Executive Summary: Cable Companies

A new study from the New Paradigm Resources Group explains why cable companies have a bright future.

by New Paradigm Resources Group [January 3, 2007]

This is the executive summary of the NPRG Industry Analysis: The Cable Broadband & Telephony Report. For information on ordering the report click here: (.pdf).

Cable companies have been pursuing broadband and telephony options for many years. With their core video programming market under attack from satellite providers and, recently, telephone companies, it is more important than ever for cable carriers to extend their reach into the data and voice markets. For them "triple play" means survival.

 

Table 1: Competitive Services
	Voice	Video	Data
Cable Multiple System Operators (MSOs)	VoIP	Cable TV	Cable Modem
Local Exchange Carriers (LECs)	TDM Telephony	IPTV	DSL
Satellite	VoIP	Satellite TV	Satellite Modem

Source: New Paradigm Resources Group, Inc.

Relative to telephony, cable holds some advantages, such as a more robust network that extends deeper into the neighborhoods. Telephone companies, on the other hand, possess a more robust network in business districts. Both hold enough cards that a high-stakes poker game is clearly underway. While satellite holds the distinction of being a strong video competitor, wireless may hold the key to the future. Will the cable companies view wireless as a partner or a competitor? Will cable companies enter the wireless realm via partnership or investment? The answers to these questions will likely shape cable's future.

Looking back
In the past, cable companies faced no competition in their video realm. Like any franchised monopoly, they served defined geographic areas and invested heavily in asset-based networks that took years, if not decades, to pay back. Traditional regulation kept rates down, competitors out, and profits predictable.

Perhaps due to such lack of competition, cable companies had a notably poor customer service record. Frequent service outages and inconvenient customer service scheduling were a hallmark of the cable MSOs' early days. Many customers still recall missing days of work awaiting a service technician's visit—indeed, the 1996 film The Cable Guy, which starred Jim Carrey as a creepy, friendless cable installer, drew upon customers' negative sentiments toward the cable companies' draconian customer service policies. As the cable companies compete head-to-head with other triple-play service providers, the impact of these memories upon customer choices remains a question mark.

In the more recent past, traditional cable companies began to face competition in their markets from new cable overbuilders like RCN and WideOpenWest. On a larger scale, they faced competition from satellite providers that have taken a bite out of the cable companies' market share for video customers.

In the broadband data arena, cable companies have battled telephone companies to a draw in the fight for consumers' high-speed data dollar.

Shut out of the telephone arena by high barriers to entry—namely, expensive switching equipment—cable companies were reluctant to encroach on the telephone companies' turf.

The present
Recently, cable operators have rounded out their "triple play" bundles by adding voice to their video and high-speed internet service offerings. The companies are also beefing up their video offerings, adding digital cable and its accompanying accoutrements—products and capabilities like digital video recorders (DVRs), video on demand (VOD), high-definition television (HDTV), and on-screen viewing guides. Cable companies have also continued to increase bandwidth and expand reach of their cable modem services.

Most notably, with voice over internet protocol (VoIP) and its accompanying softswitch architecture reducing the cost of entry into telephony, cable companies are diving in headfirst to provide voice service to their customers, racing the local telephone companies to offer the triple play of services in as many markets as possible before telcos get legislation that eases their entry into video.

At the moment, cable television still provides a majority of the cable carriers' revenues. While video's percentage will decline with cable modem and telephony services comprising more of the cable companies' revenues, cable television will still represent more than 50 percent of cable companies' revenues in 2009.

Looking ahead
Cable companies will be marching into the coming years in a position of strength. The added features to cablecos' video service offerings have given them a tangible advantage over satellite providers. The expanded capabilities of cable's video offerings—video on demand (VOD), digital video recorders (DVRs), and other digital service enhancements like interactive program guides—have improved to a level that is able to compete head-to-head on a relatively level playing field with the telephone companies' internet protocol television (IPTV) offerings, even if IPTV delivers all it promises.

On the broadband data front, cable modems should continue to keep pace and exceed the capabilities of DSL. The only potentially superior technology, fiber-to-the-home, is expensive to deploy and will be deployed slowly. In addition, only a handful of data applications have tested the limits of cable modems' capabilities to date, so even superior bandwidth performance, if it arrives, may not be a significant competitive advantage.

Finally, on the telephony front, cable companies' VoIP deployments—particularly those over dedicated networks—should compare favorably with telephone companies' voice service. While voice may be slowly consumed by wireless, cable companies still need to offer voice to complete their triple-play bundles.

In the realm of wireless, the fourth service needed to complete a "quadruple play," partnerships with cellular companies, may be the answer to cable companies' deficiencies in this area. There is also a possibility of cable companies entering the wireless world themselves, though it stands to reason that, if that happens, it will be through acquisition rather than via build-out; acquisition would allow the cable companies to tap the expertise of existing carriers in that market.

Perhaps the brightest growth opportunity in cable's future is the business market. As cable companies build out the core business district sections of their networks, they will actually leapfrog to a superior position to serve business' needs—after all, cable companies' networks in the suburbs and neighborhoods are more robust than their competitors', a business advantage that could certainly be exploited to help businesses reach branch offices and home workers.

Cable companies must act quickly to secure their advantages and work to lessen their disadvantages, however. The whole telecommunications landscape is beginning to shift, as voice, video, and data converge via internet protocol (IP) into simply "telecommunications service." With a potentially bitter fight ahead and the eventual merger of three distinct revenue streams into one, cable companies must not grow complacent. Though the cable companies enter the "service provider battles" from a position of relative strength, inactivity could cause their advantage to disappear quickly.

If the cable carriers fortify their business district networks, add wireless to their service bundles, plan ahead for the effects of convergence, and win over customers with their now-competitive customer service levels, they will have the upper hand going into the next decade.

The bright future
Indeed, we think the future looks bright for cable companies. Their core business (cable video) is in better shape than the telephone companies' core business (wireline voice). As the battle for triple-play, and later, quadruple-play, supremacy is waged, this factor will fill deeper pockets for the cable companies. If used wisely, this revenue will allow cable carriers to build out their infrastructure to meet any challenges posed by their competitors. By combining continued broadband market growth with entry into the voice telephony market segments, cable MSOs will not only survive the communications wars, they will prosper.

— End