Upgrading an Existing System from MATV to SMATV
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By Jerry Budge • BDR Broadband • November 2004
Jerry Budge, an employee of Blonder Tongue Laboratories, Inc., serves as the Director of Operations for BDR Broadband.
In August, we took a detailed look at the installation and commercial success of a 55-channel non-sports analog cable system with a DirecTV digital tier, in a new 288-unit broadband-friendly MDU located in a B+ demographic in Northwestern Dallas. In this issue, we look at an upgrade to a larger, existing system. Both cases, with down-to-the-dollar financial details, come courtesy of BDR Broadband, a joint venture of Blonder Tongue Laboratories, Priority Systems, Resident Technology Group and Telepro Communications. BDR got its start by acquiring 21 private cable TV systems, mostly in the Dallas-Ft. Worth area, from Verizon. The property that we are going to look at this month was part of the initial acquisition that created BDR. This property had a limited service offering, which produced a very low subscriber count – only 108 of 508 units passed. BDR doubled that in one year.
The financial information can easily be compared from case to case, allowing you to contrast the capital, complexity and return on investment for each. Data includes
- Property Specifics: Property Demographics, Initial Service Platform, Setting Baselines.
- Marketing: What was the best package for the property and why?
- Financial: Cost of Upgrade, Revenue Lift or Loss, Return on Investment (ROI).
- Operations: What does it take to operate the system properly?
- Lessons: What key information was learned?
Property Specifics
The first property was a new build with limited service offerings and limited revenue potential. This month we are going to take a look at the benefits of upgrading service platforms.
This month’s case involves an existing system that was part of the initial acquisition from Verizon. The system is located in a B demographic, in southeastern Dallas, serving 508 passings. When BDR bought it, the system offered a 12-channel, Master Antenna Television (MATV) lineup and a DirecTV (DTV) digital tier.
The MATV service was only a connect or disconnect with no options for service tiers, while the digital tier was diplexed on to a new subscriber’s drop. Customers who use only the off-air MATV suffered (and still suffer) from poor reception. The property had been constructed in two phases, which created an unusual situation because the phases were wired differently.
We will look at this issue in greater detail under the operations section. The MATV system did not require any set-top boxes inside the customer’s home to provide service, but the DTV package did.
BDR didn’t have an opportunity to deploy a high speed data platform on the property because the owner provides data services via its own multimode fiber-based Ethernet system.
We quickly realized that the success of this property depended on giving the residents options. We needed to make the property “installer friendly” to reduce costs down the road, and we needed to provide programming options based upon the strength of our “non-sports lineup” for analog cable, described in August. We’ll look at these two ingredients in more detail later.
Marketing
Installing a headend to carry our standard 55-channel Satellite Master Antenna Television (SMATV) “non-sports lineup” accomplished three goals. First, it gave the residents choices in what services to subscribe to (Locals Only, Extended Cable, Premium Channels, DTV). Second, it improves the quality of the local channels being provided by using digital satellite reception. Third, it generates a larger revenue share for the property owner. We'll discuss that in more detail later, under the Financial section.
In the first twelve months after upgrading, we doubled the penetration (108 new net subscribers). This lift can be directly attributed to the additionof the enhanced SMATV lineup. We had expected a gradual shift of subscribers from the DTV to the SMATV over time, which would have cut into revenue gains, but it hasn’t happened; there were 96 DTV subscriptions to start and 99 after 12 months. The chart shows the quite normal monthly variation along with the sharp growth over the year.
Another key benefit of the SMATV addition was the improvement of the signal quality on the property. Until this upgrade began, the only analog service that residents on the property were familiar with was an off-the-air-based product. If you have been around this business for any amount of time, you are aware that quality off-air reception is one of the most difficult facets of being an operator. At this location, there were severe ghosting problems and sub-optimal signal levels due to the location of the antenna.
As I noted in August, BDR developed the Non-Sports Lineup to catch subscribers who are not avid sports fans and are sensitive to price points. By having fewer channels in the analog tier, the majority of television viewers are given the channels they desire, without a high cable bill.
Being able to keep the financial entry point as low as possible is good for all parties. BDR Broadband has found that the majority of residents prefer not to pay for sports programming in the extended basic tier. The operator is more likely to gain the occasional TV viewer as a subscriber.
With sports programming, subscribers must pay more, and sports programming fees have been rising 20 to 25 percent a year from already high levels. In our customer surveys, we have found that only about 20 percent of the subscribers really desire to view the sports-only networks. Also, sports programming is included in the DirecTV package, so we do not alienate the avid fan.
Financial
The breakdown of the capital needed to upgrade the property is as follows:
| Hardware | Labor | Total Cost | Projected Net Revenue Lift Per Month | Projected ROI |
|---|---|---|---|---|
| $16,327 | $5,590 | $21,917 | $1,554 | 14 months |
The “Projected Net Revenue Lift per Month” was calculated by taking the average number of SMATV subscribers over the 12 month period listed in the chart (the average is 74) and multiplying that by $21, the average net contribution for the average SMATV subscriber, to get $1,554. The time to cover the cost of upgrading this property is about 14 months.
The largest cost of the SMATV upgrade was upgrading the headend, but unlike the example I discussed last August, there was significant labor cost due to the large cleanup that the distribution network required.
One of the key factors in deciding which properties
BDR will perform upgrades
on is the presence of a distribution network. We believe that the costs
of retrofitting an existing property with a totally new CATV network
far outweigh the financial gain
from the system.
The labor for the headend was about $2,000, while the distribution system cleanup ran just over $3,500.
Had the prewire been completed correctly when the first phase was built, the distribution labor would have been about $500, bringing the ROI period down to about 12 months.
Owner’s Revenue Share
| Average Bill | BDR’s Revenue Share % |
BDR’s Revenue Share $ |
Owner’s Revenue Share % |
Owner’s Revenue Share $ |
|
|---|---|---|---|---|---|
| BDR Locals | $11.00 | 100% | $11.00 | 8% | $0.88 |
| DirecTV | $44.00 | 15% | $6.60 | 8% | $0.53 |
| BDR SMATV | $32.00 | 100% | $32.00 | 8% | $2.56 |
How services are billed greatly affects how much the property owner gets paid in a revenue share. (see table 2). The current revenue sharing model has BDR paying the owner a percentage of the monthly recurring revenue that BDR receives from DTV. For example, if the average DTV subscriber bill is $44, our revenue share might be 15%, or $6.60.
BDR then pays the property owner a revenue share of say 8 percent, $0.53, plus $0.88 for the BDR Locals, or only 2.5% of the total being billed to the resident.
When BDR provides the SMATV signals, our average billing to the customer
is $32 for the average analog package, thus providing the owner with
a $2.56 per subscriber revenue share instead of $1.41, for an increase
of
over 180%. The same principles apply to the gross revenue on the
property. By billing for the SMATV lineup, we have managed to more
than triple
the monthly gross revenue from $2,300 to $8,500!
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