Forum: Cable Can Get Something Out of Nothing

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Last week, I sat down at my computer and spent about $700
on airline tickets and computer equipment. I have Internet access through my cable
operator, and the process was fast, simple and secure.

But people within my firm's financial-services group
tell me that American Express made about $24 from the deal. The rest went to AirTran and
Tiger Direct.

My cable operator made nothing.

The Internet has come to cable, and it is coming soon to a
TV near you.

Recently, in this column (Multichannel News Forum,
Sept. 21, 1998), Steve Necessary, vice president of marketing for Scientific-Atlanta Inc.,
made a compelling case that interactivity on the cable network is going to be based on
Internet protocol -- a case that has been echoed in both computer and telephony journals.

Quoting Steve, "IP enables digital set-tops and
systems to tap into a global network of interconnected networks, including the
Internet."

Therein lies the opportunity, and the challenge, because
with the move to IP comes the inevitable evolution of your cable system from a private
network to a public network, and the need to understand -- more than ever -- what your
company's value proposition to the subscriber is.

Steve closed his column with a forecast that MSOs can
"potentially increase cable revenue per subscriber by two to three times over current
levels" -- pretty exciting.

But when I went shopping, my cable operator made nothing.

What happened? What happened is the public network. The
Internet is open by design. Your tax dollars and mine paid for it to be that way. And --
as the feds are finding out when they try to regulate the Internet -- it is essentially
impossible to change it.

The open environment lowered the barriers to service
development and fostered the creation of an enormous number of content companies and
business solutions. The open environment is precisely why interactivity happened on the
Internet before it happened on television.

But open means open. Once you give your subscribers access
to the Internet, you have freed them from all of your traditional modes of controlling
access to content, and they can do business -- like I did -- with whomever they please.

Simply put, the Internet doesn't care who owns the
pipe. All it cares about is connecting with users. And users can set their browsers to
start anywhere they want.

In this open IP environment, cable's added value has
conventionally been held to be its superior technology. Cable offers higher-speed access
at a better price than any available option -- for the moment.

Digital-subscriber-line service -- which appears to have
more lives than a cat -- is beginning to be offered (and actually installed) at
increasingly competitive prices. Bell Atlantic Corp. is now offering ADSL (asymmetrical
DSL) in some markets, with data speeds and rates competitive with cable access.

Another "born-again" technology, MMDS
(multichannel multipoint distribution service, or wireless cable), threatens to take
high-speed access wireless. When and/or if this happens, cable becomes just another fast
pipe.

Are DSL and MMDS real? Time will tell. But even if
cable's speed advantage is maintained, its exclusive hold on the fast pipe is
threatened by common-carrier status. Canadian authorities have already decided that cable
systems are common carriers for data.

Established dial-up Internet-service providers like America
Online Inc. are pushing for the same determination in the United States. Speed alone is an
uncertain defense against competition.

In other critical technologies, the Internet is arguably
ahead of cable. For example, all of the enabling technologies and infrastructure to
support transactional commerce on networks -- from simple credit-card authorization to
fully integrated electronic ordering, billing and shipping "back ends" -- are
available on the Internet from multiple companies. We have contact with dozens of such
companies in Massachusetts alone.

Which leaves making the customer want to do business with
you as your best -- and safest -- line of defense. Branding and relationship building have
been preached for years as being important to success in the very protected world of
traditional cable. The industry has been slow to respond.

Articles and studies continue to indicate that cable brands
are weak and that customer loyalty is low.

The world of IP networks is neither as patient nor as
forgiving as the world of traditional cable: It's too easy for the customer to go
someplace else. But there is hope for the MSO in the form of a "portal." I was
going to say, "Internet portal," but the opportunity for cable lies in thinking
more broadly than that.

The importance of portals stems from a sort of Zen paradox
relating to content on the Internet. Being connected to everything is, in some ways, like
being connected to nothing: It's very hard to find what you want. This is where
portals add their greatest value -- by aggregating and packaging attractive content in an
easy-to-access manner.

Portals are valuable. The top sites on the Internet are all
portals of some type: browsers, start pages or search engines. The only companies making
money on the Internet are portals.

AltaVista, Infoseek Corp., Lycos Inc. and Snap! (NBC Inc.)
-- all strong Internet services in their own right -- recently paid $15 million each to be
"a premier [sic] search engine" on The Microsoft Network's (MSN) start
page. That was pretty gutsy, considering that MSN has hardly set the world on fire as an
ISP, but they're all betting on MSN's privileged position as the start page on
all of those Microsoft Corp. Internet Explorer browsers being shipped with Windows
computers.

AOL -- the largest online service, with more than 13
million subscribers -- is a portal. AOL's portal function is so important to its
subscribers that in a recent study, the biggest concern that subscribers voiced about
switching over to high-speed Internet service with their cable operator was losing their
"AOL content."

Leveraging this position, AOL has recently cut deals with
content providers like NetGrocer, Music Boulevard and E*Trade in the $15 million to $25
million range, often with revenue sharing.

Into the wide open IP environment comes cable television,
with its inherent, and largely ignored, ability to do what the Internet can't --
build audience.

Cable operators have the unique opportunity to combine and
cross-sell video and databased content and, in doing so, to build the most valuable portal
of all. The industry still tends to think of video and data as different businesses, and
its exploitation of the combination extends primarily to price-based "bundling"
tactics.

The extraordinary opportunity for cable lies in thinking
about these businesses as extending and promoting each other in ways that merge the two in
consumer usage and perception, as surely as digital technology and IP will merge them
technically.

We believe that the cable portal can build a powerful and
unique new relationship with the customer by developing a trusted local presence that
offers a simple, user-friendly way to access and use this powerful combined network.

Creating this relationship raises strategic questions that
need to be addressed at the highest MSO levels. The best use of technology, the formation
of effective alliances and meaningful communications with the customer are all going to be
critical to the success of this new way of doing business.

Incidentally, the open IP configuration has analogous
implications for content owners and programmers. On the one hand, they have the
opportunity to form direct relationships with their customers. On the other, they will
need to figure out how to use their video and Web resources to break through the vastly
expanded level of competing content.

Company size will not guarantee success. There are many
small, new Internet companies with eight- and nine-figure market capitalizations that got
there by knowing how to build relationships with customers and how to form the right
alliances: Ask Barnes & Noble about Amazon.com.

Acting now is critical. You have a great chance to build a
powerful relationship with your customers, and some time in clear air to do it. But if you
don't grab the relationship with customers, somebody else will. The essence of IP
interactivity is that your subscribers can go right by you and do business with whomever
they please, just like I went by my cable company with $700 worth of business.

Bruce Jones is senior consultant in the cable and media
group of Dove Associates.

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