Business Analysis for Cable Companies

Transcription

1 Business Analysis for Cable Companies

2 New World Services

3 Business Analysis for Cable Companies Cisco Systems provides several business analysis tools for cable operators. These tools are designed to optimize Data-over-Cable Service Interface Specification (DOCSIS) compatible delivery of New World services such as data, voice, and video networks. Executive Summary If you are a cable operator, you face a tremendously important business decision: whether to make significant investments in digital IP services or stay with traditional analog content delivery. To help cable operators make a fact-based, plant-specific decision, Cisco Systems provides numerous strategic analysis services and a suite of powerful tools at no charge. Model Your Digital Service Delivery Options on Facts Today s cable business and physical infrastructure is based on content delivery via analog signals. Tomorrow s opportunity for cable operators is an extended combination of offerings via DOCSIS or DOCSIS-compatible digital signals. By adding Internet access and other interactivity via IP-enabled digital signals to traditional content options, these two-way services can help defend your core business as well as capture new revenues (Figure 1). Offering two-way services can also open new opportunities to gain revenue from business subscribers in your coverage area. For many cable operators, local businesses represent an untapped population of potential subscribers, and at the same time, most businesses are becoming increasingly dependent on digital service delivery to optimize their own costs and opportunities. Even small local businesses are taking advantage of the Internet for information gathering, customer contact, and electronic commerce (e-commerce), to mention just a few uses. Whether your subscribers are strictly homes or a mix of homes and businesses, you can offer many new services, including: Residential Internet access Internet telephony Telecommuter network access (virtual private networks [VPNs]) Digital program delivery Targeted advertising E-commerce transactions Figure 1 Financial Opportunity Model Objectives Actions Revenue Per Sub Capture New Revenue Defend Core Business Reclaim Cash Flow NVOD/VOD Transaction Advertising Telephone/Voice Internet/Data Enhanced Cable Segmentation Marketing Branding Bundling Set Top Boxes Modems $10 $10 $10 $25 $25 $10 $30 Tomorrow (Digital) Today (Analog) 1

4 Assessing the Opportunities As cable operators, the business challenges in understanding the rationale for investment in new services begins with several questions: How large is the opportunity? How much does it cost? Is it worth the investment? How should I approach these new opportunities to maximize cash flow, revenue, and profit? Cisco Systems recognizes an industry-wide need to find accurate answers to these questions. Consistent, dependable data is needed before most cable operators can confidently decide to develop a complete digital deployment business plan, much less commit to its scale and scope. Of course, the answers are different for every cable installation. Dozens of variables must be considered to answer the above questions in a way appropriate to the unique characteristics of your plant. Cisco has developed an Analysis Framework to help you organize assumptions into logical pieces. Thoughtful analysis of these pieces through the use of financial modeling tools will help you understand the implications of each assumption on the final results. Bandwidth demand from each household drives the engineering requirements for the entire system. Therefore, determining this demand (Figure 2) is the first step of any analysis process. This calculation is a function of the following assumptions: Rollout schedule for two-way services How many homes will have access to the new offering? Market penetration How many of those homes with access will actually purchase the new services? Product usage Of those who subscribe, how frequently will they use the service and when? Product definition How much bandwidth is required when each service is being used? Figure 2 Analytical Framework Analytical Framework Total Revenues Equipment Expense Operations Costs 3 Pricing and Indirect Revenues 4 Equipment Cost and Depreciation Schedule 1 Product Definitions 2 RF Throughput Capacity Service Rollout Schedule Market Penetration Product Usage Equipment Requirement Equipment Capacity Bandwidth Demand ssessing Bandwidth Supply

5 Revenue With bandwidth demand established, information about subscriber (for example, customer care expense) and those an multiple system operators (MSOs) radio frequency that are considered global expenses (for example, G & A (RF) plant is required to calculate how many up-stream or Marketing). and downstream channels will be required to satisfy this Capital expenditures, costs, and revenue represent the demand. This statement transitions into two questions: entire set of information required to produce a complete Given the noise characteristics of the plant, how economic profile of any potential service. This profile many nodes can be combined without compromising should include financial statements as well as numerous data integrity? additional analytical tools that can help highlight the What is the bandwidth throughput potential in the different economic relationships that exist in the system. upstream? Downstream? Cisco Will Help Assumptions about the equipment capabilities of your rollout are added to the bandwidth demand/supply framework opportunities has limited utility unless this framework is Of course, establishing a framework to evaluate economic to determine the equipment necessary to provide two-way combined with industry expertise and intelligent tools that services. This equipment requirement, multiplied by price can execute the analysis to draw powerful economic relationships. Therefore, Cisco Systems continues to improve its and a Moore s Law adjustment, provides cash expenditures for the entire system. understanding of the two-way cable space through close Revenue is derived by adding pricing assumptions work with many its customers. In addition, Cisco has built to the market penetration and product usage assumptions two sophisticated modeling tools that are flexible enough to already defined in bandwidth demand calculations. Operating adapt to the unique characteristics of your plant and use this costs are broken into those that scale with each additional approach to maximize overall effectiveness. 3 Table 1 IP Business Models Tops-Down Strategic Analysis Tool High-level network topology assumptions are used to derive an average network. How many systems are included in the model? How many headends per system? How many hubs per headend? How many nodes per hub? How many homes passed per node? Usage assumptions are at peak only All consumers have identical patterns Two service types are available: Streaming services (VoIP, video, etc.) Bursty services (high-speed data) Complete pro-forma financial statements and full complement of analysis tools are included. All output is a function of the average subscriber and average network topology All output is aggregate information Bottoms-Up Tactical Analysis Tool Robust network layout assumptions construct an accurate picture of the network from the bottom up. Step 1: Define each different user segment. Step 2: Define nodes as a function of segments. Step 3: Define hubs as a function of nodes. Step 4: Define networks as a function of hubs. Place equipment in each layer of the network when the layer is defined. Same service types are available as in Tops-Down model. Service usage is defined differently for each segment. Complete financial statements and full complement of analysis tools are included. Output is based on detailed assumptions Output can be produced for individual segments or portions of network

