convert at least 20,000 more. Further, they are in talks with other small-town operators to merge in another 40,000.

Ultimately, they hope to coax even large MSOs like Charter Communications and AT & T Broadband into selling or merging their small systems into the venture. "Our new deal with DirecTV calls for us to do 300,000 to 500,000 subscribers," said Galaxy Vice President of Marketing and Programming Doug Montandon.

"The financial deal with DirecTV makes enough financial sense to keep the systems running," he explained.

The prospects of the smallest operators can be bleak. Rural North Dakota telco BEK Communications Co. recently ceased cable service to towns in North Dakota after losing 150 of its 400 customers. Ouray Cablevision in Ouray, Colo., is going the same way, giving its 1,000 customers EchoStar dishes. "We literally rolled a whole fleet of trucks in there" to install dishes for new customers, said EchoStar Marketing Vice President Mary Peterson.

Galaxy itself shut down some cable systems to around 2,000 customers last year in places like Economy, Ind., and Johnson County, Mo., where 5% to 6% of customers were migrating to DBS each year. The company even dismantled the systems because pole attachment fees to local telephone and electric companies proved too costly.

Galaxy has since halted that scorched-earth approach.

"It isn't a good option, because we can't offer our strengths as local television companies," Montandon said. "We become nothing more than a dish provider." In addition to simply writing off perfectly functional plant, shutting down cable systems also means less favorable terms from DBS companies. And it created political problems Galaxy wanted to avoid.

Galaxy wouldn't disclose the terms of its DirecTV deal but said they've gotten a lot better in the two years the companies have been working out the deal.

One rural operator said that, initially, DirecTV and EchoStar wanted to become the total provider, essentially buying the customer lists and paying cable operators the same commission they would pay Circuit City or any other dealer.

One unexpected benefit: recapturing cable thieves. In older systems, residents would simply tap the cable line at the pole and enjoy all the channels. "In some towns, the phone's ringing off the hook. We had calls from people we had never heard of," Montandon said. "If we go into a town with 100 customers, we come out with 150 customers."

One problem is that DirecTV already has dealers franchised in many small towns through a deal with the National Rural Telecommunications Co-Operative. Galaxy said it was close to resolving that problem, but wouldn't say how. Another cable executive said a venture with Pegasus Communications, which has been aggressively buying up NRTC franchises, is in the works.