Wireless—German Cable's Holy Grail?

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By Barry Flynn
Barry Flynn is a Winchester, England-based technology writer and consultant, and runs the UK digital terrestrial TV website www.idtv.co.u. Email: barry@idtv.co.uk.

For German cable, digitalization always seems to remain tantalizingly out of reach. Three years ago, as venture capitalists circled round the broken-up remains of incumbent telco Deutsche Telekom's cable empire, it looked as if a combination of cash and consolidation might overcome its legacy infrastructure problems.

But little has changed. Back in 2002, there were just 1.4 million digital cable subscribers—this in a country with 34 million TV households, 52 per cent of which are hooked up to a cable net. Today, according to the latest official figures from the German regulator (see table) there are still only 1.7 million. In other words, digital cable uptake is progressing by a mere 100,000 subscribers per year.

The “last mile”" issues are considerable. Historically, Telekom failed to invest in upgrading its cable plant, preferring to concentrate instead on rolling out ADSL on its POTS network. That means that most German cable networks today are still analog and one-way.

But following Telekom's Ma Bell-like break-up, capex has started to ramp up. This summer, the German cable association claimed that three new operators—Kabel Deutschland (KDG), Unity Media (which incorporates the recently merged ish and iesy networks) and Kabel Baden-Württemberg (KBW)—would this year be plowing €185 million ($222 million) into upgrades, up from €172 million ($207 million) in 2004.

KDG's planned upgrade this fall of its cable network in the two German states of Rhineland-Palatinate and Saarland will, for instance, enable it to offer a “triple play” service—TV, Internet and telephone services—to over a million households in both states.

However, network upgrades are of little benefit if you don't own the customer at the other end—and in a good 60 percent of cases, generally in apartment blocks, cable operators don't. Instead, the final drop will be controlled by someone else, a so-called ‘Network Level 4’ operator (table).

This situation—a legacy of the German government's attempt to undermine Telekom's old cable monopoly—remains an intractable issue. Imagine how slow US cable's conversion to digital would have been if operators had not had a direct billing and marketing relationship with their own subscribers.

Consolidation between Level 3 and Level 4 operators would seem to be one obvious solution: if you don't own the customer, buy the company that does. As Stefan Lennardt, head of company communications at ish, puts it, “If you ask me how to overcome the last mile [issues], integration is, of course, a very powerful way of doing it.”

That is one reason why Unity agreed in August to purchase the country's biggest Level 4 operator, Tele Columbus, with 2.6 million cable subscribers. Although the regulatory authorities have in some cases allowed such consolidation to take place in the past, the process is complex and time-consuming because of the potential monopolistic implications.

The Unity deal, for example, had to be reviewed by European regulators in Brussels first, and has only just been referred to the German Cartel Office. “We don't know if the Cartel Office will allow it in the end,” admits Lennardt. “We're hopeful we will know some time this year, but that remains to be seen.”

But consolidation—even if it is allowed by the regulators—doesn't solve everything. Even where cable operators do “own” the relationship, they are up against a system in which their customers have been accustomed to consuming cable service as a utility bundled in with their rent.

So cable operators wanting to upgrade their customers to digital have first to persuade them to pay for a set-top box (an unfamiliar device in Germany, where the cable outlet plugs straight into the back of the TV set), and then to start paying extra for a service they had always traditionally regarded as “free.” To make matters worse, it often requires the agreement of everyone on a housing estate or in an apartment block to upgrade before digitalization can proceed.

Cathy Dobson, managing director of Düsseldorf-based consultants Red Door, believes “that's been what's held up the whole of the digitalization process. And that's why all of the attempts by ish and iesy [to roll out digital television] have failed.” Unity currently has 5.2 million subscribers, but at the last count, although it began marketing digital TV as long ago as November 2003, it had only 90,000 digital subscribers.

Dobson argues that the only realistic solution is one where “those people who don't want a set-top box or aren't prepared to buy one continue to get their analog cable feed and everybody else just has to bypass that cable loop altogether.”

Ironically, says Dobson, “this is also what Deutsche Telekom's strategy is with its TV-over-Internet Protocol [service] on DSL, which is basically trying to provide a kind of digital enhancement to your television over a different network completely. So having sold off the cable networks they're effectively now trying to provide pay-TV via ADSL.”

