Changing Lanes
Open access deal with AOL spurs broadband provider's strategy shift
By Karen Brown
from the May 21, 2001 issue of Broadband Week
It began with a focus on helping small market cable operators build and field high-speed data services, by sharing the cost and the profit. But in these tough economic times, High Speed Access Corp. is finding that strategy is too risky for business.
So the broadband service provider is largely abandoning its original "turnkey" offering splitting profits and risk 50-50 with cable operators for systems it helps build, manage, market and operate. Instead, it is veering toward network service agreements, where operators pay HSA for services rendered and shoulder the capital risk on their own.
That strategy will get a significant boost from the company's latest deal to get access to the cable networks of AOL Time Warner, which in short order will make HSA a broadband ISP competing shoulder-to-shoulder with the likes of America Online, Earthlink and Excite@Home for cable modem subscribers.
Dan O'Brien, CEO of Littleton, Colo.-based HSA, says the company will ride TW Cable into the MSO's top 20 markets, which are concentrated in major metro areas of New York, North Carolina, Ohio and Texas, a presence that provides a substantial growth opportunity that doesn't exist in the business of building cable modem systems.
"Given that most operators today already have a relationship with Road Runner, or @Home, or us, the opportunity to actually build a network for them, at least in this generation of networks, is limited," O'Brien says.
HSA will begin selling retail broadband Internet access services over its first TW Cable systems in the third or fourth quarter once Time Warner and its ISP customers work out the network and back office challenges of open access. HSA still has to work out exactly how it will brand its service and differentiate itself from other competitors--such as ISP bigwigs AOL and Earthlink--who will have the same access capabilities.
HSA had 140,000 residential cable modem subscribers at the end of the first quarter, up from 100,000 at the end of the fourth quarter and 26,000 a year earlier.
It is the third ISP, after Earthlink and Juno Online Services, to gain access to subscribers via Time Warner Cable systems, under a pledge the MSO's parent made with the Federal Trade Commission to gain approval of TW's mega-merger with America Online.
O'Brien notes his company has been in discussions with major content aggregators--the likes of Yahoo! and Microsoft's MSN--about a possible branding deal but nothing has been finalized yet.
He also says that rather than relying primarily on access subscribership to make a profit, HSA at some point also plans to offer its subscribers value-added services such as video-on-demand and streaming video over the cable network.
Successfully executing this strategy will mark a virtual makeover of HSA, which like other companies providing turnkey broadband access services--SoftNet Systems Inc.'s now-defunct ISP Channel, for example--found the going tough.
While smaller operators found the revenue-sharing agreements a useful way to add snazzy broadband services at a relatively low risk, the developing broadband economy deflated profit potential for HSA and other providers.
"There's no value accorded to HSA from losing money," O'Brien says. "When these businesses started, footprint was more important than underlying economics. Fortunately we started to make our changes before the market shifted, but now it is clear to everyone that you're not going to be valued unless you have a business model that generates cash flow and/or income."
That is especially true with older, less reliable systems using a telephone line for the return path. HSA last month notified these system operators they had to shift to the network services agreement model or the contract would be terminated. Under the new arrangement, HSA collects a flat monthly fee to operate the network and provide tech support, and it is up to the operator to bill and collect from the customers.
"When you combine a small system with being one-way, we generally find that penetration is half or less in one-way markets than it is in two-way markets, and then you have the incremental costs," O'Brien says. "None of those systems will ever be profitable for us on a 50-50 basis."
HSA did talk to operators about changing the revenue split, but "that's not something that is accepted for the cable operator," O'Brien notes.
Although the 60-day notice was issued April 19, it will likely take about 90 days to wrap up negotiations with affected operators. The change affect about 4 percent of HSA's subscriber base, and even if all of these subscribers are lost, it will not affect the company's new subscriber growth projections in the second quarter, O'Brien says.
HSA still is offering turnkey systems to two-way cable plant operators, but even there the rules will be changing. "We're not offering 50-50 terms on a full turnkey basis to anyone--even if they have two-way plant," O'Brien says. Of the older 50-50 agreements, he adds, "Certainly we would seek to renegotiate terms as these contracts come up for renewal so it is more representative of value created and paid for."
The sole exception is some one-way systems with Charter Communications, which have not received termination notices. Most are on an upgrade schedule, and Charter is large enough of an overall contract for HSA that the cost to keep these one-way systems on the books is "an acceptable trade-off," O'Brien says.
With these changes also came staff reductions at HSA--about 70 of the company's 761 employees--mostly in sales and marketing for the turnkey business.
While the business shift is intended to put HSA on more solid footing, the company still does not have enough cash to reach a break-even point. O'Brien hesitates to say the company will need to seek an additional funding round, saying there is enough money to get the company through at least another 12 months. But raising money will be on the list of things to do.
"We don't have to raise money right now, but it is something from a public company perspective that's one of my jobs as CEO," he says. "We like our business plan. We think we have a strong plan and we're executing very well against it. Yet, we do still need to raise money."
Cable watcher Michael Harris, president of Kinetic Strategies, says it was always a question whether HSA could make money with smaller operators on a revenue sharing basis. He thinks the change is a necessity of the Internet economy these days.
"Certainly it's reflective of the overall Internet and broadband market trends toward profitability rather than market share," Harris says. "They and other players inked very aggressive contracts in the early days in an effort to lock up broadband real estate. Now it's important for them not just to have a footprint but to have profits ... so they are obviously revisiting those contracts and trying to make the best business decisions."
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