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State
of Cable TV Industry - Big Picture:
Overview - Few businesses
have enjoyed the rapid growth and sustained acceptance of
cable. The Cable industry grew from a handful of subscribers
in 1948 to over 60 million in the 1990s. During that time,
the Cable industry was able to increase its average revenue
per user (ARPU) regularly with such services as expanded channel
lineups and premium subscription packages. Content, not technology,
defined the successful Cable business model. Today, Cable
passes 95% of the country's 108 million TV households with
service reaching 67.7% of them. The industry produced $51.3
billion in revenues during 2003, and it's poised to earn more
from a plethora of new products. At the same rate, with cable
or satellite TV in about 88% of the nation's TV homes, the
industry is maturing. Programming has increasingly become
"commoditized," with both Cable and direct broadcast
satellite offering a broad selection of programming packages
to meet a wide variety of consumer tastes. It is becoming
more difficult for service providers to demonstrate differentiation
in terms of content, and both Cable and DBS are looking for
ways to increase revenue and retain customers. For Cable,
with almost 70% penetration, much of the industry's future
growth will come from its existing customers. It is recognized
that advanced services such as High Speed Data and Voice over
Internet Protocol are key to revenue growth, and investment
in these technologies has been significant. However, customers
still choose their service provider based on the quality of
video offerings, and it is imperative that the Cable industry
continues to improve the video portion of its product portfolio.
This will be done not through additions to the programming
lineup, but by exploiting the industry's technological superiority.
At any rate, for MSOs, future growth will come from the added
ARPU found in additional services like High-Definition TV
(HDTV), Digital Video Recorders (DVRs), Subscription Video
On Demand (SVOD), Video On Demand (VOD), High Speed Data (HSD)
and Voice over Internet Protocol (VOIP) telephony. Each will
provide consumers with more value and satisfaction, and in
turn, will contribute to a higher retention rate. The ability
to deliver these new services is imperative, both for the
security of Cable's financial health and in light of more
threatening competition.
Wall
Street and investors view on industry
- Cable has been a growth industry. It's past was built on
growth and, though the multichannel video market is maturing,
it's future will be built on growth. But there are concerns
from Wall Street and the investment community about how much
growth can be expected. Those concerns surfaced once again
in May (2004) during MSOs quarterly earnings reports. For
one, Cable's main product, Digital Cable, is slowing. In May,
2004, MSOs Digital sub growth for the top 10 cable operators
dropped by 15% in the first quarter compared with the fourth
quarter of 2003. Total digital subscriber numbers grew from
19.16 million to 22.02 million. The comes on the heels of
Digital Cable's continued low take rate. For a variety of
reasons, namely value, the service hasn't caught on in the
way many had hoped, forcing Cable operators to lean more heavily
on broadband Internet or high-definition TV. "Cable companies
need to add revenue streams, and video is a mature business,"
said Mike Goodman, an analyst at the Yankee Group. Secondly,
as mentioned above, multichannel video services is a maturing
market. Despite the fact that free cash flow is starting,
analysts note that earnings growth is slowing or revenue and
cash flow growth is slowing. And competition is becoming more
fierce. For one, News Corp. chairman Rupert Murdoch has said
he wants 20 million subs at DirecTV. That’s another eight
million, a majority which is expected to come from Cable systems.
Secondly, there's the Regional Bell Operating Companies (RBOCs),
who are aggressively pricing their DSL products and making
significant gains on Cable's lead on broadband connections.
Wall Street is also concerned about basic-subscriber losses
at several MSOs, whether VoIP is rolling out fast enough to
mitigate some of those ominous high-speed trends, and about
how effective VOD, HDTV and DVR will be in combating satellite.
But Cable companies are optimistic. Overall, cable operators
were upbeat about the industry's financial outlook, as most
companies are emerging from the $85 billion spending spree
to upgrade their networks for digital transmission. New services
such as DVRs and SVOD have created excitement with subscribers,
and the margins for VoIP are expected to be 30-40% or more.
"Innovation is always risky," says OpenTV chairman
and CEO Jim Chiddix. "But not innovating is also risky.
In this competitive environment, operators don't have the
luxury of time to make safe decisions. Cable is in three businesses
today, and it's a drop-down, drag-out fight in all categories.
They can't wait for the future and then instantly react and
expect to succeed. These are big businesses, and they can
afford to do it," Chiddix says. "You can't ignore
the spending concerns of Wall Street. But you can't turn over
your business to quarterly results either. You've got to take
risks or you might as well hang it up."
Issues
facing industry
- There are several issues facing the Cable industry, most
of which will be explored in detail further below or on different
pages in this site. Earlier in 2003, one of the most pressing
needs was to reach free cash flow, or net Income before interest
expenses, income taxes, depreciation and amortization. However,
with the great strides the industry has taken towards reaching
this goal, coupled with the industry moving past the Adelphia
scandal and stock upswing, MSOs are now looking forward. They
know that the huge capital outlays required to build out their
networks are a thing of the past, and though more investment
will be needed to better position themselves against the competition,
they can now concentrate on the strategies needed to recover
their investments. That starts with ramping up their product
offerings to be competitive with satellite. Simply put, Cable
needs to retain it's customers, and get more from them. But
satellite providers, led by Rupert Murdoch's DirecTV, are
coming on strong. Since 1994, the direct-to-home satellite
broadcasters DirecTV and EchoStar have amassed over 20 million
subscribers, many at Cable's expense. And while they have
made great gains in rural markets where Cable competition
was poor or non-existent, they have continued to lure away
many of Cable's most lucrative subscribers (early adopters
and premium service customers). But Cable is fighting back
with new products such as DVRs, HSD and even SVOD. But the
competition doesn't stop there. The regional bell operating
companies (RBOCs) have teamed with the satellite providers
to offer bundles of voice, video and data. They are also using
aggressive pricing tactics to gain new HSD subscribers, making
great gains along the way. The competitive landscape is having
other effects on the Cable industry too. For one, MSOs want
to become better positioned against News Corp's vertically
integrated content and distribution empire. This was part
of the reason behind Comcast's attempts to buy Disney. Secondly,
looking down the road, it's looking like the Cable industry
will eventually consolidate to 3-5 players who will be ready
to compete head to head against News or any RBOC-driven competitor
that may enter the fray. Outside that, Cablers will eventually
be converting to an All-IP network, which will dovetail with
the FCC's mandate for Digital broadcasting. It won't happen
soon, but Cable companies will be putting together strategies
in the coming 12-18 months. The implications will loom large
as bandwidth becomes more and more scarce with expanding services
such as HDTV, SVOD and so forth. A quick overview of the top
issues and challenges facing the Cable industry is below.