Since the cable operators don't have access to the local loop either, one way of addressing the issue would be to use a wireless approach: that way, they could offer new services to their customers without even needing to step inside the building.

Indeed, consultancy PriceWaterhouseCoopers, which this summer hosted a cable summit on the new broadband wireless standard, WiMAX, in Berlin, has concluded that German cable operators' ability to upgrade their networks to offer advanced interactive services will ultimately depend on them winning new wireless licenses.

German cable operators are already increasingly receptive to unwired solutions as a way of solving their last-mile problems. KDG, the biggest of the three cable operators, started offering WiFi-based broadband in parts of its Munich service area this year. KBW, meanwhile, says it is considering launching a WiMax trial.

Snare your customer with broadband, so the thinking goes, and you can then upgrade them to a full triple-play service incorporating digital TV and voice over Internet Protocol (VoIP) as well. Significantly, this summer ish demonstrated technology which could allow it to provide its broadband customers with an internet protocol television (IPTV) service through their cable modems.

Tony di Paolo, chief executive of Mediacell, the Denver-based company which provides KDG with its wireless technology, argues that such an approach has benefits beyond just “a replacement for the wire. I think what we showed [in Munich] was that it was an adequate replacement for the wire, but the marketing feedback seems to indicate that it's a feature-rich new product for them. It's the same feedback we get in the US, where the cable operators see the wireless as an additional feature, because it can actually make their wired service more attractive.”

Mediacell's technology is installed in KDG streetside cabinets over a 20-square mile coverage area in Munich. Within that service area, anyone can subscribe to the service, regardless of whether they happen to be existing cable subscribers. According to Di Paolo, the wireless units typically take just 15 minutes to be installed in each cabinet. With each one costing €3,000 [$3,600], including installation, and able in principle to supply 2,700 subscribers with a 1 Mbps service, the incremental capital expenditure per subscriber could come down to just over one Euro [$1.20],” he suggests.

Di Paolo is confident the technology can cope with delivering digital video at rates of up to 10 Mbps, if KDG wanted to do that. “We use unlicensed spectrum for the air link and those bandwidths go up to 100 Mbps per second over a relatively short range,” he points out.

In any case, the issue is not really the technology, but the cost of deploying more Mediacell units within each coverage area, he argues. “Putting them in is fairly inexpensive, and the cable operator already has a ubiquitous presence anyway, so they really don't need to run extra wire. So it really comes down to the price we end up charging for our device.” They're already pretty cheap, he notes, and their cost can be expected to fall with time.

Ironically, any further rollout of Mediacell's technology on KDG's network is temporarily stalled by yet another legacy issue associated with Deutsche Telekom's previous stranglehold on cable. According to a procurement policy inherited from the incumbent telco, KDG must go through a competitive tendering process—and Mediacell is, thus far, the only manufacturer able to supply it with a carrier-grade wireless product.

Di Paolo is philosophical about the problem, and says such “basic inertia” is to be expected from the cable operators, who are all geared so tightly to legacy wired systems that “any new technology such as this represents a sea change for them.”

Such outmoded attitudes towards innovation may, in the end, be the major factor that has to change in order for Germany's outdated cable system to move into the 21st Century.

Table 1: Germany's Digital TV Market by Platform

Table 2: Germany's Four-tier Cable System

• Network level 1 (NE 1) is the national backbone of the cable network. This begins at the TV or radio studios, where video and audio signals are fed out onto the network, and terminate at cable head-ends (see NE 2).
• Network level 2 (NE 2) is the regional backbone of the cable network (otherwise known as the regional trunk or distribution network). NE 2 transmits signals to NE 3 networks and consists of headends and associated coaxial cable networks.
• Network level 3 (NE 3) is the local distribution network and ends at the limits of a building or property. In general, NE 3 consists of coaxial copper cables located in underground cable ducts.
• Network level 4 (NE 4) comprises the co-ax cable networks inside buildings (single-family homes or multiple dwelling units). NE 4 typically terminates at a wall-socket (e.g. in the livingroom).