Cable bandwidth on the run

Sep 10, 2001  •  Post A Comment

While planning this week’s CTAM of New York Annual Blue Ribbon Breakfast, we searched for a topic that would impact industry execs from all facets of the business. The issue of bandwidth management quickly became our consensus choice.
Programmers, who are always looking for carriage of their next channel, have a running joke: The reply, “I don’t have any channel space,” should be one of the infamous “Three Biggest Lies.” Cable operators, who are always looking for new ways to attract, retain and upgrade their subscribers by offering them compelling products, have been racing to lay fiber-optic lines and rebuild their plants to add bandwidth. Plenty of ISPs are eager to strike deals with cable companies to use their fat pipe to deliver high-speed Internet service under the ISP’s brand. And there are a bunch of ITV and t-commerce companies vying for a piece of the broadband action as well.
The common thread is bandwidth. As operators analyze their options and make major strategic decisions, they’ll be using a new financial equation: return on bandwidth.
Whether you’re talking about the cable MSOs or, more recently, the DBS guys, subscription television distributors have rightfully earned the reputation of high-stakes gamblers-in many cases, entrepreneurs willing to lay down their last dollar to stay in the game. All along, these players have firmly believed that there is a lot of revenue-and eventually profit-in providing the consumer with a competitive array of TV products.
Going forward, our gamblers are faced with a new kind of casino. They no longer have the option of continuing to place their bets on the traditional games (linear basic and pay programming). It’s time to step up and lay their money down on the new games in town (video-on-demand, high-speed Internet, voice over Internet protocol). As always, bandwidth is the currency, but the bets are much more complicated, with choices on technology, pricing and competitive tactics playing a bigger role than ever.
It has been estimated that up to half of the asset value of a cable subscriber is based on expected revenues from new digital services. With so many viable scenarios for bandwidth allocation, the decisions that cable operators and DBS companies make about allocating bandwidth will play a huge role in determining who walks away with the big winnings.
In recent years, the cable business has undergone as much evolution as any industry, to the point that we are in the process of changing the industry’s name to broadband. Twenty years ago, the average
cable operator offered 36 channels, a standard collection of off-air, basic and premium satellite channels. In the ’90s, systems were rebuilt, lineups expanded to include pay-per-view, local ad sales took off, competition picked up, but fundamentally the business didn’t change that much.
In the last couple of years, suddenly the business has started changing in a big way.
Operators laid thousands of miles of fiber, rebuilt their plants to 750 MHz or more and realized they had the opportunity to represent a whole new kind of communications company to their customers. With the advent of digital technology, cable operators and DBS companies are poised to court consumers with a diverse array of services from vastly expanded transactional video products to remote-access home security systems.
Lots of opportunity, for sure. As operators contemplate how much weight (bandwidth) to put behind a given service, they will need to think about market share and profit margins. Will their entry be competing in an established arena or represent the introduction of an entirely new service? In some cases, operators will better satisfy a proven need by offering an improved version of a service for which their customers have already shown an appetite.
The cable business started as a way for viewers to go beyond the three-channel off-air world by watching uncut movies and basic channels that superserved their personal interests. Now, along the same lines, video-on-demand, near video-on-demand, and subscription video-on-demand will bring much more choice, access and convenience to much of the same kind of viewing experience (mostly watching movies). In other cases, operators will be seeking to steal market share from an incumbent (with such services as IP telephony) by offering better prices and improved customer service.
In yet other cases, they will be introducing something entirely new, like home networking, betting that customers will pay for the convenience of linking their computers and other devices throughout the home. To exploit these and many other opportunities, operators will have to make tough decisions about how to manage their precious-and increasingly profitable-bandwidth.
But beyond the algorithms and amplifiers, there is an equally critical challenge: how to brand and convey all of these services to the consumer in a coherent and successful way. Each MSO is taking a little different path to “broadband.” They all have plans to eventually roll out VOD, enhanced TV, walled-garden content, t-commerce and, in most cases, digital video recording and telephony. As each learns from market trials and the experiences of others, they will start honing their vision on when and how aggressively to enter all these new businesses.
Operators’ ability to brand themselves and build customer trust will determine whether they’ll be able to achieve the revenue and profits Wall Street is anticipating. Until recently, operators didn’t have a strong need to brand their businesses. As distributors and packagers of some of the best-defined and most popular consumer brands, affiliates had the luxury of satisfying their customers’ needs via other brand names. Now it’s the operators’ turn to step up their branding efforts and decide how best to position themselves. How do they convince consumers they are not only the source for the most choice in video, but also a company that can use digital technology and networking to make consumers’ lives more convenient and enjoyable? Operators’ brands will develop as a result of a multitude of decisions about customer service, marketing, advertising and public relations that will be just as critical as their bandwidth allocation decisions in determining their ultimate success.
In addition, pricing models will become an even bigger factor. Do you package and provide discounts for customers who take multiple services? Will it be more profitable or technologically necessary with some services to charge customers based on usage (volume) or to vary pricing based on usage patterns (dayparts)? Do you sacrifice margins on some services to retain customers in response to direct competition? A lot of questions and a lot to think about, but as the saying goes, “It’s all good.”
It really is a time of unprecedented opportunity and strategic challenge. Distributors will be managing the trade-offs involved in allocating bandwidth between traditional and new services. Content providers will be seeking to claim more “real estate” by offering content in innovative ways. New players are emerging, eager to jump on the “broadbandwagon” (sorry) by partnering with distributors to introduce entirely new services to their customers. One thing’s for sure. It will be fun to watch the bandwidth bets get placed and see who walks away with the winnings.