TOP
ISSUES/CHALLENGES FACING CABLE INDUSTRY
Short term (next 12 months):
- Driving up digital penetration and ARPU in an increasingly
mature marketplace
- Staving off video competition from DirecTV and EchoStar
- Competing with High Speed Internet competition and bundled
satellite offerings from RBOCs
- Reducing churn and increasing subscriber retention, "stickyness"
and loyalty
- Facing down regulatory pressure for A la Carte and rate
legislatio
-
Implementing VOIP roll outs
- Effectively marketing DVR, VOD, HDTV and similar new services
- Refining pricing and packaging models for SVOD, DVR, HDTV,
VOD, VOIP, etc
- Developing Interactive TV launch plans
- Transitioning to next generation OCAP enabled HDTV and
DVR set-top boxes
- Assessing content-distribution vertical integration strategies
- Continuing to diversify, targeting to Hispanic, African
American and Asian communities as well as women
- Furthering customer service improvements
Long
term (12-36 months):
- Increasing business growth and financial gains in an fiercely
competitive marketplace
- Creating a tiered HSD product to lure dial-up customers
- Developing home networking product launch strategies
- Pursuing any content-distribution vertical integration
strategies
- Converting to an All-IP digital network and eliminating
network silos
- Reducing rate increases, continuing the downward pressure
on increased programming cost
- Defining product mix to be offered over a dumbed-down
set-top box on a converged all-IP network
- Continue developing the retail channel in for new products
and POD enabled TVs
Short,
mid, long term strategy
- MSO's are carefully planning their short (next 12 months),
mid (12-24 months) and long term (24+ months) strategies.
Among the short term ones, Cable operators will be focusing
on competition, penetration and average revenue per subscriber
(ARPU). They will be continuing to roll out new products such
as DVRs and VoIP in order to add value to their services and
ultimately increase customer satisfaction and retention. VoIP
will see increased attention in the next year with large scale
launches. They will also be placing more priority on Interactive
TV. With DirecTV's pending launch of ITV services, the "OnRamp
for OCAP" will be tested, trialed and implemented in
the next year. As a result, operators are pushing forward
with capital investment in set-top boxes and infrastructure
refinements because it will ensure their long term leadership
position. Among the other short term priorities, with increased
HDTV implementation and the advent POD (point of deployment)
enabled TVs on the horizon, Cable operators will be creating
stronger ties with the retail segment. Among the mid-term
priorities, Cable operators will be focusing on their ability
to offer a triple-play of voice, video and data. There will
be more of the next generation set-top boxed deployed featuring
HDTV and DVR abilities. With those products in hand, the operators
can offer various forms of discounts and bundles which they
hope will lead to increased subscriber satisfaction and retention.
They also will be exploring the commercial business, like
the small office/home office (SOHO) as well as small medium
business (SMB), with specialized HSD offerings and possibly
other types of services. Operators will also be focused on
the steps required for the conversion to an all-IP network.
This will entail a vast number of considerations, which will
require careful planning. Implementation of an All-IP network
will be in the long term. Operators may also be repositioning
themselves with new deals, such as the acquisition of content
companies like MGM, or the addition of smaller operators like
Adelphia. That said, most major MSOs have said they will only
do deals that make sense to their business plan, rather than
adding more subs just to increase size and what not. In the
longer term, Cable operators will look to implement a powerful
platform that can take advantage of it's IP ubiquity and provide
a supreme video, voice and data product offering that out
duels the competition. Between now and then, Cable operators
will need to tell their story on several fronts, especially
if the political landscape becomes hostile, and be ready to
react to changes in the marketplace.
Importance
of marketing
- For Cable operators to sell more products, increase average
revenue per subscriber, and succeed against fierce competition,
they will have to maximize their marketing effectiveness.
In the bigger picture, the complex entertainment and information
technology environment that surrounds consumers' lives also
adds to their stress and sense of time pressure. Cable's challenge
is to clearly position its advanced services as products that
can help alleviate that time pressure and accompanying stress,
and to make these services as simple and as easy to use as
a microwave oven. With technology, it's critical that consumers
understand the benefits. Awareness of features is not enough.
Take on-demand service, for example. Many consumers realize
"on demand" means that they can watch what they
want when they want, with VCR-like functionality. After all,
they have been using a VCR for two decades. However, that
knowledge does not transfer into a clear benefit, nor does
it translate easily into a 30-second TV spot. Consumers need
to experience the product in order to have an "on-demand
epiphany," just like they did with high-speed Internet
access a few years ago. Moreover, aggressive and unified communications
approaches need to be the norm. These unified, focused messages
will be about what sets Cable's digital products apart from
the competition. As cable continues to introduce new products
like Cable phone, HDTV and home networking, it will be increasingly
important to help customers understand that they can receive
all of these products from one company with one point of connection.
Cable has many killer "apps" in its arsenal and
is well-positioned to ride this big wave. While it sounds
simple enough, there are many details. And as some say, the
devil is in the details. “At the end of the day, if it’s
not simple, the consumer is going to turn it off,” said
Patrick Esser. Executive Vice President. Cox Communications,
noting that retail could become one of cable’s most important
sales channels in this environment.
Financial
State
- The Cable industry is a heavily leveraged business. It has
been built on private investment, with no public funding.
Moreover, the recent $85 billion investment has increased
it'd debt considerably. And while the current financial state
of the industry is brightened considerably, the past few years
have certainly been tumultuous. Before the dot-com bubble
burst, the Cable industry was gliding along on their path
to increased ARPU with thick STB's, interactive TV and VOD.
Then the bottom fell out. Stock prices plunged and the capital
markets shrunk. Bloated debt, incurred from network rebuilds
that gave Cable companies 2-way networks and Digital packages
competitive with satellite, along with continued capital expenditure
(CAPEX) outlays were criticized by Wall Street. Cable companies
were asked to focus on financial performance and free cash
flow (see below). Cable companies have since made great strides,
many achieving free cash flow in the past year. Likewise,
after spending about $1,000 per subscriber to digitize their
networks and enable broadband services, Cable companies are
looking for more payoff in the coming years. But as of mid-2004,
they are not quite there yet. For one, many of the new products
that were a result of the infrastructure investment, such
as VOD, SVOD and DVR, have just hit the market in the last
12 months or less. Soon, operators will be adding ITV, new
IPGs and VOIP to the mix. Thus, while the capital expenditures
have gone down, the actual implementation of these new services
has yet to be really felt across the board. Meanwhile, with
competition heating up quickly on several fronts, there are
mixed feelings from Wall Street. For instance, despite solid
first-quarter 2004 earnings reports from the major MSOs in
April, some analysts were not optimistic about cable's long-term
competitive prospects. They stated the speed at which phone
companies are adding high-speed data subscribers, as well
as their efforts to form partnerships with satellite operators
to offer video services as particular concerns. Moreover,
they point to the fact that Digital Cable sub growth for the
top 10 cable operators dropped by 15% in the first quarter
compared with the fourth quarter of last year, and that VOIP
isn't happening fast enough. The pressure from News Corp only
adds to their worries. Still, the financial state of Cable
companies continues to improve. Time Warner Cable has shed
considerable debt. Comcast has also improved it's position.
Both companies are actually looking at acquisitions now. Charter
has taken steps to improve it's standing, consummating several
refinancing deals in the past 18 months. Just the same, in
May, 2004, three of the top cable companies reported strong
quarterly results. Comcast said revenues from it's Cable unit
were up 9.8 percent, to $4.6 billion. On the same day, Time
Warner said its cable unit revenues were up 11 percent, to
$2.04 billion. Cox Communications said its revenue was up
13 percent, to $1.5 billion. All three reported sharp increases
in operating cash flow for the quarter as well. Still, stocks
of those companies have dropped 5 percent to 8 percent this
year while the Dow Jones industrial average is down 2.15 percent.
Even so, most MSOs feel much more confident about their financial
state these days as well as their ability to perform in the
coming years.
