U.S. cable television service providers are looking to new technologies to help upgrade their networks, hoping to avoid expensive capital outlays that could spook investors.
As demand grows for bandwidth-hungry services like high-definition television and faster Internet access, the pressure on service providers has helped boost the fortunes of cable technology companies that offer a cheaper solution to building bandwidth without having to lay new cable.
One such supplier is BigBand Networks, which offers a technology called switched digital video, used by operators to gain more bandwidth by only delivering channels to homes when a viewer tunes in to them.
Shares of BigBand, which went public last month, soared more than 30 percent on their Nasdaq debut. Clients include Comcast, Cablevision Systems and Time Warner Cable, which has a 2.9 percent stake in BigBand.
Another company that has piqued investor interest is Vyyo, whose shares have risen more than 60 percent in the past month. Vyyo attracted an additional $35 million in funding from Goldman Sachs in late March.
“Cable is going to have to invest in some way in all of these different technologies until they make the leap to full fiber,” says Cameron Cooke, an analyst at Janco Partners. “I’m thinking about ten years from now you’ll start to see cable operators taking cable into the home.”
A typical cable system usually operates at 750 to 860 MHz with around 80 channels in analog video, or twice that with digital, as well as video-on-demand, digital phone and high speed Internet.
Analysts say this is adequate for today, but competition is intensifying as rival telephone companies Verizon Communications and AT&T invest billions of dollars in laying new fiber optic networks to offer better and faster services.
Satellite TV providers DirecTV Group and EchoStar Communications are also aggressively rolling out high-definition TV channels.
“We believe cable will need to manufacture incremental bandwidth over the medium to long term in order to remain competitive,” Spencer Wang, an analyst at Bear Stearns, wrote in a research note last week.
“In the short term, the greatest concern is high definition TV, given growing HD TV set penetration and DirecTV’s plans to offer over 100 national HD feeds by the end of this year,” said Wang.
These competitive forces, coupled with cable’s plan to start selling more services to small and medium-sized companies, mean the need for extra bandwidth is imperative.
But investors who had witnessed cable’s last spending spree are easily unnerved by the prospect of another major investment. The cable industry collectively spent around $100 billion laying upgraded cable systems during the 1990s, collecting a mountain of debt that they are still paying off.
Reflecting these jitters, when the largest U.S. operator Comcast forecast higher-than-expected 2007 capital spending in February, it overshadowed record profits and sent the stock down more than 3 percent.
Therefore, the focus this time round is on affordable solutions that are as much about keeping costs down as they are about improving technology.
According to analyst Michael Arden at ABI Research, switched digital deployment could cost an operator as little as $5 to $10 per household, compared to $1,000 if new cable has to be laid.
Vyyo Chief Executive Wayne Davis says his company’s technology, called spectrum overlay, helps operators increase the raw bandwidth of their networks by as much as 3 GHz. It could on average cost around $125 per household.
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