When trends collide --
[good job setting this out; best read using url below – as it contains interesting stage/paradigm tables, not part of copied text -- develops big picture trends – including consolidation of telecom services, the growth of broadband and bundled services, and the emergence of new businesses such as voice over Internet protocol telephony…. "Cable appears the most likely of all media to not only weather but benefit from the perfect storm of change, challenges and trends that is unfolding."
[Pointed examples:
[“First,] "Over the last six months, there have been increasing signs that voice over Internet protocol telephony could become a mass market product," Mr. Levin said.
But cable providers with advanced digital system buildouts are not the only game in town. "Edge" service providers such as Net2Phone, VoicePlus and Vonage rely on computer-to-phone architecture to provide local, long-distance and bundled services at a considerable discount to traditional telcos.
Cable operators have control of their own networks and customer base-making the most of a telephony rollout in the case of Time Warner and a 2005 rollout, in the case of Comcast. It all intersects in a major promotional war for consumers….”]
--Cable wins because of its greater broadband capacity and market penetration, allowing for more services to be created at the edge rather than as part of existing networks, which overall provide more cost-effective, flexible and nimble.
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When trends collide: tech, regulation don't mix
mediareform.net
From Mermigas On Media,
December 5, 2003
By Diane Mermigas
An industry viewpoint...
There is no resisting an analyst report titled "Three Trends and a Train Wreck."
It could, in fact, describe any number of circumstances undermining, reshaping and downright reinventing media and telecommunications.
But the intriguingly titled report from Washington D.C.-based Legg Mason analyst Blair Levin makes the unsettling prediction that continuing consolidation, the growth of broadband and bundled services, and the emergence of new businesses such as voice over Internet protocol telephony are about to crash head-long with current regulatory policies governing rates and competition.
"This is creating pressure for Federal Communications Commission reforms and, potentially, a legislative overhaul," for which there is much inertia and little consensus, Mr. Levin said.
The "potential train wreck" euphemistically alluded to by Mr. Levin, who was FCC chief of staff from 1993 to 1997, reflects his belief that the potent big-picture trends threaten to crash into the current regulation of voice, video and data services, creating new pressure for regulatory reform.
In the end, there will be no clear single winner in the intensifying battle for the wallets of telecom and media customers, Mr. Levin writes in his Nov. 17 client report. Everyone is running for cover and searching for the killer application.
Against the backdrop of rapidly emerging interactive, digital technology, the shift of content ownership from cable operators and independent national broadcast television networks to media conglomerates is one of the moving forces of industry change. Another is the telecoms' shift in revenues from high-margin, low-competition wired phone networks to low-margin, high-competition wireless and data networks.
"The 1996 act unleashed a lot of forces of competition, and those forces are having a big impact on the market in some very unexpected ways," Mr. Levin said in a recent interview. "It had a profound impact on radio."
What the FCC did in eliminating the cable-broadcast ownership ban will create waves in the future when companies and investors catch up with what the change means and how it will be applied in the marketplace, he said.
"When that recent ownership ban leads to the formation of four large companies with TV broadcast distribution, cable channels and multi channel video distributions, then you've really restructured the industry," Mr. Levin said.
"The 1996 act stimulated a lot of investment in the long-haul networks which dramatically, over time reduced the cost of broadband. Broadband will affect the media market dramatically.
It also stimulated $75 billion in cable investment to upgrade systems which not only enabled them to compete better against satellite, it also enabled them for the first time to compete against the phone companies, which really brought about the broadband revolution," he said.
Three big-picture trends
But that's just the beginning, Mr. Levin said. There are three profound big-picture trends that are reshaping media and telecommunications.
Existing and future regulatory will relief will continue to fuel "horizontal growth and vertical integration, which will generally help the big get bigger," Mr. Levin said.
At the same time, new technological developments are providing alternative ways to transmit content and services other than the conventional, staid networks, relying on increased broadband penetration and the availability of Wi-Fi, which provide for more decentralized, user-created networks.