Cash
flow
- Cash flow is short for operational cash flow, which is a
financial metric used by the Cable industry generally referred
to as EBIDTA (Earnings Before Interest, Taxes, Depreciation
and Amortization). EBIDTA is an approximate measure of a company's
operating cash flow based on data from the company's income
statement. It is calculated by looking at earnings before
the deduction of interest expenses, taxes, depreciation, and
amortization. In general, this earnings measure is a useful
measure only for the Cable industry typically made up of large
companies with a large asset base and a significant amount
of debt financing. EBIDTA it is a good way of comparing companies
within and across industries. “EBITDA is a shorthand
valuation metric that was invented for companies like cable
companies, because they generated neither earnings nor free
cash flow and you had to use something,” Sanford Bernstein
& Co. cable analyst Craig Moffett said. “People shouldn’t
mistake EBITDA for anything other than what it is, and that’s
a second-best measure when free cash flow as a metric is not
available. No industry can be valued on anything other than
free cash flow and earnings over the long term,” he said.
Thus, the reason why the industry was urged towards free cash
flow after the 2001 telecom meltdown. And in turn, most major
MSOs have finally hit the elusive free cash flow status, with
only Charter and Cablevision not there yet. Considering the
fact that Wall Street and the investment community were only
calling for this achievement in 2002, MSO's have accomplished
it fairly quickly. The leading MSOs are getting as much as
$285 cash flow per year on each subscriber. That's up more
than $100 over the past 4 years. Comcast even reported 21%
cash flow growth in the first quarter of this year (2004),
and is expected to report free cash flow of $2 billion in
2004. Time Warner Inc., which includes cable networks, movie
studios and theme parks in addition to its cable systems,
reported $3.3 billion in free cash flow in 2003. The media
giant provided no free cash flow guidance for 2004, except
that it expects to covert between 30% and 40% of its operating
income before depreciation and amortization (OIBDA) to free
cash flow. Cox Communications Inc. — which reported free
cash flow of $306.6 million in 2003 and is expected to double
that to $620 million in 2004. One reason free cash flow is
here is because capital budgets have been slashed over the
past year and are expected to come down even further in 2004.
For example, Cox spent $1.6 billion in CAPEX in 2003, down
from $1.9 billion in 2002, and will spend between $1.35 billion
and $1.4 billion in 2004. Comcast, which spent $5.3 billion
in CAPEX in 2002, slashed that budget to $4.1 billion in 2004
and will pare it down further, to between $3.3 billion and
$3.4 billion in 2004. Another reason is the performance of
products such as High Speed Data, Cable's biggest cash-cow,
which has accounted for as much as 50% of their growth. In
any event, some industry insiders are saying that MSO's need
to keep spending on the development of such revenue opportunities
and worry less about near term free cash flow. The reasoning
is, Cable operators are already finishing with expensive rebuilds
and capital outlays are decreasing at a time when margins
are growing. In that sense, operators are already on track
for free cash flow. If they can effectively explain to Wall
Street how their capital expenditures translate into profits,
they should be able to sell their strategy.
ARPU
- In addition to the Wall Street concerns stated above, there
is pressure on Cablers to increase average revenue per unit
(ARPU). This is critical because with the multichannel space
approaching 90% penetration, more growth will have to come
from the current customer base. This is yet another reason
for Cable operators to stem the defections to satellite. In
terms of increasing ARPU, VOIP could stand as the best hope
because it is a nice high-margin, add-on business. But the
concern is that the RBOCs and companies like AT&T with
CallVantage are moving aggressively. Pricing pressure from
competition could reduce margins, in time. Considering modem
penetration is as high as 30% at some MSOs, VoIP could penetrate
half that or more, but that would still put it at only 15%
to 20% of cable homes. DVRs look like the next best opportunity.
It has wide appeal and adds value to the viewing experience,
more so than HDTV. But cable starts in a dead heat with DBS,
who have incorporated DVRs in their strategy and will have
them in all their new receivers. Maybe all digital boxes become
DVR boxes, eventually, portending a nice 30% penetration rate.
But actual revenue-per-subscriber will be smaller, and the
success of DVRs will be better measured in churn reduction.
HDTV has similar characteristics, with a smaller starting
base. It's a necessary piece of ammunition, but isn't going
to generate the kind of average revenue per unit that high-speed
has produced. Wall Street has given up on ARPU estimates for
VOD, as most MSOs push usage and churn-reduction features.
However, VOD could be a legitimate ARPU generator, perhaps
at $10 a month or so, if transactional movies become a real
business and if the industry can agree on measurement tools.
And data tiering, whether it includes features like firewall,
security, digital photography or broadband content (music,
news, games, sports and even movies), holds some promise.
Impact
of scale
- The scale of Comcast has changed the industry. It's been
said that Comcast has saved over $270 million in programming
costs in the first year of the acquisitions. Likewise, there
are the savings from the operational efficiencies created.
The size and reach of Comcast and it's 20M+ subscribers has
put other Cable operators at a disadvantage (Time Warner is
the next biggest with 11M subs), and that will be a factor
going forward. In other words, scale is going to be a consideration
from here on out. This has only been reinforced by a few other
activities in the marketplace. The first starts with the heft
of News Corp, an empire which can combine considerable programming
and content assets together with it's BSkyB and DirecTV distribution
channels. This gives News leverage, operational savings and
opportunities to combine content and distribution for innovative
new products. Secondly, there is the future question about
whether content will need distribution, or distribution will
need content. Today, distribution needs content. But if that
changes in the future, then distribution providers may have
a better case for leverage if they hold 20 million subscribers
in lucrative markets. In other words, the smaller operators
such as Mediacom and Insight, will have a harder time gaining
that leverage. Thirdly, there is a possibility that the RBOCs
could make a move, such as acquiring Echostar. This could
also change the landscape as a deep pocketed Bell would have
access to video, voice and data that dramatically improve
their competitive position. Such a move could force other
Bells to react. Either way, some Bells are ramping up their
efforts to build out their fiber networks closer to the home
with the hopes of getting into the TV business. One, Verizon,
is actually building fiber right up to the premises in suburban
Texas. In any event, the ball cold begin to roll soon.
Consolidation
- As already noted, it is believed that there will eventually
be consolidation in the Cable industry. "The desire to
do deals is coming back, but it's much more nuanced and careful
acquisitions that are being considered," said Tom Wolzien,
a media industry analyst with Sanford C. Bernstein in New
York. The hunger for more targeted deals is being fueled,
in part, by an improving economy and the ready availability
of investment funds. But the deals may start out on a smaller
scale. "For smaller, focused deals, there is a lot of
capital available in the marketplace," said Joel Reed,
principal at Relational Advisors, a boutique investment bank
in San Diego. Moreover, Time Warner Inc. chairman and CEO
Richard Parsons said in May, 2004, that in the wake of major
acquisitions that didn’t work out as expected –
notably Time Warner’s failed merger with America Online
– MSOs may have to wait a bit before the next mega deal.
“Not only did we put our company in the penalty box,
we put everybody in the penalty box with our last big deal,”
Parsons said. “We’re going to have to go through
a period where the Street settles down and gets comfortable
again with the direction things are moving and starts to have
a little more faith in current management.” In any event,
it could start with Adelphia, the nation's fifth largest operator
with about 5.5 million subscribers. Several operators could
have interest, but the issue is that they don't want the whole
thing. For instance, Adelphia clusters would be attractive
near some large Time Warner Cable operations in upstate New
York (Buffalo), New England (Vermont and Maine) and the Los
Angeles area. But other Adelphia markets might be too far
removed or too expensive for Time Warner to get serious about.
