Nurturing Innovation on Cable

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They are two friends who went to high school together in San Jose, Calif., whose dads worked at the same IBM plant and who ended up at investment funds owned by the top two U.S. cable companies — one as a principal at Comcast Interactive Capital and the other as a managing director in technology at Time Warner Investments.

Both also, in recent months, went to work at venture-capital firms. Warren Lee, ex of Comcast, is at Canaan Partners in New Canaan, Conn., while Neil Sequeira, ex of Time Warner, is at General Catalyst Partners in Cambridge, Mass.

At their former jobs, they’d invested in several companies offering innovative services to cable operators. Both invested in Arroyo Video Solutions, a start-up pitching a new structure for hooking servers, software and other equipment together to deliver video programming on demand. Separately, they invested in another pair of video-server vendors, Broadbus Technologies Inc. (Lee at Comcast) and N2 Broadband (Sequeira at Time Warner); digital-video switching provider BigBand Networks Inc. (Time Warner) and interactive-TV software provider GoldPocket Interactive Inc.

Keeping in mind that both still value their cable-industry connections, I asked them what cable-system operators needed to do to encourage the addition of innovative new services that might set them apart.

Finding innovative services and keeping them exclusively on cable systems might, in fact, be mutually exclusive goals. Sequeira and Lee said vendors pitching services that are aimed at cable operators alone — that wouldn’t work for telephone companies, for example — are not attractive. Cable companies “don’t pay up for technology,” as Lee put it. And big cable firms “have traditionally been challenging partners for early-stage technology companies,” Sequeira said, because they are few and drive hard bargains. He added, “a lot of the venture capital or investment to spur innovation’’ in cable systems and what they offer customers “has actually declined over the last few years.”

Cable could do more to help early stage technology firms succeed, Sequeira said.

Some dynamics aren’t going to change. The big two cable companies — Comcast Corp. and Time Warner Cable — control so much of the market that a vendor has no choice but to make deals with them. Cable companies are used to getting what they want in those conditions.

But exceptions could be made for early-stage companies. Cable companies should do what they can to assist companies that have potential to enhance the business overall. Sequeira cited N2 Broadband as an example of a company that created a technical architecture on which video-on-demand servers from any maker could work. “In those examples, early-stage companies can help move an entire industry.”

Cable could also figure out ways to make it cheaper for vendors to write applications for cable platforms without, for example, having to buy complete sets of Motorola Inc. and Scientific-Atlanta Inc. headend and set-top equipment in order to do the necessary testing, Sequeira said.

Maybe MSOs could subsidize the cost of necessary testing and certifications for small, promising firms at CableLabs. And instead of requiring vendors to sell their services market by market, maybe more early deployments could be done on a regional basis.

“Time Warner Cable and Comcast are incredibly successful, wonderfully run organizations,” Sequeira said. “Over time, however, there are some serious implications for their business. It’s a little bit unclear what the media landscape looks like five to 10 years from now, and how people will be getting their media and how it will be delivered. If they’re willing to reach out and help innovate on their [cable] platforms, probably they should do it.”

Lee thinks one of cable’s biggest challenges is internal: recruiting enough employees skilled with Internet protocol-centric networks, or retraining the existing technical force reared on radio-frequency networks.

“For many of the cable operators, they really need to hire a different caliber of person,” he said.

He also made a pitch for improving the look and feel of cable’s on-demand video systems.

Video on demand “is not just about rolling out lots of content,” Lee said. “Having as much of the right kinds of content is important. But it’s also the experience itself.

“I think one of the risks to cable operators is this over-the-top approach, where you’re using the PC as the interface. The PC has the best user-interface mechanism out there: it’s the mouse. You can do anything with the mouse. The remote control is a clumsy device by comparison.”

Moral: Little vendors, like mice, can do big things if properly fed and cared for.

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