US cable spending still on pace. Spending shifts more to settops and cable modems..............................
broadbandweek.com
What Slowdown?
Cable construction steady through 2002
By Leslie Ellis
from the March 19, 2001 issue of Broadband Week
The predominant sound late last year in the cable business was of capital spending wallets snapping shut. But the echoes of that market-rattling noise may have faded pretty quickly: Cable's broadband plant upgrades will continue at a steady pace throughout 2001 and 2002, despite drastic moves by AT&T Broadband to find more cost-efficient ways to upgrade its networks.
Six of the top seven U.S. cable service providers plan to release an aggregate $11.6 billion to capital expenditures this year, which, on an operator-by-operator basis, slightly surpasses 2000 levels.
AT&T Broadband is the exception. At press time it had not yet finalized its 2001 budgets, after shutting off the spending valves last November with a clang that reverberated through the stocks of its key suppliers. If AT&T spends capital dollars at the same level as last year, an additional $4.2 billion moves into the overall upgrade kitty, for a total of $15.8 billion.
Clearly, there's still a lot of build going on. Not only are the bigger MSOs still digesting an ongoing series of system swaps and acquisitions, all of which require some level of tweaking; they're also in a perpetual sprint to lay their lines into new housing developments, to lure creampuff suburban homeowners into becoming voice, video and data customers--before DSL or satellite interlopers do at least parts of the job for them.
And, AT&T can't hold off forever. At some point, whether it's later in 2001 or next year, whether they're owned by AT&T or someone else, those systems will get an upgrade.
What's changing is the spending mix. From this year out, the ratio of plant materials to in-home electronics starts to tip toward the latter. As upgrades wind down, spending on plant materials--opto-electronics, amplifiers, line extenders, pole-line hardware, passives, etc.--slims. Spending on items needed for advanced services, such as cable modems, digital set-tops and telephony gear, swells.
In addition, watch for gradual increases in dollars spent for servers, software and integration. Virtually every new Internet Protocol-based service targeted for cable deployment relies heavily on software, which remains a relatively new animal for cable providers.
The spending shift is part of a logical progression, especially given that all of the top seven MSOs, which serve more than 75 percent of all U.S. cable households, are nearing the finish line for 750 MHz, two-way plant capable of doing high-speed Internet access, telephony and digital video. On a combined level, cable providers will end this year with an estimated 79 percent of their collective plant upgraded, up from around 71 percent at year-end 2000 (see chart, p. 6).
AOL Time Warner, nearing the end of a rebuild/upgrade cycle that started seven years ago, will spend 2001 putting the finishing touches on systems it previously acquired. Adelphia Communications Corp., Cablevision Systems Corp., Charter Communications, Comcast Corp. and Cox Communications will stay in high gear for upgrades this year, they say, as they continue to digest systems gained through acquisitions or cluster-induced swaps.
AT&T Broadband will at the very least leverage what's already upgraded, keeping the flame high on advanced service rollouts. That means 100 percent of basic subscribers marketable for digital video; 15.4 million homes marketable for high-speed Internet; and 6.2 million homes marketable for phone service, as of the end of 2000. When its capital budgets are finalized and released, AT&T Broadband likely will allocate a much larger fraction of its dollars to in-home electronics than plant for 2001, by as much as a 70-30 split.
"We're trying to target our capital better from those days when we would go out and build as much mileage as we could," says Dan Somers, CEO of AT&T Broadband.
Suppliers Try to Rebound
An $11.6 billion aggregate cable budget from the MSOs mentioned should come as sunny news for cable's big hardware suppliers--Antec Corp., C-COR.net, CommScope Inc., Harmonic Inc., Motorola and Scientific-Atlanta Inc.--which lost an aggregate $122.5 billion in equity value since their respective stock highs.
But take that number with seasoning: Including Motorola in the calculation means including all of its non-cable business units, which skews matters. Without Motorola, cable's big vendors lost $24.2 billion since their 2000 highs (see chart).
AT&T's spending correction didn't help matters for hardware manufacturers, and particularly those that make plant materials. Capital markets already were sliding into decline late last November, when AT&T informed key suppliers that it had as much gear as it needed.
Most vendors spent the days following Thanksgiving doing damage control on weakened knees, assuring the investment community that AT&T's moves weren't a total disaster. Most nonetheless saw their stocks summarily hammered (see chart).
Antec Corp. slid to an intra-day low of $6.87 on Nov. 24, an 88 percent plummet from a high of $57.50 nine months earlier. From March 9, 2000, to the AT&T-induced D-Day, the company lost $1.9 billion in market capitalization. Since then, the company's stock is starting to climb out of the torture chamber, but slowly, to over $8 by mid-March.
Also hit hard was Harmonic, which makes opto-electronics used in cable broadband upgrades. From its March 8, 2000 heyday price of $150.87 to its January 3, 2001 low of $5.25, the company lost 94 percent of its equity value. Its rebound also is coming slowly.
Portrait of an Upgrade
The good news is cable hardware suppliers are resilient. Sudden spending shutoffs aren't anything new--AT&T Broadband, when it was Tele-Communications Inc., did the same thing in 1997. Its own executives used to ruefully acknowledge a tendency to run out of rebuild money in the third quarter, which prompted the old TCI to shut down the build cycle for winter.
Nor have suppliers done much but feast-heartily--for the past half decade. The proof of this is in the networks themselves. For most MSOs, the use of hybrid fiber/coax (HFC) plant is a foregone conclusion, and in the future the story won't be so much HFC as the software, servers and electronics connected to its end points.
Architecturally, most North American cable providers are running bundles of 48 fibers from headends or primary hub sites to secondary hub sites. From there, six fibers extend to each of the neighborhood nodes. The neighborhood nodes, in turn, feed coaxial networks equipped with 750 MHz or 860 MHz, two-way amplifiers. Each node typically passes 500 homes; most MSOs cite an average of 380 homes passed.
The six fibers are important for upstream bandwidth management. The spectral area allocated for home-to-headend (upstream) signals is inherently slim--just 35 MHz located between 5-40 MHz, and some of that simply unusable because of noise. So operators are keeping a close eye on penetration rates and bandwidth usage for such two-way services as high-speed Internet access and telephony. If speeds suffer, the extra fibers can be used to subdivide the node, potentially to as low as 125 homes passed. Cost estimates on node splitting vary, but run in the range of $5,000-$10,000.
In all, cable's upgrade schedule looks solid for the next few years. It won't be the full-tilt boogie it's been for the past three years, partly because the competitive heat is off from the overbuilder community, which appears to be scaling back its construction as financing becomes harder and harder to secure.
And although cable providers like to assure Wall Street that at some point they're done upgrading--and their capital expenditure line goes attractively down--most know that it's never that easy. As penetrations for new services rise, so too will a focus on increasing upstream bandwidth, by splitting nodes. And as new services emerge that rely heavily on software, so will a need to spend on servers, licenses and integration.
It's all in a day's work, and for cable upgrades, the work is never done. |