Interestingly enough, John Malone's Liberty Media may become
interested in partnering with Cox to make a push for Adelphia.
The idea would be that Cox gets the systems it wants, the
others get sold, and Liberty gets more of Discovery networks.
There are other MSOs out there that could eventually be acquired.
For instance, Stifel Nicolaus & Co. cable analyst Ted
Henderson said another possible acquisition target could be
Insight Communications Co., which has about 1.4 million subscribers,
mostly in the Midwest. “If you look at where Time Warner
operates in the Cincinnati area, they have some interesting
matches with Insight,” Henderson said. Cablevision could
be another, but Time Warner Cable chairman and CEO Glenn Britt
said the company is not for sale. “It [Cablevision] doesn't
happen to be for sale; it's hard to buy something that's not
for sale,” Britt said. “In our quest to get bigger,
we're going to have to see what comes on the market and evaluate
it and if we can make a deal that makes economic sense I think
we'll do it. I don't think we're going to make silly deals.”
Cablevision CEO James Dolan has said in the past if Cablevision
does sell out, it won't be cheap. Dolan also said last December
(2004) that he wouldn't rule out a sale, but that any consolidation
of the New York cable operations would involve a “valuation
we have not seen yet.” Since cable systems were trading
at more than $6,000 per subscriber during the height of the
consolidation craze of the late 1990s, it's safe to assume
that Cablevision would only entertain offers that exceeded
that benchmark. That would set the floor of bidding at $18
billion — a hefty price even for the top media market
in the country. No matter what happens, it seems clear that
Cable companies will be taking a calculated approach. Richard
Parsons reiterated his desire to build his cable footprint,
but added only at the right time and at the right price. “We
are all engaged in a business that is maturing,” Parsons
said. “But cable is the one business that can look for
double-digit top line growth.” Even Charter Communications
Inc. Vulcan founder and chairman Paul Allen alluded that the
debt-heavy MSO could get involved in consolidation. “There
are obviously opportunities, whether it’s partnering
or whatever options are out there,” Allen said. “I
think that scale is something that all operators look at very
seriously.”
Comcast's
failed Disney bid
- In February, 2004, Comcast proposed a deal for Disney that
would have created one of the largest media and distribution
companies in the world. The deal at the time was valued at
$66 billion, including the assumption of $12 billion in Disney
debt. After the Disney offer was first announced, Comcast
CEO Brian Roberts said publicly that the content Comcast would
gain through the merger would power the cable giant's next
generation of services, such as video on demand, high-definition
TV and streaming media. Yet even at that point, Roberts indicated
that he did not view the Disney acquisition as critical to
Comcast's business. Rather, he had thought the deal would
allow Comcast to innovate its product portfolio faster and
make the two companies stronger, he said. At the time, the
announcement also fueled a controversy over Disney CEO Michael
Eisner, who rejected the bid early on. He was forced from
his position of chairman of the board after a contentious
shareholders meeting at which 45 percent of votes opposed
his re-election to the board, though he eventually received
the board's official backing. Through it all, Disney never
engaged Comcast in talk. With one stroke, it said the offer
wasn't enough and basically brushed it off. Consequently,
Roberts said "It has become clear that there is no interest
on the part of Disney's management and board in putting Comcast
and Disney together." In turn, Comcast decided to let
the deal go. "I said from the outset that we would not
outbid ourselves. In this case being disciplined meant walking
away," he said. Roberts repeatedly said that Disney's
board made it well known that it had no intention of entering
negotiations with Comcast. He also said that he does not intend
to revisit the offer anytime in the near future and that Comcast
is not in a position where it needs to make an acquisition.
A few industry watchers expressed relief that the Disney bid
was withdrawn. One, David Mantell, an equity analyst at Chicago-based
Loop Capital Markets, said he felt Comcast would have had
problems overseeing Disney's vast entertainment business and
getting the two companies' corporate cultures to work in unison.
"These are two very different businesses, and I've felt
from the beginning that Comcast didn't have the expertise
necessary to run a content business of this scale," Mantell
said. "These are also two very different cultures, and
I think a lot of people overlook the fact that you must have
the right fit to pull off a buyout like this, and the chemistry
wasn't there in this case." The move also made sense
from a shareholder standpoint. It would have taken so much
money to land Disney, Comcast executives "would have
had an investor revolt on their hands," said Viacom Inc.
Chairman Sumner Redstone. Comcast shareholders never warmed
to the proposed Disney deal and signaled deep skepticism about
the "synergies" that were supposed to wring value
out of a combination with the Burbank-based entertainment
conglomerate. According to Sanford Bernstein analyst Tom Wolzien
and others, the Comcast bid's failure and the still-fresh
memory of disastrous results from the merger of AOL with Time
Warner and Vivendi with Universal Studios militate against
another round of blockbuster combinations anytime soon. "We've
all been seriously burned over the past decade by the use
of the word 'synergy,' " Wolzien said. "And you
know, when it came down to it, these companies just couldn't
execute."
Technology
- With VOD, DVR and HDTV becoming a reality, Cable operators
are looking at implementing more new technologies which translate
into value for their customers. First and foremost is VOIP.
Providing IP telephony will not only complete the triple play
of voice, video and data, but it will cement many subscribers
in as long term customers. There's also Interactive TV. This
will require middleware layers in the set-top boxes as well
as servers in the head end. New set-top boxes are another
area. More features and benefits will be provided in boxes
with more power and capabilities, such as DVR, HDTV, HD-DVR,
Home Networking and media centers. And with new set-top boxes
becoming cheaper and ever more powerful, Cable have the opportunity
to ramp up new exciting product offerings. The Moxi Media
center is a good example of what the next generation media
centers will look like. They will have integrated software
and hardware capabilities that allow for a zippy, seamless
user experience. They'll also manage pictures, music files
and so forth plus they will talk to smaller units spread about
the household through wireless connections. Speaking of which,
as the viewing experience increases in complexity and PC applications
keep pace, there will be more crossover between TV and PC
services. This will not only spur more home networking apps,
but new ideas will undoubtedly crop up. On another front,
with all broadcast signals being switched over to digital
by the end of 2006, a conversion to an all digital network
is on the horizon. Such a change would involve more new technology,
from newer, dumbed-down STB's given to those subscribers who
have analog TVs to the network equipment to support it. But
the end all is that this could be the biggest bonanza of them
all for MSO's. An all-IP network would create considerable
bandwidth room for all sorts of new products and services
and could open up a vast plethora of opportunities to cater
to the commercial sector. In an all IP world, broadband speeds
would be phenomenal and streaming HD-VOD would be commonplace.
However, one big concern is the potential for Cable's much
hyped broadband pipe to become a "dumb" pipe. We've
seen it already with the advent of such services as Vonage.
In this case, a VOIP application is implement using the Cable
modem (or DSL) broadband connection, and Cablers receive no
part of the profits. In the end, though Cablers are still
investing in technology and capital expenditures (CAPEX),
there has been a huge drop from the all time peak of 2 years
ago. Still there's plenty of activity ahead on the technology
side.
Transitioning
to the All-IP network
- Cable TV basically has three networks, sometimes called
silos, that run over it's hybrid fiber coax system; Cable
TV, High Speed Internet, and circuit switched telephony. Of
those, only the internet service is IP-based, the other two
are analog and require more bandwidth spectrum. As Cable companies
launch VOIP, they will move their voice customers to VOIP
systems that essentially ride on the same network infrastructure
as the High Speed Data service. That leaves Cable TV as the
lone bandwidth hog. Therefore, with bandwidth increasingly
becoming a precious commodity, the largest driver for an all-digital
product offering is the efficient use of available bandwidth.
