July 23, 2007

A Strengthening Force: Next Generation Video & Business Bundles to Take Telcos to Task

Part 2 in a Continuing Look at Cable’s Competitive Threat

The cable industry is facing incoming competition from telephone companies for video customers and ongoing competition with the telephone companies – incumbents and competitive carriers – for data customers.  In addition, cable providers view voice as a necessary revenue stream for completion of their triple play bundles.  Cable multiple system operators (MSOs) are focusing their attention in three key areas.  First, they are continuing to develop cutting edge video products.  Second, bundling – triple play and beyond – will be a necessity in the coming years.  Third, the cable companies will be looking to establish a greater foothold in the commercial space, moving beyond residential customers to compete with the incumbent telcos and competitive carriers for business customers.

The Future of Video

Cable companies are looking to the future of video entertainment, and, indeed, initial versions of future products are available now.  The cable industry is also responding to customers’ desire to view video entertainment on their own schedule – at a time and place of their choosing.  To that end, cable companies are increasing their video-on-demand libraries.  Time Warner Cable continues to roll out its “Start Over” feature, which allows customers to view from the beginning any program to which they’ve tuned in mid-show.  The presence of a representative from Sling Media at the cable industry conferences is additional proof of the cable industry’s forward view. 

The Slingbox Family of Products Allows Users to Place-Shift Programming

Source: Sling Media, Inc.

 Sling Media, of course, is the company that brought the world the Slingbox, a device that facilitates place-shifting of video programming via an Internet connection.  Cable companies would like to play a role in providing customers with video programming whenever and wherever they want to view it.  If wisely conceived, a Sling-type device could build great loyalty to cable customers, who, with a place-shifting device, would be able to access their cable television subscriptions while on a vacation.

Collaboration between Sling and the MSOs would allow cable companies to use Sling Media’s time-tested technology rather than having to reinvent the wheel, while Sling would benefit by having the cable giants as customers rather than competitors.  Time-shifting, place-shifting… cable companies are actively pushing the frontiers of video’s future in an effort to secure a long-term position of strength in their trademark product.

Bundling

Indeed, the move toward “bundling” hardly qualifies as news – cable MSOs see the necessity of offering voice, video, and data triple play bundles, which increase average revenue per customer and reduce churn.  In the future, triple play will be table stakes.

The following graph, which appeared in NPRG’s Cable Broadband & Telephony Report™, 2^nd Edition, illustrates that, while video remains the dominant revenue stream for cable companies, voice and data will encompass a greater portion of cable’s future.  This is a result of both choice and necessity; as triple-play bundles become consumers’ expected standard, video-only offerings simply won t cut it.

Cable Broadband and Telephony Providers’ Revenues by Market Segment,

2005-2009

Source:  New Paradigm Resources Group

Will triple play be enough, however?  The key question for the owners and operators of hybrid fiber coax[s1]  (HFC) networks is:  What about the wireless elements?  Built now through partnerships, as well as through participation in spectrum auctions, cable companies are preparing to offer the entire communication package to customers.  Recently, the major cable companies that partnered with Sprint to offer wireless services announced the brand name of their service – Pivot.  Still, partnering with another carrier is neither as seamless nor as competitively advantageous as owning both the wireline and wireless components, as AT&T and Verizon do.  Whether it’s a shared service offering, the integration of a third-party offering, or a combination of both, cable companies will still be somewhat disadvantaged when it comes to mobile – if not competitively, then at least from the standpoint of maintaining full control of their own revenue streams.

 Beyond Residential

Cable companies are looking beyond residential services for future revenue streams.  Three prime targets are cellular backhaul, large businesses, and small and medium-sized businesses (SMBs).  Of the three, SMBs will provide the most significant near-term revenue stream.

Why not cellular backhaul?  Cable companies are certainly talking about it.  Undoubtedly, they will gain some of the cellular backhaul market.  Cable companies have deployed fiber deep into many neighborhoods.  A typical neighborhood node serves about 500 homes, so the cablecos have fiber between their headends and each of their nodes.  To the extent the cost of fiber extensions to reach cell towers makes sense, cable will get a piece of that market.  Beyond this low-hanging fruit, the cable industry seems uncertain about how to secure more of that market.  They are discussing the available market loudly and openly, but for now it’s “all talk, no action.”  As a result, in the near-term at least, cellular backhaul will comprise a limited revenue stream for cable MSOs.

Large business customers will also be tricky for cable companies.  They do currently bid on deals for schools and hospitals, but many of those deals include locations scattered throughout metro area neighborhoods where cable companies can compete on a relatively level playing field.  The cablecos’ central business district (CBD) fiber deployments, however, tend to pale in comparison to the telcos’.  Certainly, some of the cable companies have focused on remedying this fact in some markets, but as a rule, cable can’t hold a candle to telcos – incumbents and competitors – in CBD fiber counts.  As a result, large businesses are a future revenue stream cable will undoubtedly pursue… in the long-term.

Right now, the great deal of sound and fury in the SMB market actually does signify activity.  Cable companies ranging from large MSOs like Comcast to competitive cablecos like Knology are deploying dedicated personnel to cater solely to commercial customers, targeting the SMB market head-on this year.  What is driving this momentum?  As Comcast pointed out in its first quarter earnings call, it’s the broader availability of voice service.  Certainly, some SMBs have been purchasing data services from the cablecos for a decade now.  But most SMBs require the existence of a bundled data and voice offering before they’ll open the door to a potential new service provider.  Now that telephony is being rolled out across cable’s footprint, cable companies have a fresh market segment in which to compete with the telcos – SMBs.  And, of course, cable can add video service as an add-on, while telcos are still only able to offer bundled satellite service as competition in most areas.

To date, cable companies have tapped only $1.5 billion of the $90 billion SMB telecommunications services market, representing 2% of the cable companies’ overall revenue.  This sector offers great opportunity for growth for cable companies, and the industry is taking steps – by adding telephone service to its existing data and video services – to actively compete for a piece of this market.

Looking Ahead

Cable companies continue to sit in a strong position.  Though there are challenges ahead, the cable MSOs are formidable competitors to the telcos.  Cable providers understand their customers and are moving forward with well-designed strategies to compete for the residential markets – focusing on securing their video customer base with continually upgraded service offerings while moving into voice and expanding their data customer base.  The move into business is moving slowly… except in the SMB sector, where competition will be fierce in the coming months and years.