Cable Operators

The New Dirty Word: Disintermediation

1/13/2006 7:00 PM Eastern

There’s a new word being lobbed at the cable industry almost daily: disintermediation. The official dictionary definition is “removing the middleman or intermediary.” And that has special implications for the multichannel industry.

At the Consumer Electronics Show two weeks ago, never really a cable-friendly gathering, disintermediation was heard early and often. But it’s also being uttered by investors with increasing frequency. And it is one reason cable stocks, along with telco and satellite stocks, continue to languish.

The view is that with broadband connectivity — ironically put in place by cable and telephone companies — and the consumer’s ability to get content and shift it anytime to any device they want, video gatekeepers, like cable, will be history.

Who needs Comcast Corp., or Comcast’s video lineup, when you can go to Google and download CBS shows? It’s a fair question that dominates the press and is on the minds of Wall Street analysts and service providers.

Cable, compared to telcos, seems particularly vulnerable. Telcos don’t have incumbent video businesses to protect. Telcos also have wireless platforms, and plans for continued migration to more robust wireless platforms that will handle video more easily. Cable is playing catch-up in that arena.

But telcos are service providers that stand to get end run by content providers. Disintermediation could hurt their nascent video business and cause disruption in other areas.

Ivan Seidenberg, chief executive office of Verizon Communications Inc., was asked the disintermediation question after his keynote speech at CES two weeks ago.

“We’re already seeing how technology can disintermediate a business,” he said with almost a shrug, listing cable voice over Internet Protocol, Vonage Holdings Corp. and others that have impacted the traditional telephony business. “The old phone business was a great business,” he said, wistfully.

Seidenberg also said industries can’t take any safety position that what they’ve always done will stay in place. “New technology and new capabilities create new markets.”

That may be one reason Verizon is allowing FiOS TV subscribers to move Internet content from their FiOS data platform to the TV. “We’re new. We can think differently,” he said.

In cable, a wall exists that prevents such movement. That wall is part business model and part protect-the-legacy video service, which by the way hasn’t grown in a number of years.

Seidenberg added, “If we don’t invest, we get into a lot of trouble.” The company is taking a big chance that its fiber-to-the-home platform will pay off, but the investment has its skeptics on Wall Street. Seidenberg counters that the company’s wireless business went from $0 to a $30 billion valuation in 15 years. The message: The telecom business isn’t a place for the timid.

“Technology could disintermediate [cable and telcos],” he said. “You have to create a platform that is useful and relevant.”

Yes, he said, there may be places where Google Inc., Microsoft Corp. and America Online compete with Verizon. But they can also “create applications to use over our network,” such as Google’s map service.

Verizon customers can download maps and transfer them to TVs and mobile devices on Verizon’s network. “Portals can’t do that,” he said.

Jeff Weber, vice president, product strategy at AT&T Inc., shrugged off the disintermediation question at a CES session. The key for providers is to deliver and maintain an integrated suite of services. “It’s very unglamorous, but it’s how you can add value to customers,” he said.

“What if you have a virus on your PC, and you can’t get your show for a week?” he asked. “There is nobody to call.” Do you think Google is going to take responsibility or troubleshoot for the consumer?

Cable can probably rest easy, even its telco competitors worry about the same disintermediation issue. Weber’s conclusion: “There is not a model that will replace us, but it is going to be a wild and wooly ride.”

It’s something that most cable operators would find hard to argue with these days.