With today's technology, between 8 and 14 digital channels
can be carried in the same spectrum required to support a
single analog channel. To expand line ups, Cable companies
have divvied up the spectrum to support a combination analog
and digital channels. Depending on the total bandwidth of
the Cable system in question, for a typical 750 mhz system,
most operators have rough 60-80 analog channels. With analog
channels consuming roughly 6.66 mhz of space each, that's
anywhere from 50-70% of the total bandwidth that's being allocated
to analog channels. Why does this matter? Because even though
these TV channels are broadcasting their one-way signal at
the same, a viewer can only watch one of them. In essence,
that means for a 60 channel system, 59 channels worth of space
goes to waste. Now if Cable TV was transmitted over an IP-network,
things would be entirely different. Instead of big huge swaths
of bandwidth being dedicated to all these analog channels,
there would be multiple streams of bandwidth efficient "packets"
which represent the TV channels instead. The viewer's set-top
box could then tune into any stream asked just as if it were
a normal TV experience. With HDTV requiring over 19 mbps of
streaming capacity per channel, the need for more bandwidth
is coming to the forefront. Thus, Cable operators will be
transitioning to an All-IP network in the coming years. But
that doesn't come without complications. For one, there are
250 million analog TVs out there of which would not be able
to receive a signal without a set-top box or device that could
decode the IP transmission. There has been talk of a $35-50
decoder that can be sent to subscribers, but how well that
unit supports next generation IPGs and other video services
is another question. But the competitive advantages, operational
efficiencies and capital savings alone would make it worth
doing. Moreover, the new platform could support new services,
applications and technologies that could bring TV into the
future. For one, there would be scale for targeted advertising
and interactive applications, support for advanced video codecs
such as H.264 and WMP9, and the ability to run open conditional
access systems. In any event, while Cable’s top engineers
agreed the shift to an all-digital network is inevitable,
they believe the transition will be a slow one. “Over
the next the next half a decade or so, it has to happen,”
said Comcast Corp. chief technology officer David Fellows,
who said cable operators will need the bandwidth for HDTV,
VOD and to deliver higher bit rates to the home. Cox Communications
Inc. senior vice president of engineering and CTO Chris Bowick
agreed. “The key word is migration,” Bowick noted.
“You have to define all-digital. “Is it all digital-products
or an all-digital network? Do we eliminate analog programming
or do we have a subset for foreseeable future?” A slow
timeframe also seemed likely to Time Warner Cable CTO Michael
LaJoie. “We will have all digital devices and all digital
tiering as we migrate toward an all-digital network,”
he said. The consumer-electronics industry is a key factor
here, LaJoie added. “When do they stop selling analog
TV sets? When do the broadcasters go to all-digital broadcast?”
Those two issues will affect the timing of cable’s DTV
transition, he said. “The key will be making this all
seamless to the customer,” said Bowick, listing new features
like customer caller ID on the TV and voicemail via high-speed
email, and vice versa. And while capital expenditures will
be required to make the transition, it wont be anything like
the huge outlays required when the Cablers rebuilt their networks
for two-way transmission. Comcast Corp. co-CFO John Alchin
said that in the next five years, the nation’s biggest
cable company plans to spend $1.5 billion to $2 billion on
the all-digital conversion, but compared with the $40 billion
Comcast has invested in its network since 1996, that is a
relatively small amount. He added that Boston and Los Angeles
will likely see the conversion first in 2006. The rest of
Comcast’s markets should be going all-digital two to
three years after that, he said. Cox Communications Inc. CFO
Jimmy Hayes hasn't given a time frame for Cox’s all-digital
conversion. He said only that it won’t be this year.
“The problem would be if you went all-digital platform
at the wrong time,” Hayes said. “Today would be
the wrong time.” Insight Communications Inc. CFO John
Abbot said that his company would likely start its digital
conversion in 2006, and that the switch will enhance products
the MSO already is providing to a smaller group of customers.
Outlook
- Aside from ARPU gains from new products and the potential
of some consolidation, the profound effects of implementing
symmetrical IP-based networks with extremely high bandwidth
capacity should be far reaching for the Cable industry. Such
a transition is expected to bring new subscriber products
and services such as videoconferencing, videophones, gaming
applications, online voice technologies and additional opportunities
that will reach out to the SOHO and SMB spaces. Because of
this, the industry will undergo a massive shift in focus during
the next 10 years. Revenue from video services will decline,
and revenue from high-speed data and telephony services will
increase. Among other things, new bundles will be in place
that will offer more value to subscribers, digital program
insertion (DPI) will become a reality, newer IPGs that provide
better information that's easier to access will be rolled
out, wireless home networking will become more prevalent,
and Digital Cable revenues and subscriber counts will surpass
that of analog cable.
(sources:
Liberty may be interested in joint bid for Adelphia, by Chris
Walsh, Rocky Mountain News, 5/14/04; Cable digital subscriber
growth slows, Broadband Daily, 5/13/04; CEOs: Disney Bid Hurt
Our Stock, by Mike Farrell, Multichannel News, 5/10/04; Panelists:
It’s a Gift to Keep It Simple, by Linda Moss, Multichannel
News, 5/10/04; Op Chiefs: We Can Stand Pat - MSO Heads Say
They’d Like to Be Bigger, But It’s Not a Necessity,
by Mike Farrell, , Multichannel News, 5/10/04; Digital Won’t
Drain Capital, by Mike Farrell, Multichannel News, 5/10/04;
CTOs: All-Digital Shift Will Be Gradual, by Matt Stump, Multichannel
News, 5/10/04; Analyst to MSOs: Don’t Buy Adelphia, Multichannel
News, 5/5/04; Telecom's Potential, Review & Outlook (U.S.),
Wall St Journal, 5/4/04; Top Cable Executives Are Willing
to Buy Operators, Reuters, 5/4/04; Analysts ’04: It’s
a Big Year for Cable, by Mike Farrell, Multichannel News,
5/3/04; Playing It Cool, No Bidders for Adelphia yet, by Mike
Farrell, Multichannel News, 5/3/04; Spring in Step for Four
MSOs, by Mike Farrell, Multichannel News, 5/3/04; Looking
Past Cable's Profits to the Rivals on Its Heels, by Geraldine
Fabrikant, NY Times, 5/3/04; If We Ain’t Got It, They
Can’t Buy It, by K.C. Neel, Cableworld, 5/3/04; Analysts
sour on Cable, Hollywood Reporter, 4/30/04; Battling the Cable
Guy, by Mark Heinzl, The Wall Street Journal, 4/29/04; Bells
Join Race to Offer TV, by Almar Latour, The Wall Street Journal,
4/29/04; Cox Won't Make Bid to Purchase All of Adelphia, by
Peter Grant, The Wall Street Journal, 4/29/04; Time Warner
Net Surges Amid Boost From Film, Cable, by Julia Angwin, The
Wall Street Journal, 4/29/04; Smaller Media Deals Likely,
by Richard Verrier, NY Times, 4/29/04; Comcast Drops Disney
Bid, by Mike Farrell, Multichannel News, 4/28/04; Comcast
retreat, by Time Arango, NY Post, 4/26/04; Cable industry
due for mergers, analysts predict Adelphia sale talk illustrates
point, by Tom McGhee, Denver Post, 4/26/04; Free Cash Flow
— It’s Here, Actually, by Mike Farrell, Multichannel
News, 4/26/04; Adelphia Raises White Flag, Hangs ‘For-Sale’
Sign, by Mike Farrell, Multichannel News, 4/22/04; Broadband,