6 nalysis Too The Bottoms-Up analysis tool helps develop a much deeper understanding of the business as a whole. An extremely detailed assumption set makes it a valuable tool for discovering where the financial leverage resides in your particular business model. Cisco provides these powerful tools free of charge, because Cisco understands that no one can know your business as well as you do and it is working hard to move the entire market ahead as quickly as possible. At the same time, Cisco has used its tools, industry experience, and strategic expertise to help several MSOs formulate their business plans and make difficult strategic decisions. It is important to Cisco to gather as much information as possible about real-world usage patterns, network configuration options, and economic realities so that Cisco can provide useful strategic guidance to complement its powerful tools. These two cable IP business models (Table 1, on previous When Cisco works with its customers, the priority is to page) are designed to leverage the Cisco analysis framework to quickly calculate capital expenditures, costs, provide sound advice on difficult questions. The tools are the first stage of this process. and revenue associated with IP services implemented on cable networks. The tools are designed to enable powerful Get the Tops-Down View Quickly sensitivity analysis with relatively little effort by the end The simpler of the two financial models, the Tops-Down user. These two models are known as: strategic analysis tool (Figure 3) can provide results after Tops-Down strategic analysis tool just 30 or 45 minutes of answering questions about expected Bottoms-Up tactical analysis tool customer behavior, planned product offerings, plant capabilities, and pricing/operating costs. When these questions Both tools derive a complete financial framework and are answered, the model combines the information with provide an effective analysis structure to better understand assumptions about equipment capability costs to produce the sensitivity of the economic system to assumptions a complete financial record. such as: With this output, it is easy to Market size (rollout and market penetration assumptions) develop powerful sensitivity Churn analysis to drive insightful Product usage strategic decision-making. Potential bandwidth throughput in the RF plant Operating costs Pricing strategies The Tops-Down analysis tool quickly creates an expected financial picture from a high-level set of assumptions about plant topology. The user-friendly interface and speed with which the model can be manipulated enable the user to develop a powerful understanding of generic economic sensitivities in a very short timeframe.

7 s Figure 3 Main Menu Tops-Down Strategic Analysis Tool Demand Expected Network Roll-out Plant Geography Supply Plant Bandwidth Capacity Economics Expected Network and Connectivity Market Penetration and Product Usage Product Definitions Calculations and Projections Operations Costs Product Revenue and Pricing Financial Statistics Balance Sheet P and L Output Choices CAPEX/User $$/Mhz Graphical Output Cash Flow Monthly π The executive-friendly interface of the Tops-Down strategic analysis tool presents a series of questions about your current and expected situation, such as: Geographic coverage and build-out schedule How many systems will you service and when? How many headends per system? How many hubs per headend? How many nodes per hub? How many homes passed per node? Market penetration After you ve implemented two-way capabilities, what percentage of your homes passed will subscribe to the new services? Service definition and product usage About how many subscribers will use each of these products during peak times? How actively will they use each product? Are they constantly downloading files or simply reading text? Will you offer data services, voice services, or both? How much data throughput will you provision? Plant characteristics What potential bandwidth can you expect to achieve on your plant? How much geographical coverage does your plant provide? Economic realities How much will the equipment cost? Will you need to lease bandwidth on the back-end of the service? How much? How much do you expect customer care to cost? What is the cost for an installation? Cancellation? What pricing strategy are you going to set for the different services? 5

8 Develop Figure 4 Net Income Figure 7 Operating Cash Flow Dollars per Subscriber-Month Net Income 10 Total Dollars (Net-Wide) Figure 5 Capitalized Equipment Purchases Figure 8 Revenue Per Channel (Per Each Node) Dollars per Subscriber-Month Node-Based Equipment Hub-Based Equipment Headend- Home-Based Equipment City-Based Equipment Based Equipment Dollars per Quarter 1, 1, Q4 2, Q3 3, Q2 4, 4, Q4 5, Q3 6, Q2 7, 7, Q4 8, Q3 Dollars per Subscriber-Month 9, Q2 10, 10, Q4 Figure 6 Profit Snapshot for Average Subscriber-Month as of 4, Revenues Network Equipment Maintenance Network Connectivity Costs Non-Network Service Oriented Costs Marketing Other Fixed Costs Interest Payments Depreciation/ Amortization Extraordinary Results Taxes Net Income

