For years, cable TV companies have said the key to their future is spending more on new technology. Now they're talking about spending less.
, the two biggest equipment suppliers to the cable industry, will soon start selling cheaper versions of the digital video set-top boxes that cable operators use to offer extended channel lineups and other advanced services.
Cable operators are hoping that these new boxes, priced anywhere from 25% to 45% less than the digital boxes now widely in use, will improve the uncertain economics of digital video, cut a major capital expenditure and speed up their achievement of free cash flow from operations -- that is, earnings before interest, taxes, depreciation and amortization, minus capital expenditures and interest expense.
"The cost of a set-top box has been sort of stagnant at approximately $260 for the last couple years," said
President Kim Kelly in a conference call last month. But now Insight, Motorola's first announced customer for its new boxes, will be paying about $140 for its new boxes, Kelly said.
"And that's important," continued Kelly. "It's important for us, because we need to be able to bundle
a whole house with technology at an affordable price."
The Whole House
Cable companies, from blue-chip giant
down to more speculative, highly leveraged players such as
, have been reeling this year as investors fretted about the companies' declining growth and heavy liabilities. Though the cheaper set-top box is merely one path to cutting capex, cable box expenditures are significant for operators. For example, in the nine months ended Sept. 30,
spent $140 million on customer premise equipment. That number, which includes wiring, cable modems and wiring as well as digital set-top boxes, amounts to nearly a quarter of Cablevision's consumer-related capex over that period.
Against this background, any cuts in capex for cable boxes or anything else is welcome news for cable investors.
Both Motorola's DCT1700 and Scientific-Atlanta's forthcoming low-end box, referred to as the Explorer 1800, are designed to let operators offer digital video and other high-end services, including, perhaps, video on demand and subscription video on demand. VOD and SVOD let customers pick a program from a menu and watch it at any time of day they choose, plus pause, fast-forward or rewind the program as if they were watching a tape played back in a VCR.
But unlike current widespread models, such as Motorola's DCT2000, the newer boxes will have other features stripped off to cut costs. Motorola says its DCT1700, which cable operators say is due in December, will have fewer input-output ports and will work entirely by remote control, to the exclusion of front-panel buttons. A Scientific-Atlanta spokesman says the company doesn't have a release date or a feature list of the new boxes.
Judging the impact of these cheaper boxes on cable's bottom line is hard to quantify. But from Insight and other operators, some relevant information has trickled out over the recent earnings season.
Cablevision, which had previously committed to buying advanced cable boxes from another supplier,
, said in August that it would also be purchasing boxes from Scientific-Atlanta as well. While analysts have speculated that Cablevision was paying $350 apiece for the Sony boxes, Cablevision said on a conference call with analysts last week that it would be buying a mix of high-end and low-end digital boxes from Scientific-Atlanta. The "blended capital cost of all the boxes we will buy next year," says Cablevision executive Tom Rutledge.
conference call last month, chief technical officer Chris Bowick said the new, cheaper boxes would be likely used as an additional box in a digital customer's home, rather than as the most-used or only box. Separately, chief financial officer Jimmy Hayes said on the call that current digital set-top boxes cost Cox about $260, and subscribers took an average of 1.3 boxes per home.
Including labor, Hayes said that capital expenditures per digital home, amounted to about $400. By
calculation, replacing that average 0.3 extra digital box per household with a cheaper version would cut digital household capital expenditures as much as 9%.