DVR Offerings Are Key to Cable Results, by Ellen Sheng, Dow
Jones Newswires, 4/16/04; DBS Providers using VOD to build
subscribers, by Paul Sweeting, Video Business, 4/14/04; Cable
standing its ground in battle with DBS, Broadband Daily, 4/12/04;
Aggressiveness pays off for digital cable and satellite TV
marketers, by Rebecca Weeks, Imedia Connection, 4/12/04; Cable
Companies Seek A Boost From Services, by Ellen Sheng, Dow
Jones Newswires, 4/7/04; Home Run Days Are Over for CTAM Crowd,
by Matt Stump, Editor of Broadband Week, Multichannel News,
3/8/04; Conquering the Digital Wave, by Mark Hess and Sergei
Kuharsky, Multichannel News, 3/1/04; Cable's Problem: Is Cable
Greedy? by Laura Hamilton, Communications Technology, March
2004; Acquisitions Could Be on Menu, by Mike Farrell, Multichannel
News, 2/23/04; Western Wrap, by Jonathan Tombes and Jennifer
Whalen, Communications Technology, February 2004; Charting
the Next Frontier, VoIP Telephony, VOD, DVRs: Ops Tout Them
All For 2004, by Mike Farrell, Multichannel News, 12/15/03;
Operating Preview: '04 Might Be a Big Deal for MSOs, by Mavis
Scanlon, CableWorld, 12/15/03; Digital cable falls short of
expectations. The Wall Street Journal, 9/24/03; Cable's Triple
Crown Bundle, by Terrence Barnich, Craig Clausen and Gregory
Mycio, XChange.com, 8/01/03; Pricewaterhouse Coopers.com;
SkyReport, 7/13/03; Large Ops Poised to Dominate Industry,
by Ted Hearn, Multichannel News, 4/18/03; Cable, satellite
TV deals swirl, BizJournals.com, 1/23/03; Standard and Poor's
Industry Report Card: U.S. Telecom & Cable TV Report Card,
8/6/02)
Overview
of Cable TV Product Portfolio:
Product overview
- FIn the past 10 years, the Cable industry has dramatically
increased it's product portfolio. Building out their networks,
Cablers started offering multiplexed digital channels on new
Digital Cable tiers. With that service came new interactive
program guides. Once the two-way infrastructure was complete,
High Speed Data services were introduced. In the last four
years, MSOs have really ramped up their offerings, rolling
out such services as Video On Demand, Subscription Video On
Demand, Digital Video Recorders, High Definition TV, Voice
Over Internet Protocol telephony, Interactive Program Guides
and Commercial Business. Below is a brief synopsis on the
outlook for each:
VOD
- Video On Demand has not been the killer application that
many had hoped it would be. The fact that new release movies,
the main driver of the category, are 30-45 days older than
video releases doesn't help. The confines of the set-top don't
either. VOD today uses standard set-tops that limit its performance.
Still, VOD can be an effective added value retention tool
that can help satisfy customers. Most MSOs have launched it
or are well on their way to completing roll outs across their
footprint. For instance, VOD is expanding to 80% in 2004.
Moreover, a combined VOD/DVR set-top box will make for a better
experience for consumers, and usage will climb as a result.
Likewise, the expansion of interactive applications, such
as VOD and DVRs, present operators with a new opportunity
in the ad sales department. In the end, Jay Schiller, SVP,
market development for nCube, says "In five years, it's
not hard to imagine 30% to 50% of all TV viewing being on
demand," Schiller says.
SVOD
- Subscription Video On Demand has met with good results so
far. SVOD has shown to have a positive effect on churn. For
example, MSO and premium suppliers report in some cases digital
churn dropping anywhere from 15% to 25% after SVOD has been
launched. There are other soft revenue effects. For example,
there is evidence that SVOD is helping premium sell-in. Insight
launched Starz On Demand last fall and reported 18% fourth-quarter
growth in Starz premium units after launching SVOD, according
to Greg DePrez, vice president at Starz. As of Q2 2004, Comcast
Corp. has rolled out VOD to more than half its subscribers,
and SVOD services from all three major brands have followed.
Starz, the last in the fold, reports that it has been launched
in 26 Comcast systems serving 11 million subscribers. TWC
has launched HBO and Showtime in basically all of its systems.
Cox Communications Inc. has gone a slower route, with only
Showtime reporting an on-demand launch in Oklahoma City. Charter
Communications Inc. president Carl Vogel said the MSO has
launched SVOD in 12 markets totaling 1.2 million subscribers.
Insight has launched all three SVOD services nationwide. In
time, operators will learn more about what kind of impact
the service has on revenues, bandwidth and VOD. Overall, the
addition of SVOD has had a positive effect on Cable operators'
product portfolios.
DVRs
- At some burn in time, Digital Video Recorders proved to
be a big hit with satellite companies. Cable companies have
taken note. Today, the largest MSOs are aggressively rolling
out the service using DVR-based set-top boxes. For instance,
Comcast's DVRs, says DVRs will be available to 100% of their
customers in 2004. Cablevision Systems Corp. telecommunications
division president Tom Rutledge also was high on DVRs, adding
the MSO would roll out the equipment in 2004. Rutledge also
said his company probably could have rolled out DVR-enabled
boxes sooner, but that he didn't believe the products would
be as popular as they are. Time Warner Cable, which began
an aggressive rollout of DVRs earlier this year, said the
boxes have been flying off the shelf. "As fast as we
get these boxes, they're going out the door," chairman
and CEO Glenn Britt said. Cox launched DVRs this year in four
markets and expects to add four additional markets by the
second quarter of 2004. Aside from the fact that DVR numbers
have been very impressive, in some cases penetration being
as high as 4% in the first month of deployment, contrary to
some thinking, DVRs have shown they can actually enhance the
VOD product. In Alexandria, Va., for example, Comcast has
achieved 10% DVR penetration in just five months, averaging
1.2 DVR boxes per household. In addition, he said, 46% of
DVR households in Alexandria use the VOD service as well.
In the end, just as with satellite providers, DVRs has been
a hit in the Cable industry. Going forward, they will be an
important product both in terms of providing value for subscribers
and ensuring lower churn.
HDTV
- With TV prices dropping and content becoming more widespread,
High Definition TV is on the up and up. Most MSOs see real
potential in the future. Subscribers are showing interest,
and with Cable's lease option for their HDTV enabled set-top
boxes, they don't have to incur large up front costs. Moreover,
Cable has strong channel line ups and all the local into locals.
Most MSOs have extended the service across the bulk of their
footprints. For instance, HDTV is available in 85% of Cox's
footprint. Comcast says it will be available to 90% of its
subscribers this year (2004). Overall, Cable systems from
99 of the top 100 DMAs offer an HD package (plus 56 markets
beyond the top 100). In addition, Cable operators carry 382
local digital broadcast stations, something that satellite
competitors don't. And according to the Consumer Electronics
Association, manufacturer-to-dealer digital TV sales for the
first quarter of 2004 totaled 1.39 million, a 104% climb over
the same period in 2003. By 2007, nearly one-third of American
households will be tuning in to HD programs. Also promoting
interest among subscribers is that some Cable operators, such
as Time Warner and Cablevision, are not charging extra to
show high-definition versions of programs already broadcast
in analog. However, subscribers do have to fork over a premium
for pay channels. In any event, with the government helping
the transition along, HDTV is here to stay, and Cable operators
feel very strong about HDTVs future within their product portfolio.
