Broadband Home alone
Despite some nasty debt, cable companies will soon control how consumers access the Internet, watch television, and even use their phones--beating the Baby Bells at their own game.
By Mark Mowrey
December 16, 2002
Red Herring
Why It Will Happen
Cable operators have a stable base of revenue-producing customers: 73 million homes. They, and not the traditional phone companies or satellite TV providers, have the fattest pipes into the home and the ability to offer what one analyst calls the triple play--video, Internet, and telephone services. At last, customers will get what they crave: easy setup and one-stop billing. More importantly, the cable firms will have a platform to sell lucrative additional services like video on demand, home networking, and personal video recorders (PVRs).
Leading cable's revenue growth will be its ability to bring high-speed Internet access to the home. The research firm Yankee Group expects the number of U.S. cable modem subscribers to top 13.9 million in 2003, nearly 66 percent of all broadband subscribers . Yet Yankee predicts the Baby Bell's equivalent broadband service, DSL, to hit less than half that.
Next year, cable companies will implement a new standard that allows operators to prioritize traffic on the network (a critical step for cable telephone service, because voice traffic will have the right of way over data to ensure better quality). The standard, data over cable service interface specification (DOCSIS 1.1), will also lead to tiered services. Operators, for instance, will be able to offer slower speeds at a lower price (say, for email), and faster speeds at a higher price (for voice and streaming video). They also will be able to change prices quickly to match or undercut the competition. All this means the cable firms will be able to sell their services to a greater number of small business and home-office customers, a niche currently neither targeted nor heavily penetrated.
New technologies will also bolster cable's old standby--broadcasting content. The next evolution in cable TV will be video on demand (press a button and here comes the movie) and PVRs. A recent survey by the Leichtman Research Group, a consulting and market research firm, found that 30 percent of all U.S. households spend $15 or more on video or DVD rentals each month. Two-thirds of that group would use video on demand more frequently if it were available. As for the popularity of PVRs: "Customers would rather you take away their electricity than their PVR," says David Pugliese, vice president of product marketing and management at Cox Communications, a cable company that will offer a trial PVR service through its set-top boxes by early next year, with a limited rollout by year-end. In June, about 1 million PVRs were in use, 65 percent of which were supplied by satellite TV providers, according to Leichtman. As more cable companies offer PVR functions in their set-top boxes, satellite companies will lose an important competitive differentiation.
Not content with just supplying entertainment, cable companies are moving to offer telephone service. Thus far, only AT&T Broadband and Cox offer voice over cable on a large scale. Currently the networks are circuit-switched, which means they operate much like conventional telephone networks, without any of the cost savings of Internet-based telephones. Yet standards are being developed that will solve some of voice over cable's limitations. Once this happens, cable companies will be the envy of the communications sector.
Revenue from these new services is one reason that cable firms' heavy debt (expected to be more than $75 billion among major providers by January) will not be their demise. Cox, for example, expects to be cash-flow positive (meaning positive earnings before interest, taxes, depreciation, amortization, and capital expenditures) for the entire year.
What It Means
Cable operators will acquire more subscribers and will slow an industry trend: in 1994, satellite TV firms had 1 percent of paid TV revenue; this year they are expected to get 24 percent, according to Richard Bilotti, managing director of equity research at Morgan Stanley. But this growth will slow, reaching just 25 percent in 2007, as cable exerts its advantages over satellite. Cable technology is uniquely suited to offer services like video on demand (satellite is limited by its one-to-many broadcast framework) and enables firms to offer broadband services more cheaply and with greater speed--especially for transmitting data--than satellite TV providers.
Finally, unlike the telecom sector, which offers a new revelation of financial impropriety each week, cable has only one lone bandit: Adelphia Communications, whose founder and his two sons were indicted by a federal grand jury for, among other things, securities fraud. As cable firms continue to report solid results not tainted by fraud, stock prices will begin to rise.
Write to Mark Mowrey. |