And finally, there is a massive repackaging and bundling of core products and services occurring in every medium, most obviously in cable and telephones.
"We think that these trends, along with wireless and data substitution in the telephone market, could ultimately lead to a regulatory train wreck," Mr. Levin said.
While these big-picture trends, already well under way, challenge everything conventional about media and telecommunications-including competition, pricing, classification, distribution and content economics-they also are yielding new opportunities for companies and individuals courageous enough to roll with the change.
While conventional owners of broadcast and cable TV, telephone networks and large television station groups might appear to be the most likely winners of continuing consolidation, more and more gains and losses at media companies and sectors will be measured by nontraditional means.
For now, the watershed event and single most potent change agent in the next year is News Corp.'s imminent acquisition of a controlling 34 percent stake in DirecTV.
As the first major deal combining a content producer, national broadcast network and multichannel video programming distribution network, it will inspire other broadcast networks to align with satellite TV and cable distribution platforms that might eventually see such combinations as NBC Universal and Comcast Corp. or Viacom and EchoStar Communications.
The stage is set for change
Although Mr. Levin declined comment on such potential alignments, his report sets an intriguing stage for such change.
For instance, whatever conditions regulators place on the News Corp.-DirecTV deal will set a new legal precedent for the industry and other future media deals, as already witnessed by the proposed formation of
NBC Universal.
While television station groups such as Hearst-Argyle Television and Sinclair Broadcast Group and newspaper-based broadcasters such as Tribune Co. and Gannett are prepared to engage in mergers and acquisitions that strengthen their advertising bases, a recovery in market confidence, stock prices and momentum is first needed, Mr. Levin said.
But the FCC official-turned-analyst firmly reminds that as much opportunity lies outside traditional media circles as within, or what Mr. Levin calls the "edge."
Consider some of his pointed examples:
[First,] "Over the last six months, there have been increasing signs that voice over Internet protocol telephony could become a mass market product," Mr. Levin said.
But cable providers with advanced digital system buildouts are not the only game in town. "Edge" service providers such as Net2Phone, VoicePlus and Vonage rely on computer-to-phone architecture to provide local, long-distance and bundled services at a considerable discount to traditional telcos.
Cable operators have control of their own networks and customer base-making the most of a telephony rollout in the case of Time Warner and a 2005 rollout, in the case of Comcast. It all intersects in a major promotional war for consumers.
[Second,] Cable also is under attack from a broad range of edge video providers that include the likes of RealNetworks, Yahoo!, and even ESPN and Fox Sports, who are taking their offerings direct to consumers.
Blurring the lines will impact a number of critical areas, including new ways of determining how a service or product is classified: as telecommunications, cable or information services, he said. Microsoft, Amazon and Walt Disney are among the edge providers who have asked the FCC and other regulatory agencies to adopt a network-neutral policy.
Among other things, it would give anyone the right to attach any device to the edge of a network, prevent network owners from allowing users to reach any Internet sites or discriminate against any service.
So far, such competitive neutrality has been mandated by such measures as digital must carry, copyright issues and digital TV transmission, which gives broadcast and cable companies more functionality and options.
But as cable and satellite providers incorporate and sell mass content copying, storage and manipulation (that includes ad-skipping), it will prompt the replacement of television's traditional scheduled viewing models with new on-demand services. The result, over time, is a shift in industry economics.
Why Wi-Fi is the next big paradigm shift
However, Mr. Levin makes the case that ultimately Wi-Fi and its iteration known as Wi-Max will be the next watershed event for media and telecommunications as its "offers transmission (of products and services) in a way that facilitates the growth of new services and potentially complete with incumbent services.
The key regulatory issues is whether operators will acquire additional spectrum in the 5 GHz band, representing the largest opportunity for growth in a relatively uncluttered spectrum band," Mr. Levin said.
Rather than supplant existing services, "Wi-Fi will operate in many places as a component of a larger bundle of services" and as a last-mile alternative to broadband, he said.
