No Oasis in Cable Market
The good news for equipment hawkers is that the case for upgrading cable plants and adding network capacity has been made a thousand times over. The bad news is that in this tough economy, many of the services that would chew the largest chunks of network capacity, such as voice over IP, are painfully slow in coming.
Cable operators are now getting broadcast competition from satellite providers such as Echostar Communications Corp.'s Dish Network and Hughes Electronics Corp.'s (NYSE: GMH) DirecTV. In order to hang onto customers and win new ones, they've got to offer digital services such as high-speed Internet access and phone service, industry watchers say; therefore, MSOs need to have the network capacity to handle new services.
But there are some problems. For one thing, there are the RBOCs, which don't take kindly to the thought of losing their stronghold to a bunch of cable guys. "Competitive forces in the voice market are daunting," says Richard Greene, president and CEO of Cable Television Laboratories Inc. (CableLabs).
Also, voice services have not been the most profitable thing for providers yet. UnitedGlobalCom Inc. (UGC) chief financial officer Rick Westerman says that high-speed Internet is the most profitable service his company offers. Telephony services were third on the list in the markets UGC serves and, therefore, aren't getting as much investment.
There's also the problem that some new service rollouts are hampered by cable providers needing to figure out how to bill for them properly and integrate the new services with the old. Cable has the potential to deliver many services over one pipe, says Vincent Dureau, chief technology officer of OpenTV Inc. However, many times the MSO's back office operations are "just silos of different services and billing systems."
But what about the overseas markets? Weren't they supposed to be the savior of the slumping U.S. networking equipment business? "Yes," say attendees here. But at the same time, many wonder whether the marked growth seen in some Asian markets signals another bubble waiting to burst. "You don't hear a lot about profitability in China, yet you see a lot of money chasing money there," says Michelle Sie Whitten, president and CEO of Encore International Inc..
As if that weren't enough to give equipment vendors some more stomach acid, there's also the age-old story of the declining capital spending. Westerman, for example, says that UGC's capex has fallen to about $400 million in 2002 from "just under $2 billion" in 2000. Largely, he says, it is because the company has completed its network upgrades.
So where does that leave equipment vendors? They have to do what they've always done -- build faster boxes, for less money, while giving operators the option of turning on incremental features so they can bring in more revenues. "One of the best ways to reduce capital expenditures is to try and put as many services across the same network instead of running two or three different networks," says Carson Chen, vice president of Cisco Systems Inc.'s (Nasdaq: CSCO) cable business unit.
Putting its money where its mouth is, Cisco announced upgrades to two of its cable head end routers -- the uBR10012 and the much smaller uBR7246VXR -- on Tuesday (see Cisco Spruces Up Products). In both cases, Cisco beefed up the capacity of the routers and baked in the ability to turn on services such as MPLS virtual private networks, giving operators another tool with which to extract revenues from the pockets of their subscriber base.
Chen and others here say that when the cable network upgrades do happen, the equipment in demand will more resemble the highly reliable carrier-class gear in telecom networks with optical interfaces that rival the T1 services provided by the RBOCs.
How fast the MSOs will move, however, is anyone's guess.
— Phil Harvey, Senior Editor, Light Reading