9 Your Plan The resulting analysis, available immediately, describes what your financial situation would be if you were to implement the modeled system. It provides complete economics as well as numerous financial statistics about the system you ve defined by answering the questions. A small sample of these outputs is provided in Figures 4 through 8 and illustrates the capabilities of the model. With so many powerful outputs, it is easy to create a number of what-if scenarios for basic questions such as: What happens if usage doubles? What is the cost of adding voice services? When do bandwidth requirements replace geographic requirements? Which assumptions truly impact net income? Cash flow? Figure 9 shows one of the many sensitivity analysis that could be produced from the output of this model. Cisco is prepared to assist in this analysis and is willing to use these techniques to help you develop powerful strategic insights from the assumptions sets you ve entered. Figure 9 Sensitivity of Five s Net Present Value to Variables Market Penetration Service Price Customer Care Budget Service/ House Hold Variable #5 Variable #6 Variable #7 Variable #8 Variable #9 Variable #10 Variable #11 7

10 Get the Bottoms-Up View and Develop Your Plan The Bottoms-Up analysis tool is designed to provide an in-depth analysis of the IP services opportunity on your specific plant. Using a much more robust assumption set, it provides a similar set of outputs to those illustrated for the Tops-Down tool. However, with the more detailed assumptions (Figure 10) the model is able to provide a much more accurate picture of your particular situation. It is also able to provide the financial results in much more detail. The Bottoms-Up tool is meant to be part of the tactical decision-making process. When key points are identified using the Tops-Down tool, the Bottoms-Up model provides a powerful method for investigating these critical data points in more detail. Because the entire model is driven from a market-up perspective, it allows unique insight into your specific customer situation as well as the flexibility to use the model with whatever level of customer research that you have done. For example, with the Bottoms-Up analysis tool, you will define: Characteristics for each customer segment Node count by customer segment Hub equipment by nodes Network equipment by nodes Figure 10 Bottoms-Up Analysis Tool

11 The most fundamental building block of the model, a segment (Figure 11), is simply a profile for a group of people. Users that differ in any one of four general areas can be classified into different segments. Because of the flexibility in definition of these segments, numerous strategies can be used to profile the customers in the cable system. These strategies can be based entirely on the level of information that you have about your subscribers (Figure 12, next page). When the segments are defined, the model allows the operator to specify the mix of those segments in each node (Figure 13, page 11). These node definitions are then used in the definition of hubs and the network as a whole to provide the model with an accurate picture of your network and its low-level requirements. This detailed assumption set is the key that unlocks the powerful financial analysis available throughout the rest of the model. Figure 11 Segment Profile 9 Financial

12 The resulting analysis will give you a detailed view of your proposed IP rollout. At each level of deployment, you will be able to see how much any variable will affect your bandwidth needs, total capital expenditure, monthly operations costs, total revenue, net revenue, profit and loss, and cash flow. In addition, the Bottoms-Up analysis tool is designed to specify the equipment you will need at each hub. This setup is possible because it accounts for the many different characteristics and usage patterns that will define your bandwidth needs at each hub. Figure 12 Segmentations Strategies andwidth

13 Optimize Your Plan with Specific Questions As with the Tops-Down tool, this model allows the user to explore a series of advanced what-if scenarios to fine-tune the IP service rollout plan. For example, if there is a business in your service area, can you offer it off-peak discount services without exceeding your bandwidth threshold? Where should you deploy your marketing funds to maximize profit? To maximize cash flow? 11 Figure 13 Node Definitions

14 Conclusion IP services represent a high-value opportunity for cable operators, taking the traditional cable business to new levels of service delivery. However, the transition from analog to digital services requires considerable preinvestment planning. Today, few tools are available to help with this process. Cisco brings the Tops-Down strategic analysis tool and the Bottoms-Up tactical analysis tool to its customers as a value-added part of its relationship. The company s goal is to provide sound answers to the strategic financial questions encountered in planning any IP-overcable deployment. To achieve this goal, Cisco Systems is committed to providing you with the personalized help you will need to effectively use all of its tools and their subsequent updates. The Cisco team of technical and business specialists can also help you gather more precise information about your customers to drive more accurate projections and results. These modeling tools and services are yet another example of the unique services designed by Cisco Systems. To take advantage of services as part of the free strategic support provided by Cisco, contact your account manager or visit

15 Most companies talk about providing excellent service, but Cisco actually delivers. This financial model for cable-based IP telephony is a great example; they have taken an intellectually rigorous look at my business and constructed a robust, credible, and highly flexible tool for me to understand the magnitude of the opportunity and the timing of investment required. This tool helps provide me with certainty in a highly uncertain environment. Developing and sharing this tool demonstrates that Cisco truly wants to be a partner in my business. Jeff Turner Director of IP Technology Media One

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