appeared in Barron's November 11, 2002)
The industry's survivors will focus on pipes, not programming
In a dozen years, the cable industry as we know it will cease to exist.
Therein lies opportunity.
By GREG BLONDER
turbulent times for the cable industry. Long undercapitalized and led
by free-wheeling, iconoclastic empire builders, the cable industry is
struggling with the end of an era of significant new subscriber growth.
Many investors view cable as a mature business with the potential for
squeezing out only marginal returns. Cable, however, has moved far more
aggressively onto the Internet than the big phone companies, which are
only now seriously rolling out DSL, their own version of broadband access.
Even as the cable operators have lost revenues to satellite TV they have
compensated by boosting sales of cable modems. Many of the industry's
investment dollars are flowing into development of a next-generation set-top
box -- and the massive infrastructure behind it -- that supporters see
as the central control point for the wired home of the future, and as
a way to sweep telecom dollars into cable-industry coffers.
It is a tough
period and a very dynamic one. But if cable operators were to step back
and examine longer-term trends, they would perceive a far more forbidding
most cable companies are dead on their feet. Their grim fate will become
obvious in five years and that fate will be well on its way to reality
in 10 years. Only the cable operators that perceive the trends early enough
and act in time have an opportunity to survive and achieve some success.
There is probably even room for one great company to emerge out of the
cable industry -- as the foremost champion of wireless broadband ethernet
to the home.
what is happening, observe the trajectories of two long-term trends (see
chart). They show that the ability to compress data is improving, and
the average speed of data coming into the home is increasing. Around 2004,
those two trend lines will meet. At that point, sending TV-quality images
directly to the home over the Internet will be simple, and a historic
business barrier will fall.
A few content
providers then will say, "Cable systems are a thing of the past.
You consumers ought to dial in and get your videos and your TV shows directly
from us." Others will follow more slowly.
after the lines intersect, virtually all content providers will have found
many ways around the less-than-beloved cable middleman. Film studios will
be advertising and delivering movies directly to consumers. News organizations
will provide broadcasts that consumers can download at the hour they find
most convenient. And sports teams will end their long-term cable contracts
and reach their fans more directly -- and more profitably -- than today.
reason cable gained leverage with content providers in the first place
was its status as a local monopoly. That leverage has dissipated somewhat
with the competition from satellite TV. But direct access to consumers
by content providers will undermine that leverage completely. Loss of
fees from transmitting content-advertising dollars alone are a third of
total industry revenue-will drive cable into the red. The cost structures
that are built into the industry will prove too difficult to revamp fast
enough, and much of the industry will simply cease to exist.
facing such long-term trends retreat to a state of self-denial. In the
early 1990s, AT&T management argued internally that the steady upward
curve of Internet usage would somehow collapse. The idea that it might
actually overshadow traditional telephone service, was simply unthinkable.
But the trend could not be stopped -- or even slowed -- by wishful thinking
and clever marketing. One by one, the props that held up the long-distance
business collapsed. First time-of-day pricing, then fax machines in the
wake of e-mail, then profitable stand-alone services fell prey to low
cost, always-on, fixed-priced data services from companies with new names
and little brand equity.
words, as the leverage that came from AT&T's former monopoly status
diminished, so too did its ability to control its customers. Indeed, so
quickly did the business model for long-distance service providers collapse
that the entire industry has been transformed into little more than a
feature in a larger communications set.
compression and transmission speeds to the home, we are dealing with classic
cost-improvement curves. Such curves represent the interactions between
market and scientific disciplines, and they are very predictable. Experience
shows that if new technologies promise improvements by a factor more than
four, they tend not to get funded because they are seen as too risky.
And if they
promise less than a factor of two, they tend not to get funded because
they offer too little economic benefit. So each new generation of products
-- be they jet engines, software or chicken broilers -- brings about a
measured, highly predictable benefit.
curves determining cable's future stretch out for all to see. And as the
modems cable companies are so energetically promoting grow ever faster
and ever cheaper, the cable companies will find that they have unintentionally
cut themselves out of the content delivery business. Customers will simply
bypass the cable operator's content -- and its layers of fees -- and go
straight to the source.
companies must do is become transport companies. A smart cable company
would stop pouring money into projects that conflict with the new reality
and have repeatedly failed to gain traction in past trials.
of millions of dollars being invested in set-top-box entertainment hubs
would flow elsewhere. In the coming era of direct contact between content-providers
and consumers, the set-top box will no longer be required as a mediator
for information. No amount of additional set-top box features can change
that fact. Instead, the open standards of the Internet will dominate --
and a range of network-attached devices will be made and sold direct to
the consumer by consumer-electronics companies.
A smart cable
company would focus all available investment dollars on finding new ways
to becoming a better pipe company -- facilitating the streaming of video
through the cable modem, for example, so that true TV-quality on the computer
screen becomes dependable.
cost structure of the cable industry remains way out of line for such
a model. Yet as cost-efficient pipe providers, cable companies would be
well-positioned to fight off the local phone companies, who will almost
certainly continue to suffer from lethargy and capital inefficiency in
defending their voice services.
a full-blown crisis for cable years away, it is clear that only the most
efficient users of capital will win. In addition, those cable companies
with ambition reaching beyond managing dumb pipes have one very exciting
option: The creation of a nationwide wireless ethernet network based on
802.11, or WiFi.
operator would move from a proprietary, private wired network to an open-standard,
publicly-accessible wireless network simply by installing wireless ethernet
base stations on the cable network running down the street. Customers
would utilize the inexpensive receivers already being bundled in their
home and business computers, and soon bundled into their CD players and
televisions, allowing the worlds of entertainment and information to meld
would pay their monthly fee and access the network by entering their passwords.
They could access all their video, voice and data needs anywhere -- at
home, in their backyards, in hotel rooms or airports.
perspective, the beauty of such an approach would be its low, shared capital
cost combined with wide reach. Cable companies could leverage their existing
customer set and infrastructure.
economic solution, after all, is to end wiring at the street and broadcast
to a network of customers. Cable companies are at least 90% of the way
there now. Moreover, in adopting 802.11, they would have the advantage
of adopting a wireless standard for which all the expensive research and
development has already been done and codified on somebody else's dime.
It's an approach
that is uniquely suited to cable's present strengths. No competitor is
likely to move anywhere near fast enough to head off a focused cable company.
And it may be one of the few possible paths such a company has open for
survival. Now all that is needed is for some cable company leader to paint
a credible future that excites the passions of Wall Street.
formerly chief technical adviser to AT&T, is now a general partner
at Morgenthaler Ventures, based in Princeton, N.J. Neither Blonder nor
his firm have any direct investments in companies developing 802.11 technology
or any technologies that compete with cable set-top boxes.