High Speed Wireless Internet Services For Rural America
There are approximately 10,700 cable systems in operation in the United States. Companies owning more than one system are known in the cable industry as multiple system operators (MSOs). Four major MSOs (AT&T, Time Warner, Comcast, and Cox Communications) dominate the industry, accounting for 70 percent of all cable television customers. These major players have aggressively pursued the high-density urban and suburban markets. These markets are approaching saturation, with Cable TV penetration approaching 100% and growth in high speed Internet subscriptions reaching a plateau. This saturation limits the ability of these major operators to increase revenues by adding subscribers within their coverage areas. In order to grow revenues they have to raise prices, which in turn decreases their competitive position against major telecom firms and others who provide similar service bundles.
"Some governmental studies place rural penetration of high speed Internet as low as 20%. This market presents great opportunities and has become Summits specific target."
The rural, semi rural, and gated community, in contrast, is extremely fragmented, dominated by single-system operators serving from 500-5,000 subscribers. Many of these operators are unstructured, with passive management teams that have been slow to exploit the opportunities offered by cable Internet and pay-per-view services. These smaller systems generally show far smaller rates of high speed Internet penetration and much lower monthly per-customer billing well below their larger, more aggressively managed urban rivals.
Many of these small systems are in a relatively precarious financial position. Some operators acquired significant debt to install cable infrastructure that is now relatively obsolete. While this debt is in most cases relatively low in absolute terms, the low per-customer billings, high costs, and generally inefficient structures these companies display has significantly impacted their ability to service debt. As a result, many of these companies are actively seeking acquisition by a larger player capable of integrating them with a more viable system. Many expected to be acquired by major cable or telecom operators, but their small size has left them below the interest level of large multi-system operators seeking systems with millions of subscribers.
Summit Digital Holdings, Inc. believes that the relatively low billing and penetration of key services in rural and semi-rural cable systems provides a substantial growth opportunity. Unlike major urban systems, these markets have yet to reach the saturation point and offer substantial room for addition of new subscribers. This opportunity is particularly evident in the key high speed Internet market. Rural markets are adopting high speed Internet along a curve similar to that of urban markets, but several years behind.
Some studies place rural penetration of true high-speed Internet at as low as 20%, which leaves enormous space for growth. Since most homes already have Cable TV installed, Cable the obvious choice for users wishing to upgrade to high-speed Internet, leaving Cable operators ideally positioned to exploit this trend. A study by J.D. Power and Associates recently concluded that Cable is emerging as the dominant and fastest growing high speed Internet service, with cable users up to 41% (from 36% in 2007) and DSL up to 30% (from 27% in 2007). Cable providers now supply high speed Internet to about 10 million US homes, with DSL trailing at 6 million.
Cable Television is the preferred delivery mechanism for high speed Internet services, particularly since a large percentage of homes already have cable infrastructure installed. Summit believes that aggressive marketing of improved high speed Internet and other services suitable for delivery through existing Cable infrastructure can drive substantial increases in revenue per subscriber with relatively low incremental costs. There are also many Internet wireless applications that provide cost effective ways to offer services to rural markets that until now have had virtually no alternatives.
Summit Digital does not intend to construct new cable systems. The Company is focused on acquiring existing cable systems, aggregating them into a single Multi-System Operator structure and creating growth by upgrading management, improving efficiency, cutting costs, and fully exploiting the opportunities presented by bundling multiple services such as basic TV, premium TV, video surveillance and high speed Internet service.
Many major MSOs show monthly billings of over $100/customer. Research firm SNL Kagan reports that Comcast’s subscribers pay on average more than $115 a month, with high speed Internet and voice services boosting billing. Convergence Inc, which publishes a comprehensive annual study titled The Battle for the American Couch Potato: Bundling, TV, Internet, Telephone, Wireless, estimates that at the end of 2008 61% of American cable TV subscribers also purchased high speed Internet from their cable provider, and projected that this figure would rise to 79% by the end of 2011.
The systems targeted by Summit lag well behind these national averages. Rural cable television operators surveyed by Summit as acquisition candidates typically have monthly billings below $50/customer, with Internet penetration as low as 25%. Summit believes that this disparity represents a substantial opportunity, and that by adopting the bundling strategies and aggressive marketing techniques standard among larger MSOs, Internet penetration and monthly billing in small networks can rapidly increase to levels comparable to national averages.
Summit Digital Inc. also intends to take decisive stops to streamline management, improve efficiency, and reduce costs in systems it acquires, using the following areas of emphasis:
- Billing, collection, call center and scheduling services will be centralized, significantly reducing costs for each system.
- Head technicians located at corporate headquarters will direct employees and monitor their performance standardizing and service practices and quality control.
- Theft by employees – installing free television and Internet for friend and family – is rampant in rural cable systems. Measures to prevent theft will be installed.
- Equipment purchasing will be combined to achieve economies of scale and reduce costs.
- Structured management systems stressing continuous documentation, performance evaluation, and action to address weaknesses will be installed, addressing a common management deficiency in small single-system operators.
The single most important factor in turning around these troubled systems will be the ability to restructure the debt load that in many cases left these companies non-viable before they ever started business. Summit is prepared to buy these systems with a combination of cash, debt and equity. This offers original investors and creditors an exit strategy with a significant upside, and provides substantial leverage for debt restructuring.
Targeting a Specific Growth Niche
Summit Digital's business strategy is to acquire systems meeting viability criteria; aggregate them in a multiple system operator format, improve management systems, reduce costs, and add revenue by aggressively promoting high-value services such as high speed Internet and video surveillance. We believe that we can substantially increase both our subscriber base and our revenue per subscriber by following this strategy.
Summit Digital Holdings Inc. currently has entered into non disclosure agreements and is entering into letters of intent with four cable companies located in Michigan, Texas and Oklahoma that would bring in over 17,000 cable television subscribers with a gross monthly billing of $765,000 a month and 4000 Internet subscribers with a gross monthly billing of $200,000 a month. These are up and running systems that have been over financed and poorly managed, but which offer excellent turnaround potential for a competent management team.
These acquisitions represent a small portion of the systems that are available and that fit our criteria. We believe that by aggressively pursuing this largely vacant high-growth market we can generate substantial increases in revenues, earnings, and shareholder value.
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