There is a raging debate going on inside cable about whether the industry has run out of bandwidth.
The debate is magnified by Wall Street's ongoing concern that cable doesn't have a lot to show for its $85 billion rebuild and that increased competition will make it harder for MSOs to reach the cash-flow levels Wall Street wants, post-rebuild.
That school of thought says that 550-Megahertz systems — and even many 750-MHz systems — are running out of space to carry increased numbers of HDTV channels and video-on-demand content that cable needs to keep pace with satellite competition.
But others in the industry believe cable is not running out of space. They think there are plenty of bandwidth savings tools at cable's disposal — better encoding, more efficiencies in the quadrature amplitude modulation system — that will allow operators to gain bandwidth without rebuilding their networks, because rebuilds are a four-letter word on Wall Street.
I'd like to raise a heretical query that questions the most basic assumption behind this debate: What exactly does cable need this new bandwidth for?
The first cited justification is HDTV. Let's take a closer look. What exactly is cable's business model for HDTV? Operators launch an HD tier and get $5 to $10 a month. Some of that money goes to cover the cost of the set-top box. Some of that money may make its way back to the programmers. The rest, which isn't a lot, goes into the operator's pockets. HD growth may steadily climb, but it hasn't hit an exponential growth curve. And digital video recorders have surpassed HDTV in set-top deployment. A cold-hearted accounting analysis puts HD in the “necessary evil” camp.
VOD — let's be honest — isn't that much different. Cablevision Systems Corp. is the only operator willing to give a monthly VOD revenue figure ($7) to Wall Street.
And Cablevision offers plenty of subscription-VOD services to bolster that number. Other MSOs don't. The average revenue other operators are getting from VOD is probably in the $3- to $5-a-month range per digital subscriber.
And some of that money gets shared with Hollywood and other programmers, not to mention the capital budget to cover the costs of VOD servers, transport, metadata and operations. Maybe there's some premium growth and digital churn reduction inherent in VOD deployments. The feedback indicates digital churn is reduced, but there have been few actual numbers attached to that trend. A cold-hearted accounting analysis also puts VOD in the “necessary evil” camp.
So why does cable need additional bandwidth for services that don't make money? It's the big elephant in the room few are willing to acknowledge.
In reality, cable can't get away with such a simplistic notion. Without VOD and HDTV, cable would get creamed even more on Wall Street. Financial analysts and investors would have had a field day. And politically, there was no way cable could not launch HDTV. It was the patriotic, smart thing to do in 2002 and 2003.
Still, it raises the question: As cable starts to go all digital and deploy next-generation architecture, should all of the bandwidth be given to video services?
Look at each new cable-modem or voice-over-IP subscriber. That's $35 to $45 per month to cable, with half or more of that revenue dropping to the bottom line. An MSO needs at least five new HDTV subscribers just to get close to the margin of one new VoIP subscriber. And which subscriber would be easier to get?
What about bringing some of those high-speed data bandwidth dreams a little closer to reality? Japanese cable-modem subscribers enjoy 25 megabits per second downstream. What about developing new, revenue-producing services at the 50 Mbps or 100 Mbps level and using cable's extra bandwidth for that? Anyone recall the phrase “revenue per hertz” used just a short time ago?
Remember the last time cable allocated more bandwidth than was perhaps necessary? Have you heard any cable operator mumble whether the last 10 to 15 digital channels they launched were really worth it? At the end of the digital launch era, operators got caught up in a programming-channel arms race with satellite, but that strategy quickly hit the wall of diminishing returns. The irony with bandwidth-saving all-digital is that it's the most-viewed analog networks that are cast as the bandwidth hog, not the most recently launched, sometimes little-viewed, digital channels.
There are lots of provocative questions raised by this bandwidth debate. Cable can't turn the clock back on VOD and HDTV. And, despite the above questions, it will be forced to add more of those services to remain competitive. But at this bandwidth crossroads, it's worth raising this “what should we do with this bandwidth question,” before it's too late to turn back.