CLECs Selling Cable TV. Marketing Suicide?

What's a small phone company doing in the cable television business? It sounds like marketing suicide.

But HickoryTech Corp., a LEC/CLEC in southern Minnesota, actually has a pretty good rationale for launching its VDSL-based TV service - even though vice president of marketing and strategic planning Ernie Lombard, is the first to admit, "This is a different deal for us."

You can say that again.

Three weeks ago, HickoryTech launched commercial digital television service in St. Peter, a small city of about 10,000 just north of the company's home base of Mankato. It had beta tested with 25 customers for a few months.

"We're doing this with some caution, though," Lombard points out. "You'll notice we haven't just slapped it into ten other towns. We're going to make sure we understand it well before we do it anywhere else."

HickoryTech is the LEC in some parts of southern Minnesota and neighboring Iowa and operates as a CLEC in other parts of both regions. It was already offering various combinations of local, long distance and mobile phone service, along with high speed DSL.

HickoryTech had overbuilt the whole community of St. Peter with fiber loops and copper so it could offer local and long distance telephone service in competition with incumbent Qwest - and offer DSL and cable TV too.

The company is using this hybrid infrastructure to deliver digital TV (and the other services) using VDSL (Very High Speed Digital Subscriber Line) - 26 Megabits per second of throughput over up to 3,000 feet of copper.

That's enough bandwidth to deliver three simultaneous video channels (so up to three TV sets in the home could be tuned to different channels), home DSL-class high speed Internet access and up to three telephone lines.

Customers who take the digital video service can choose from among over 130 TV stations, plus pay-per-view stations and 40 audio channels. They pay from $29.95 to $59.95.

The service offers some definite advantages over the offering from St. Peter's cable TV incumbent, Mediacom. It's digital for one thing, so the video and sound are better.

And one of the popular features of the HickoryTech service is that customers can take the low-end Value package ($29.95) and then add any five channels they want for an extra $10 a month to create their own channel lineup.

But as Lombard says, most customers won't change just to get those advantages. And they won't change from Qwest just for HichoryTech's phone service. Or their ISP just for Internet access.

"They're about the same as you can get elsewhere," he says of the HickoryTech services taken individually. "But when they start to add services, customers can get some nice discounts."

For example, a St. Peter customer who took TV, DSL and local and long distance phone service from HickoryTech would get free caller ID - which can be set up to display on the TV set - and voice mail, a $10-a-month multiple-service discount and free phone and DSL installation.

Yet HickoryTech sees its margins go up every time a customer buys an additional service. That is really the crux of the rationale for going into cable TV. "I guess we're a little bit on the front edge," Lombard says of the strategy. "But there are a couple of reasons for it."

It starts with the fact that HickoryTech, like other small LECs and CLECs, has long and rich relationships with its customers - the company has been providing service in the markets where it's the incumbent for over 100 years. Clearly there was an opportunity - and a need - to leverage those relationships.

The next piece was HickoryTech's decision a few years ago to overbuild some of the markets it was already serving as a CLEC or wanted to serve, including St. Peter. That decision came out of a realization, as Lombard puts it, that "leasing from your worst enemy [i.e. the ILEC] is not a great strategy."

The final piece is that NextLevel Communications (www.nlc.com) had worked with Qwest (then US West) developing its Unified Access Platform for delivering integrated voice, data and video services. Much of that partnership work was done out of Minnesota, though the technology was first deployed by Qwest in Phoenix.

NextLevel saw rural LECs like HickoryTech as natural candidates for using its technology, and started marketing to them in the Midwest where it had done much of the work with Qwest - and where there are more small LECs than in many regions.

Using the NextLevel platform gave HickoryTech an opportunity to offer multiple services over the same copper wire - and thus leverage its existing customer relationships. And yet the incremental cost to add the services would be virtually nil.

With the NextLevel technology, HickoryTech establishes a BDT (Broadband Digital Terminal) in each market. It connects the BDT by fiber to its own fiber backbone.

Then it builds fiber loops that connect the BDT to a number of neighborhood-level USAMs (Universal Services Access Multiplexers). From the USAMs, it extends copper to each home.

To add the video service, HickoryTech installed a cable headend in Mankato which receives the analog TV signals from satellites, converts them to digital and sends them out over the fiber network to the BDT in St. Peter. From there it goes to the USAMs.

Whether the network delivers one service, two or three, there is one easily swappable line card for each home at the USAM - and each, interestingly enough, costs about the same. If the video card is in place, it handles all the other services. The customer has a set-top box that includes a modem and also routes the phone service.

"The cost of offering third services is virtually nothing," Lombard says. "We've already got the electronics needed in the set-top box for the video service."

"This allows us to have relatively slim margins on each product. But when you've got three of them on the same wire, you start to get some pretty nice returns."

Leveraging strong customer relationships to increase margins and thus returns - it's Marketing 101. Of course, HickoryTech does have to take a crash course in the cable TV business.

The company hired some cable industry people to help it launch, but St. Peter will be its cable university. "We're going to watch and learn from our work in St Peter," Lombard says. "That's why we went there. It's small enough to get our hands around. We can track it precisely. And we know it well. We'll really get an education from what we learn there."

So far, so good. HickoryTech launched with advertising in all local media, letters to all its existing phone and DSL customers and "door knockers" in selected neighborhoods with a video that explained the benefits of the digital TV services and the bundling deals.

Lombard says the TV service has had universally good reviews from those who have seen it. All but three of the 25 beta customers signed up immediately. And HickoryTech has a backlog of orders that will take it a month to fill.

Meanwhile, the company is overbuilding three other small cities using the NextLevel technology, even though it is by no means certain yet that it will roll out the video service in these markets. It has identified about 14 markets altogether where it might offer video.

"My plan now," says Lombard, "is to monitor very closely our experience in St. Peter, and by the end of the year make a decision about whether to deploy video in the other cities - or not to deploy."