MSOs Scramble in Face of MDU Clash
By KENT GIBBONS
Multichannel News - VOLUME 19 NUMBER 8 FEBRUARY 23, 1998
204.243.31.23
The battle for the hearts, minds and cable subscribers in apartment buildings is heating up and forcing some wired and wireless cable operators to make changes to keep up.
Analysts and operators said consolidation in the private-cable industry is creating some potent new players that are eager to cut deals with multiple-dwelling-unit (MDU) owners to gain market share and to keep capital flowing their way.
Companies little known outside of the industry -- Dallas-based OpTel Inc., Chicago-based OnePoint Communications and Bellevue, Wash.-based Cable Plus -- are putting pressure on incumbent operators that are worried about losing their share of the estimated 20 million people who live in MDU complexes.
The MDU market is appealing because it gives operators a chance to bundle video, telephone and data services in a single package, relatively free from competition because of contract exclusivity, Paul Kagan Associates Inc. analyst John Mansell said.
Strategic shifts in addressing the MDU market are maybe most evident among multichannel multipoint distribution service (wireless cable) operators. As MMDS companies have fallen on hard times, some have chosen to get out of the MDU business altogether to conserve capital for a last-ditch shift to digital services.
People's Choice TV Corp. falls into that category and, according to sources, so does CAI Wireless Systems Inc. Both have sold or have offered up for sale contracts to serve thousands of MDU units, and private-cable outfits are snapping them up.
"I once expected the wireless cable guys to come in and consolidate the private-cable industry," Mansell said. "Now it looks like it could be the other way around, because the capital seems to be flowing more freely these days to the private-cable operators."
Late last year, PCTV closed a deal to sell some 4,300 MDU customers in 9,800 apartments in St. Louis to ResNet Communications LLC for $3.8 million. That's the first step in a planned sale of 270 MDU properties with 59,000 individual units and 21,500 customers in Houston, St. Louis, Phoenix and Chicago.
Those interested in bidding on the PCTV trove include CablePlus, which is backed by billionaire Craig McCaw, and cable MSOs Time Warner Cable and Cox Communications Inc., sources involved with the process said.
Michael Whalen, PCTV's vice president of acquisitions and finance, said the stiff competition for MDU contracts and the high market value for those contracts were factors in opting to sell them off.
CAI, meanwhile, is quietly shopping MDU units clustered in Washington, D.C., Philadelphia and New York. OnePoint is considered a leading candidate to end up with the D.C. units. CAI chief financial officer James Ashman said last week that the company has confirmed that it is considering whether to sell its MDU contracts in order to raise much-needed cash.
Other wireless cable MSOs have cut deals with DirecTv Inc. to combine its digital direct-broadcast satellite offering with their local off-air signals. One such DirecTv partner, Wireless One Inc., is focusing primarily on the MDU market in the Southeast. MDU densities enable it to keep capital costs down, and the DirecTv partnership gives it a more competitive product, Wireless One chairman Henry Burkhalter has said.
Bob Berger, senior vice president at Communications Equity Associates Inc. and a broker who has handled many private-cable deals, said the industry consolidation is fueling much of the activity. As companies like OpTel and ResNet have grown, they've managed to get to a size that attracts capital.
Now, some of those companies are rushing to build up enough heft to go public with initial stock offerings.
"I think all of the big ones are angling in that direction," Mansell said.
None of this is lost on big MSOs such as Tele-Communications Inc., which are seeing "a lot of creativity" in the kinds of financial and service offerings that their rivals are putting in front of MDU decision-makers, according to Chris Coles, TCI's senior vice president of business sales and marketing.
Those offerings include a combination of financial inducements -- such as upfront commissions and back-end revenue sharing -- and service combinations that throw in digital video and high-speed data.
TCI, which estimates that 30 percent of its market is in MDU units, is fighting back with its own digital video service and @Home Network high-speed-data service. The missing piece -- facilities-based telephone service -- may be addressed soon. Coles said TCI is experimenting with providing phone service through Teleport Communications Group, of which TCI is a part owner, in a San Francisco Bay-area location, and the company is likely to announce an expanded phone offering within the next 30 days.
So far, the lack of phone service hasn't been much of a competitive disadvantage, Coles said, because MDU managers know that there's always a local phone incumbent available.
Coles said TCI also points to its long history in the business when competing for MDU business. Many MDU managers have seen private-cable companies offer the sun and moon, only to fold before ever wiring a unit.
Brian Adamik, who follows the MDU marketplace at Cambridge, Mass.-based market-research firm The Yankee Group, agreed that the failures of some of those firms have helped cable. MDU managers "are looking for a brand name, for a credible brand in the marketplace," he said.
The flip side is the fact that other behemoths, including electric utilities and regional Bell operating companies, are also turning their attention to dense residential complexes.
Adamik noted in a recent report: "There is little distinction between a business and a residential apartment building in terms of its ability to generate large quantities of voice, video and data traffic." He thinks that apartment-dwellers will be the first to benefit from multiple-service offerings, forecasting that 50 percent of consumers in MDUs will have a choice of local phone providers by the year 2000. |
