Question-and-Answer Session
Operator
Your first question comes from Craig Moffett - Sanford Bernstein.
Craig Moffett - Sanford C. Bernstein
Tom, I wonder if you could talk a little bit more about the capital intensity trends that you are seeing. Exactly what is it that is driving the big reduction from last year? You said it is clearly a lot of it is customer premise equipment. Is that a reduction in capitalized labor? Is that a reduction in unit set-top box cost?
Given the reduction in capital intensity that you are seeing now and looking forward, a question for Jimmy is what do you do with the cash at this point? Do you consider a dividend, do you consider special dividends, and how do you prioritize the options?
Tom Rutledge
Craig, the biggest single driver in the reduction of capital intensity is the fact that our digital penetration is so high; that our need to buy additional set-top boxes is declining. So we've gone through a process of essentially digitizing our entire analog base now at 83%. We have a pretty deep digital penetration per household. So while there is capitalized labor associated with transactions which also is reduced as transactions are reduced, the bulk of the capital intensity reduction comes from less customer premises equipment.
The biggest single cost of customer premises equipment is digital set-top boxes; modems have actually gotten much cheaper and are less significant by a factor of almost 4:1 relative to set-top boxes when it comes to RGU costs. Voice capital on a customer premises basis, almost 13:1 in terms of its reduction in capital cost per RGU gain. So it is a much less capital intensive business going forward.
Craig Moffett - Sanford C. Bernstein
How long do you think that capital intensity can eventually get to, Tom?
Tom Rutledge
Well, it all depends on how fast you are growing your RGU base, obviously. But I don't think modem and phone or voice capital costs significantly less going forward. I think most of the cost reductions are out of it. There is still some capital to be spent on network going forward, particularly in increasing high-speed data speeds. Now we have already spent $15 a passing in '06 to take us up to 30 megabit speeds. Similar kinds of investments may be required in the future, but from a CPE perspective I don't think we will get much in reduction going forward.
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