Most importantly, Mr. Levin points out that Wi-Fi will create a "hotbed of innovation as well as questionable activity."
"Some economists have suggested that innovation sometimes comes from 'recombinant growth,' which occurs when companies recombine a set of components in different ways to produce new goods and services," Mr. Levin said.
But even at this early juncture, it also has raised some sticky legal questions. For instance, Time Warner recently sued a Wi-Fi provider that it claims took its high-speed service and illegal resold it through it own connections in an apartment complex." While security issues remain unsolved, Wi-Fi "has the potential to create new business opportunities as well as risks for incumbent carriers," he said.
Indeed, Mr. Levin raises the prospect that wireless Wi-Max could reach critical mass fast enough to challenge broadband providers.
What of the broadcasters and cable?
The traditional broadcast business model may be the most threatened by all of the changes and trends Mr. Levin describes in his Nov. 17 report to clients.
He reaches beyond the much-written-about challenge of digital video recorders and their ad-skipping capabilities to cite such other potent forces as dramatic reductions in the cost of content storage, the increasing viability of viewers watching stored rather than "live" scheduled television fare, the rapid adoption of cable's on-demand content services and the inability of broadcasters to create a defensive-offensive digital business model that plays to its grass-roots strength and creates a much-needed new revenue stream.
Broadcasters "expect progress to accelerate now that the FCC has adopted orders on 'plug and play' (for DTV-set compatability with cable) and 'broadcast flag' (to facilitate copyright protection). There are still a number of important policy issues to be resolved regarding the transition, but the stubborn questions remains: how will broadcasts use the new technology to generate new sources of revenue?" Mr. Levin writes.
The most immediate answer may lie in the repurposing of select programming-something broadcasters and their local TV station affiliates have fought as they strain to protect a form of program exclusivity that may be rendered meaningless in a multichannel world.
"We had a huge transition on the media side on the ownership of content, which was a function of the 1992 act devaluating cable content by virtue of the program access rules, and the elimination of the financial interest syndication rules, as well as retransmission consent. It was those three things that led us from a time when cable owned all of the programming to a time when cable owned a small percent," Mr. Levin said.
"I think there will be significantly greater change because you are actually changing the nature of all network architecture. Broadband really does change everything," he said.
In the past, traditional cable, broadcast and telephone networks looked to someone to sell the distribution and content in a bundle to the consumer. By changing everything to digits, broadband creates a kind of platform in which you can have transmissions dealing from the service. It is a leveling force, Mr. Levin said.
"Cable has a significant advantage to the broadcast networks. The broadcasters risk falling even further behind," he aaid.
On the other hand, cable appears the most likely of all media to not only weather but benefit from the perfect storm of change, challenges and trends that is unfolding.
A key issue will be whether broadcasters try to pursue legislative policies that mandate greater regulation or use of the cable platform to facilitate their own digital television transition, Mr. Levin said.
Cable wins because of its greater broadband capacity and market penetration, allowing for more services to be created at the edge rather than as part of existing networks, which overall provide more cost-effective, flexible and nimble.
But, the biggest threat to cable is the pricing power of these new edge digital networks to cable, which already is struggling with keeping its rates in line with regulatory, consumer and program supplier demands and its own needs.
"While cable and the Bells (telephone companies) are experimenting with tiered bandwidth offerings, we have not yet seen the kind of killer applications that would drive the transmission-demand curve in a way that causes us to believe they will benefit more from increased transmission demand than they will lose form increased competition," Mr. Levin said.
Cable's system upgrades, such as providing digital set-top boxes with DVR capability, increases its ability to run more targeted advertising and programs, which will further undercut broadcasters' market dominance, he said.
"As DVRs and digital upgrades facilitate the move in consumer video market toward on-demand programming, scheduled network programming (other than time-sensitive news and sports) diminishes in value," Mr. Levin said.
"While TV and radio broadcasters are upgrading their networks to digital, we have not yet seen how the upgrades will drive significant new revenues streams," Mr. Levin concludes. "And they are running out of time."
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