MSOs Struggle With Set-Top Change

The rapidly approaching Federal Communications Commission (FCC) -mandated ban on set-tops with integrated security could create a financial hardship for smaller cable operators -- and the added costs of supporting separable security devices will likely be passed on to consumers.

Some operators are simply biting the bullet, while others have filed for special waivers that will allow them to use some low-end set-tops with integrated security.

The ban, set to take effect July 1, will force cable operators to move to a separate security model, more often than not via "host" set-tops that support the CableCARD, a removable module that contains the keys to the operator's conditional access system. (See Countdown to 'Seven-Oh-Seven'.)

With the extra electronics and the module factored in, models that use the CableCARD cost, on average, about $70 more than their embedded counterparts.

Smaller cable operators are in jeopardy because they have fewer resources than their larger cable cousins, and already run their businesses on thin margins, says Matt Polka, president and CEO of American Cable Association (ACA) , a lobbying arm that represents about 1,100 MSOs serving about 8 million subscribers. About 800 ACA members have fewer than 5,000 subs.

"Generally, our members' home density is much smaller than an urban system," Polka says. That translates to a higher cost per sub, because those operators serve fewer customers per mile.

Those operators will have to apply some of those added costs to customers. While an operator might charge $2 to $3 per month for a digital set-top with integrated security, Polka believes that could jump to $8 to $9 just to recoup costs.

To remedy this, some MSOs have applied for special waivers so they can continue to buy and deploy integrated security set-tops. Some MSOs have filed for deferrals, which would allow an MSO to continue as normal if there is a backlog on CableCARDs and the set-tops that support them.

The FCC has yet to act on more than a dozen waiver requests or a smaller number of deferrals. On Monday, an FCC spokeswoman could not offer guidance on when the agency will make those decisions, either before or after the July 1 deadline.

Not all small- and mid-sized MSOs have filed a request for a waiver or a deferral. "We've decided to just plow through this," says Joe Jensen, chief technology office of Buckeye CableSystem, which serves about 147,000 basic subscribers in Toledo, Ohio, and in some portions of Michigan.

WinDBreak Cable, which serves fewer than 100 customers in two systems based in Colorado and Nebraska, says it does not plan to file for a waiver or a formal deferral with the FCC.

WinDBreak president and CEO Bill Bauer says small operators are having a difficult time buying compliant CableCARD boxes because most of the production output is being hogged by larger MSOs like Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Cox Communications Inc.

"Do you think Motorola will put me ahead of Comcast? Absolutely not," Bauer says. "I could put an order in, but I know I won't get any delivery. The only way I can continue is how I already am.

"It's not that we want to be civilly disobedient. We just don't have any other choice."

Bauer's WinDBreak, along with Buford Media Group and Tele-Media Broadband, have teamed to create Beyond Broadband Technology LLC (BBT) , a joint venture that has designs on a sub-$100 set-top with downloadable security. R.L. Drake has already signed on to build the device. According to Bauer, STMicroelectronics NV (NYSE: STM) is the project's silicon partner. (See Small Cablers Plan Sub-$100 Set-Tops.)

BBT claims to have built an in-house downloadable conditional access system called "BBT Heavy." The venture first tried to obtain a license for BPI+, a security element of Docsis, but was unsuccessful, Bauer says.

As Bauer explains it, BBT has 200 channels of MPEG-4-based programming being uplinked and delivered via satellite through a partnership with Avail Media Inc. The R.L. Drake factory in Dayton, Ohio, is receiving those signals, converting them into QAM, and sending them to the set-top for output.

Earlier this month, Bauer said he was "a few weeks away" from receiving the first prototypes from the manufacturer. "The goal is to do that [receive the prototypes] by the first week of July… but it's just tight."

Bauer expects volume production to commence in the fourth quarter, with shipments starting in 2008.

— Jeff Baumgartner, Site Editor, Cable Digital News