Cable Pins Hopes on Data

Dec 1, 2003  •  Post A Comment

Advertiser-supported news, sports and entertainment programming may still be their core business, but these days major cable system operators would much rather talk about the most powerful growth engine in their business-high-speed data delivery.
That was clear during a recent round of conference calls by multiple system operators to discuss third-quarter earnings. While reporters may want to discuss headline-grabbing programming fee fights, cable executives were telling Wall Street about the rapid growth of their high-speed data business, which is part of the rollout of broadband services. Broadband’s impact was felt in the earnings reports as most of the major MSOs posted strong revenue and profit figures for the third quarter thanks to robust high-speed data growth, which offset mixed results on the video side.
As the programming side has matured, because of both market saturation and increased competition, broadband services have become a major revenue driver in recent quarters.
Compared with the high cost of cable programming, broadband is easy money, especially now that the enormously expensive digital system upgrades are near completion.
For relatively little cost, cable operators can deliver high-speed Internet access and charge anywhere from $30 to $50 a month for subscriptions, sometimes more if a customer rents a cable modem. The operators can also expand beyond residential to business customers. On top of that, the network established to deliver broadband to customers can offer a slew of other services, most notably telephony. That list of services will increase in the future as new wireless technology ties together everything from kitchen appliances to alarms.
Even as telephone companies increase the stakes for high-speed data customers by offering discounts on their digital subscriber line service, cable continues to dominate the space, controlling 64.3 percent of the broadband market in the third quarter, according to Credit Suisse First Boston. And though that figure is expected to erode somewhat as phone companies continue their aggressive discounting, most analysts believe cable-based broadband will always lead the market.
“There are a little over 21 million broadband subscribers, and cable owns roughly two-thirds of them,” said Michael Goodman, a senior analyst at technology research company Yankee Group in Boston. “All of this is going to the bottom line. The margins are a lot better and you don’t have to share it [with cable programmers].”
Mr. Goodman said the nascent state of broadband gives it a lot more room to grow.
“Video is not a growth engine,” he said. “The only way to generate additional revenues is through rate increases. You’re limited in how much revenue you can generate.”
He added that MSOs’ digital cable service offers some incremental revenue, but it is a fraction of the $45 a month per subscriber an operator can generate from a broadband customer.
That is not to say video isn’t important, however. Nor does broadband’s role as a growth engine mean MSOs are likely to marginalize, or abandon altogether, offering video.
Broadband Won’t Kill Video
“Cable [TV] will still be the core of their business,” said Richard Siderman, managing director at Standard & Poor’s. “Even if video were to drop to 40 percent of their revenues, they are still not going to give that up. It’s still a big piece of the business.”
It’s also a business that cable operators have to fight harder than ever to retain. With satellite operators DirecTV and EchoStar reporting robust subscriber growth, MSOs can’t afford to take their eye off the video ball, observers said. When a customer leaves, the MSO not only loses a subscriber, but also the opportunities to offer other services.
Such bundled services are seen as the linchpin of cable’s future success. That’s why MSOs look to deepen the customer relationship by serving as the provider of video, broadband and, in some cases, telephone. The thinking goes that if a subscriber is tied to an MSO, he or she is less likely to leave.
“A bundled offering is critical,” said Glen Friedman, president of Los Angeles-based technology consulting firm Ideas & Solutions. “If they displace or lose video to DBS or another competitor, they can’t replace that revenue by having a high-speed data and telephone business.”