Sensing Angst Behind the Confidence


Cable operators head into the final Western Show outwardly confident that the $75 billion they've spent on rebuilds will pay off because of the host of new services — video-on-demand, HDTV, digital video recording, voice over Internet Protocol — they can deploy.

But privately, there's a fair degree of angst that gnaws at senior executives, unsure exactly how competitive battles will turn out over the next year, how Wall Street will react to those competitive battles, and how soon new technologies will be ready for primetime.

The two chief headaches are price wars with digital-subscriber-line providers and direct-broadcast satellite TV competition that continues to erode the base.

The cable-modem gravy train still has some steam left, but the price cuts on DSL service is a topic analysts can't get off their minds. They believe it's inevitable MSOs will have to drop prices to gain market share among the "early majority."

Some analysts would view a 50-50 market-share split as a net positive for cable over the next few years.

Comcast recently disclosed it's targeting DSL subscribers in a few states with a $19.95 monthly, 12-month introductory offer to high-speed data. It's the lowest price Comcast has ever broached and doesn't require the customer to buy video service.

(As a side note, you'd be surprised at the actual number of cable-modem subscribers who don't buy cable video, a figure not well publicized. Or even experiments to sell those data-only subscribers video service over their PCs. That's for another day).

In 2004, MSOs will face greater pressure to offer a lower-service data tier, or to discount, even if modem numbers remain relatively strong. There's little margin for error, with Wall Street.

That's one reason why there's much excitement for VoIP. MSOs can bundle VoIP with high-speed data for new subscribers and regain a price advantage, over both products, the telcos now exploit.

MSOs, to a degree, have a choice: launch VoIP and maximize existing revenue from existing modem subscribers or offer less costly bundled service in order to grab greater share of data and voice markets.

As Wall Street likes growth, the bet here is that attractive bundle pricing will be the hallmark of VoIP service.

DBS presents a tougher predicament. EchoStar and DirecTV added more than 500,000 subscribers in the third quarter. Cable added nowhere near that number.

MSOs realize they need the full arsenal of VOD, DVRs and HDTV to compete with satellite. VOD alone cannot blunt the allure of a satellite DVR box.

Time Warner Cable's third quarter DVR run rate — more than 7,000 per week — testify to what operators can do with DVRs.

For MSOs, there's no time to worry about what DVRs might do to ad-supported programming networks. Time is of the essence.

The next battleground in the DBS-cable war will be interactive television. Rupert Murdoch will bring some BSkyB-type interactive applications to the U.S., you can bet. Operators need to be planning a response — and you can tell that the folks at Time Warner Cable have gotten the message.

Cable's worst-case scenario for 2004 would be to continue to lose subscribers to satellite because of DVRs and end 2004 staring at a DirecTV interactive platform that cable is 12 months away from launching.

One piece of startling good news is the number of HDTV subscribers who are brand-new cable customers. Comcast, Cox and Insight reported that in the third quarter anywhere from 20% to 25% of their HDTV subscribers were new to cable.

Some actually switched from satellite, lured into a high-speed-data bundle.

It's the first time in recent memory that new subscriber additions were directly related to a new technology.

There's also decent analog-to-digital upgrade numbers to report relating to HDTV.

For the moment, HDTV remains a big-ticket item, appealing to a small subset in cable. (DVR growth has surpassed HDTV in systems where both have been launched.)

But cable's ability to use HDTV to gain basic subscribers — even former satellite owners — is big
news, should it be sustained quarter after quarter, and reason for confidence.

It all means 2004 could be a very interesting year, following all the skirmishes across the broadband battle lines.