VOIP
- A year or two ago, Voice Over Internet Protocol was in its
infancy. Today, the momentum that has brought the service
to legitimacy has been spurred by positive results from trials
and initial roll outs. Cablevision Systems Corp., an early
pioneer of the service, has made its VoIP service available
to its entire high-speed data footprint, offering an all-in
local and long distance package for $34.95 per month. Telecommunications
division president Tom Rutledge said the returns on the VoIP
service can be substantial. He estimated that operating cash-flow
margins on the VoIP service would be about 40%, adding that
the projection is conservative. That return is substantially
lower than the 60% to 80% margins some MSOs see on high-speed
data, but it is expected that VOIP margins will rise over
time. Rutledge estimated that incremental costs for VOIP service
would average about $150 per customer, about $50 each for
cable modems, the soft switch to deliver the service and truck
rolls for installation. But as cable-modem prices continue
to plunge, Rutledge said that they are more like $30 each
now, and more customers self-install the service, those costs
could be substantially lower. But even at $150 in incremental
costs, the cash flow per subscriber of $15 per month translates
into a 10-month payback period for the service. Meanwhile,
Time Warner Cable reached an agreement with Sprint and MCI
to deliver a cable telephony service that will be priced around
$39.95. Chairman and CEO Glen Britt said that he expects the
telephone service to reach cash flow break even in its second
year of operation and to generate positive free cash flow
in the third year. "There is not a large fixed cost,"
Britt said. "There is a lot of room to play with costs,
down and up." Britt told investors that the rollout will
be carefully staged. "Next year is about getting ready
for business," Britt said. "2005 is when we can
start stepping on the marketing accelerator." While Time
Warner's VoIP service will be priced less than the rival local
exchange carrier offering, Britt said there is room to drop
prices if need be. "We can go very low and still make
money," Britt said. For Cox Communications Inc., which
has perhaps been the most successful MSO in the switched telephony
arena, also has VoIP on the agenda. Executive vice president
and chief operating officer Patrick Esser said Cox is ramping
up VOIP plans. Similarly, Comcast announced aggressive VOIP
launch plans across its footprint. The service would be offered
to most customers by 2005. In the end, VOIP will not complete
Cable's Triple Play bundle and offer convenience to customers,
but it will serve to increase value and satisfaction will
lowering churn.
IPGs
- Interactive Program Guides are in for a big change. The
initial goal for IPGs was to enable their customers to effortlessly
get to their favorite channels. With the digital revenue stakes
rising along with the advent of a plethora of content sources
available on today's Cable TV, however, that model is changing.
"Guides are increasing in value as on-demand services
grow. Now, they're essential in driving the whole on-demand
category," says Bruce Leichtman, president and principal
analyst for Leichtman Research Group Inc. Going forward, content
navigation for VOD, SVOD, DVRs and HDTV as well as upselling
and new revenue opportunities will be driving the category.
"We've almost quadrupled the number of channels and titles.
With all this new content, we must improve the navigational
tools," says Mark Hess, vice president of digital television
for Comcast Cable. With their advanced software, graphics,
design and sales potential, MSOs know that next generation
IPG products will offer a compelling on-screen experience
for viewers while enabling more revenue opportunities to increase
their bottom line. However, the charter of IPGs is still clear.
"The core reason for IPGs, EPGs and UIs (user interfaces)
is managing the increased number of channels. Before they
become too much of an advertising and branding tool, they
must be functional. Utility comes first before revenue opportunities,"
Leichtman adds. Integrating all the new services into a functional,
jazzy, intuitive IPG will be a challenge. Either way, next
generation guides will be coming out in the next year. (see
more on IPGs in "Interactive
TV")
Commercial
segment
- One of the most promising new streams of revenue for operators
could come from servicing commercial businesses. Aside from
a few exceptions—notably Cox, Cablevision and Time Warner
Cable—most cable operators are not chasing business clients.
Cable has traditionally been a residential service, and it's
left billions on the table for the phone companies to fight
over. Kagan World Media estimates the cable industry could
easily generate $9.7 billion annually from commercial clients
by 2008. Today, Kagan says, cable operators pass 38% of the
commercial businesses with their plant but serve fewer than
1% of those businesses. Cox generated more than $350 million
in revenue from its commercial accounts last year, says Bill
Stemper, VP, Cox Business Services. "We're at 10% of
what we can reach today [without extending plant], and we're
growing at 20% a year," Stemper says. In its franchise
areas alone, Cox calculates there's $10 billion in potential
commercial revenue; the company's plant currently passes potential
clients that could represent $2.5 billion in revenue. The
MSO already serves a cross-section of small, medium and large
businesses with mostly voice and data services. But advances
in broadband speeds and the deployment of VoIP will enable
the company to expand its offerings significantly while gaining
customers at the same time, says Coby Sillers, VP, commercial
field operations for Cox Business Services. The opportunities
for cable operators in the commercial arena are astounding,
says David Turnbull, VP, marketing, for Rocksteady Networks,
a software firm that enables broadband providers to segment
bandwidth and prioritize voice services for commercial clients.
"In the next two years, the commercial broadband market
will be a $100 billion business," Turnbull says. "Most
of that business today is handled by telephone companies via
T-1 lines. It's 10% of their business, but it accounts for
20% of their profits." Telephone companies are charging
on average $800 per T-1 line, he says. Cable operators are
already delivering a superior product, and they could deliver
a cheaper service and still get better profit margins. "There's
no reason not to assume cable operators could get 25% of that
$100 billion in three years," Turnbull says. "In
the 25 years since I have been working in the tech sector,
I have never seen an opportunity this large for making billions
of dollars. The impediments are so low and the opportunity
is so high."
(sources:
Cable digital subscriber growth slows, Broadband Daily, 5/13/04;
Analysts ’04: It’s a Big Year for Cable, by Mike
Farrell, Multichannel News, 5/3/04; Spring in Step for Four
MSOs, by Mike Farrell, Multichannel News, 5/3/04; Looking
Past Cable's Profits to the Rivals on Its Heels, by Geraldine
Fabrikant, NY Times, 5/3/04; Cable companies compete with
telcos for business customers, The Wall Street Journal 4/7/04;
Home Run Days Are Over for CTAM Crowd - 'Singles,' 'Doubles'
and 'Triples' Will Make Cable's Hot Toys Catch Fire, by Matt
Stump, Multichannel News, 3/8/04; Conquering the Digital Wave,
by Mark Hess and Sergei Kuharsky, Multichannel News, 3/1/04;
Western Wrap, by Jonathan Tombes and Jennifer Whalen, Communications
Technology, February 2004; 2004 Plans; Charting the Next Frontier
- VoIP Telephony, VOD, DVRs: Ops Tout Them All For 2004, by
Mike Farrell, Multichannel News, 12/15/03; Digital cable falls
short of expectations. The Wall Street Journal, 9/24/03)
Competition:
Overview
- Competition will continue to be fierce, especially from
Satellite operators and RBOC's. Both are drawing up plans
to ensure their own future. And while neither is close to
offering a viable bundle of voice, video and data, together
they offer a competitive package of services. With the consummation
of DirecTV by News Corp, the Cable companies have a bigger,
more apt competitor than before. Likewise, with the Baby Bells
seeing their local phone markets slowly eroding, they are
ramping up efforts to maintain subscriber counts by aggressively
pricing their DSL services. The result has been more pressure
on Cable operators to compete on price, which is not palatable
because with the video market maturing, High Speed Data services
has padded their bottom lines. There are also upstarts coming
to the market, such as USDTV, VOOM and Broadband Powerline
providers, each which is hoping to offer viable and innovative
alternatives to the current product mix. In the end, competitors
will be very aggressive at luring away as many video and voice
customers as possible to increase their market share and work
their own magic to keep those subscribers. Cable operators
will continue to roll out advanced products and innovating
services in order to stave off subscriber loss.
