Big MSOs have stronger hand in dealings with suppliers: vendors insist they will also benefit from consolidation

Cable World, Jan 7, 2002 by Jon Lafayette

After the press conference last month announcing his company's acquisition of AT&T Broadband, Comcast Cable president Steven Burke said that as an even bigger player in a more consolidated industry, the newly merged company will find it easier to get equipment that precisely meets its requirements, rather than hardware designed for a half-dozen customers.

Greater market clout may be fine for the likes of AT&T Comcast and AOL Time Warner, but how will technology suppliers fare in an industry dominated by a reduced number of huge customers?

For one thing, larger cable operators will demand preferential pricing.

Toshiba's strategy in the cable market has been to provide the largest multiple system operators with "premium product with premium features," says Christopher Boring, manager of new-business development in the network product division of Toshiba America Information Systems, the leading maker of cable modems. But "obviously as they become more consolidated they can certainly wield a bigger stick," he says.

But while prices may go down, so will manufacturing costs, as the need to create customized products for many different MSOs is reduced.

"If you get down to some large ones, they tend to standardize more, and so in some ways that means you're not trying to build three different flavors of the same thing," says Dave Woodle, CEO of broadband equipment and services company C-Cor.net. "Which is a-positive [in terms of profit margins], unless you can't keep up with what they're looking for."

And as the number of customers goes down, so might the number of vendors. "Most of the [operators] like to have two or three suppliers that they deal with, so from the broad sense, I can see it nicking the amount of suppliers," Woodle adds. "That's already kind of gotten underway."

Richard Green, president of Cable Television Laboratories Inc., thinks consolidation will help technology companies. "When you think about it, a lot of effort goes into getting broad-based consensus," says Green. "Now getting consensus is easier, and there will be more effort put into development."

Giants like Comcast own many small systems, he notes. "So technology and approaches that work for Comcast also solve the little guy's problems," whether it's designing head-ends or deploying servers, Green says. And Comcast will want to sell those solutions to spread the costs.

Most major vendors already work for a number of the major MSOs, so for them I the latest consolidation could be seen as a positive.

"As the industry consolidates, it makes the job of customizing solutions easier, and we will have the ability to move quicker," says David Novak, director of marketing for Pace Micro Technology Americas, which is developing a set-top box for Comcast. "The greater volume that each operator can drive to a company like Pace will help our development cycles and keep us focused on providing the best solution, both technically and commercially for a given customer."

Anthony J. Ley, president and CEO of optical networking technology vendor Harmonic, says that both MSOs and remaining equipment suppliers will become stronger. "Surviving operators will have greater technical and financial resources, permitting faster growth and more rapid adoption of new technologies," says Ley.

Comcast was not known as a leader in advancing technology, but its union with AT&T Broadband could push innovation. "I think if they mix the management teams, you'll get a blend of how to bring new ideas from a business-savvy point of view," says C-Cor.net's Woodle. "Comcast has let other people go prove [a new technology works] and then they implement it very well and maybe they can balance that effectively."

Toshiba's Boring says that innovation will continue to flow, even though the industry is now dominated by giant organizations. "I don't think that because there are fewer, larger MSOs that that means that the creative juices can't flow just as strongly and that innovation cannot still happen," says Boring. "In fact, it makes it easier in some ways, because when something new comes along, it's much easier to get it implemented in an industry where you only have to convince three MSOs versus one where you have to convince eight or ten MSOs."

Still, the new environment may pose unusual obstacles for startup vendors. Smaller MSOs "usually take new startups," says Woodle. "They work closer, they know they can get the attention and they can work that. If they got sucked up by somebody larger, they may say, `We're not going to try that new thing.'"

Most tech companies say that, at the very least, the Comcast-AT&T merger should not slow the companies' plans to buy equipment to complete system upgrades already in the works.

"I don't have that concern right now," Woodle says. "They say they're going to move ahead. I think they realize they can't sell new services they've been touting if they don't finish the rebuild of the network. So I don't see any big delays."

At least one tech company executive wondered what consolidation would mean to CableLabs, with fewer MSO executives available to serve on the consortium's board.