Satellite
- Despite the increased competitive conditions, the satellite
industry continues to flourish. Combined, DirecTV and Echostar
have surpassed the 20 million mark, a number thought to be
unheard of just four short years ago. What's more, the stakes
will be even higher now that the Bells are in partnerships
and News Corp has merged with DirecTV. Though growth is slowing
as saturation of multichannel TV households approaches the
90% level, many analysts and industry executives agree satellite
operators will grow to the 25-30 million range within the
next 3-4 years, with much of that coming at the expense of
Cable. Beyond that, some say the satellite industry will level
out around the 35 million mark. Along the way, both DirecTV
and EchoStar will look to increase their competitive position
by offering bigger and better DVR services, new Interactive
TV applications, wireless multi-room capabilities, VOD-like
services, and new non-linear products still on the drawing
board. To date, the DBS Satellite providers have gained a
reputation with customers as innovators who provide cheaper
products and better service. These high rates of customer
satisfaction have always been a hallmark of the satellite
consumer services industry. For instance, satellite has consistently
rated the industry-best in both J.D. Power and Associates
reports and the National Quality Research Center's American
Customer Satisfaction Index. That level of satisfaction has
been instrumental to the industry's sustained growth. Another
reason satellite has flourished is the value it provides,
both in terms of product and price. An August (2003) study
by JP Power and Associates showed that between 1998 and 2003,
the average price of satellite went up 8 percent, while cable's
went up 41 percent. While much of Cable's increase can be
attributed to a widescale investment in infrastructure that
has resulted in two-way networks and services such as HDTV
and VOD, satellite keeps taking away customers from cable.
Moreover, Digital cable does not provide enough value. But
the tide may be turning. With more value-add video services
such as DVRs, SVOD and upgraded IPGs, not to mention bundled
offerings, Cable operators have shown they can retain customers
and reduce churn. In addition, DBS providers are facing challenges
for the growing demand for high-definition TV, which gobbles
up existing bandwidth and strains finite satellite capacity.
More than that, the one-way architecture of their satellite
services makes it difficult to provide next generation interactive
services. They are also burning through cash at a high rate
in order to acquire and keep customers. In response, the industry
has lobbying the government for new orbital slots to launch
additional satellites to increase bandwidth. In addition,
they have been teaming up with telephone companies to bundle
satellite TV service with DSL for broadband access and rolling
out new set-top boxes with expanded digital video recorder
capability to enhance its near-VOD offerings. In essence,
in a highly charged competitive sector, satellite providers
are not resting. They continue to innovate while concentrating
on delivering the best product at the best value. But Cable
operators feel they are well positioned for the future. With
a high-bandwidth connection into the home along with newer
products such as SVOD, HDTV, VOD, DVRs and eventually IPGs,
ITV and VOIP, Cablers feel they can offer unmatched bundles
of services while offering strong value and satisfying their
customers needs. (For more information, see "Satellite")
Telcos
- The telephone companies are comprised of a relatively large
group. The consist of the RBOCs (regional bell operating systems),
such as Verizon, SBC, BellSouth and Qwest, the IXCs (interexchange
carriers), such as AT&T, Sprint and MCI, the CLECs (competitive
local exchange carrier) such as New Edge Networks, Conversent
Communications, Integra Telecom and iDial, and the ILECs (incumbent
local exchange carrier) such as Huron Telecommunications Cooperative,
Nexicom Telecommunications, North Frontenac Telephone, and
several more. Though there is plenty of movement on several
fronts in the telecom industry, with respect to competition
against Cable, it is the RBOCs who are considered the main
competitive force. Starting a few years ago, the RBOCs have
found their business coming under fire. For instance, in the
first half of 2001, the RBOCs saw the number of local phone
lines on their networks drop by about 2 percent. The trend
continued, with the Bells losing 4 percent of their local
lines by the first half of 2002. To worsen things, the RBOCs
have lost a considerable amount of HSD business to Cable operators,
who's high-speed internet customers outnumbers theirs 2-1.
And with as many as 2 million additional customers lost to
Cable voice services, the climate is getting heated. So they
have plotted several strategies are a result. For instance,
RBOCs have already lowered the price of DSL in order to lure
new customers and blunt the loss of subscribers who may be
considering leaving their services altogether. They have also
partnered with the DBS providers to add a multichannel video
product to their portfolio, preparing for bundled offerings
some time next year. They have also made investments in WIFI
technology to offer innovative and convenient services to
their product mix while hoping to head off any defections
time. In response, Cable is moving forward with VOIP plans
and looking ahead to launches next year. Cable operators have
not yet matched the price reductions on their HSD product
line, but eventually, they may need to either consider it
or offer more value - i.e. more speed or exclusive content.
One area that has been talked about is video over copper -
or telco TV. However, the current solutions are either too
expensive or impractical for incumbents who would have to
make major investments. Those telcos who can deploy video
over ADSL, VDSL or maybe even fiber usually are the ones that
are building fresh networks or have rural locations. (For
more information, see "High
Speed Data")
FTTP
- Building fiber to the premises (FTTP) and enabling mega
bandwidth to the home or business has long been a desire of
many companies. But few have been able to justify the huge
up front costs involved. While it is still an expensive proposition,
today, the business case is much more reasonable. For instance,
the equipment required for roll outs has gotten cheaper and
more reliable in the past 10 years, even as the market has
grown. Digital set-top boxes, for example, cost about 50%
less. And new network designs have lowered the expense of
construction by more than 50%. A fiber connection now costs
$1,100 to $1,700, depending on whether the cable is buried
or strung from an easily accessible telephone pole. That is
only 10% more than the cost of installing a regular copper
phone connection. Generally, FTTP build outs has been the
province of Municipalities (town/city governments) Greenfields
(new home developments), overbuilders (like SureWest) and
maybe a few independent telcos. That has changed. In May,
as mentioned above, the nation's biggest telephone provider,
Verizon Communications, announced grand plans for fiber, starting
in Texas and eventually extending out to its entire footprint.
Verizon expects to spend about $1 billion on the first phase
of its rollout, making fiber lines available to 1 million
homes by this fall (2004). The Texas markets will include
Keller, a suburb of Dallas. Although the identities of the
other eight states could not be learned, one is likely to
be California, a person familiar with the strategy says. Verizon
plans to offer the service to 1 million more homes next year
and a total of 12 million by 2008. Over the next 15 years,
Verizon expects to spend $20 billion to $30 billion to extend
service to nearly all 35 million customers. Some estimates
have put that tab as high as $40 billion. In any event, Verizon
plans to offer digital TV, videoconferencing, and movies-on-demand
to th |
