Friday, May 12, 2006

How Cable Can Conquer

A distilled version of this piece was published in the February 27, 2006 issue of cable industry trade publication Multichannel News. (Click link to story)
DirecTV is making a massive commitment to high definition programming; cable will face severe bandwidth constraints as it tries to compete. Meanwhile, EchoStar and DirecTV, already two of the nation's four largest multi-channel video providers, are hatching plans to supplement their satellites with a terrestrial wireless Internet backbone. AT&T and Verizon are spending tens of billions of dollars building broadband networks to take on cable—while state and federal lawmakers work to grease the telcos’ franchising skids.

No wonder Wall Street isn't being kind to cable.

Perhaps those who see a cable industry in crisis should be more mindful of its roots. The business was built by nimble, visionary entrepreneurs, often on vendor credit, battling entrenched interests and hostile politicians all the way. Tough fights are nothing new.

While Telcos are still laying their broadband tracks, cable's $100 billion backbone is largely built out. Cable has a wealth of experience aggregating content for diverse audiences, negotiating with content providers and selling advertising. And, most importantly, it already has a broadband pipe connected to a majority of America's homes. Given the importance of time-to-market, and the inertia of many time-challenged consumers, cable's incumbency is no small asset.

From trailblazing technology to creative content initiatives, cable is doing a lot of things right. Here's how a rededication to innovation will enable cable operators to ride the waves of change.

Cable should work as hard to retain customers as it does to recruit them.

* Those that haven't already should initiate loyalty programs tied to subscription length and/or services uptake (a cable version of "Frequent Flyer Miles"), e.g. free month(s) or free services

* Cable should be doing a lot more to market the value of choice to its current subscribers and Capitol Hill--striking back at the "a la carte" clamor. "Wouldn't you rather go to a shopping mall with 200 stores than a strip center with 12?"

Play offense--on both services and price.

Cablevision's aggressive triple play pricing model and cutting edge modem data rates have helped drive digital cable penetration to more than 60%.

Acclerate digital cable uptake by giving customers control of technology.

The CableCard/DCAS genie is out of the bottle--and I believe it's a huge gift to the cable industry.

America's growing love affair with DVRs and the 2009 analog broadcasting shutoff could be catalysts for a digital cable explosion. Seizing these opportunities will require the rapid and wide dispersion of digital cable-ready consumer electronics devices. Since cable's core business is broadband services--not STBs--it should learn from AOL, which garnered millions of subscribers without selling one PC.

* Cable should work closely with PC and consumer electronics purveyors to maximize OCAP, DCAS and EPG interoperability, with particular focus on partners in Intel's Viiv media-centric PC initiative.

* Instead of fronting the $250-$400 cost of HD DVRs, cable operators could provide that amount as a subsidy to manufacturers who bundle digital cable subscriptions with the hardware purchase. This would put much more CE marketing muscle behind digital cable.

The result? A proliferation of digital cable-ready devices from a variety of manufacturers, leading to more DVRs in more rooms, greater uptake of content services and stronger bonds with cable customers.

* DirecTV has nearly three million subscribers--the equivalent of a major MSO--who've become accustomed to the TiVo-branded DVR. Now that DirecTV is replacing TiVo with News Corp's NDS DVR, cable operators have the opportunity to win over a sizable block of its subs by offering a comparable package bundled with TiVo.

* Under the CE subsidy plan, cable should work with Microsoft and Sony to incorporate DCAS, OCAP and PVR capability into the Xbox360 and upcoming PS3. This would guarantee millions of additional digital cable platforms.

Sell digital cable much more aggressively at the retail level.

Cable should leverage CableLabs' successful Go2Broadband (G2B) back office system to expand retail channel distribution beyond specialty chains like Best Buy and Circuit City to Wal-Mart, Costco and Sears. There shouldn't be a DTV set, media PC or TiVo display without a digital cable bundle supported by prominent point-of-purchase advertising. Cable's ability to offer interconnect ad inventory, promotional opportunities and even dedicated shopping channels gives it strong deal currency with the biggest retailers.

Harness the power of the DVR to extend the capacity of the network.

The Disney-backed wireless MovieBeam VOD service has just shattered the movie DVD release window--making titles available on the same date that they hit video stores; Warner Bros. and other studios are poised to launch electronic sell-through of movies. These developments present huge revenue opportunities for cable--but also an exponentially increased burden on its networks. Fortunately, consumer DVRs, integrated with the digital cable network, can meet much of that demand.

At any one time, 50 movies or less would probably meet the requirements of the vast majority of VOD subscribers. Using "push multicast" technology, cable operators could send those 50 titles out one time, to all subscribers, for automatic storage on their home DVRs. Subscribers would then play back whatever movies they wanted to watch, whenever they wanted to watch them, without tapping the cable network. This same approach would work for sell-through distribution--consumers could "burn" DVDs right off their DVRs. Making consumer DVRs part of cable's server infrastructure will enable operators to capture the new revenue stream without needlessly clogging its networks.

Accelerate the transition to all-digital networks.

Many cable operators are already switching their networks to all-digital--but are forced to continue bandwidth-hogging analog simulcasts to accommodate subscribers who don't have digital cable-ready TV sets or won't pay the extra monthly charge for digital STBs. The electronics manufacturer subsidy/digital cable bundle plan outlined above would help solve this problem by getting a lot more digital cable-ready devices into analog cable homes. Ironically, the switch-off of analog over-the-air TV broadcasting presents an additional opportunity to convert analog cable households.

As part of the legislation mandating the transition to digital TV broadcasting in 2009, Congress authorized expenditure of nearly $1 billion to provide each household up to two $40 subsidy coupons for purchase of set top boxes to convert over-the-air DTV broadcasts to analog. LG and Thomson are positioned to be the leading providers of these low-cost STBs. Cable should lobby for those manufacturers to incorporate DCAS technology, so that those same boxes can be used to convert digital cable feeds to analog. This will not only free-up badly needed bandwidth for cable, without alienating analog customers--it will do much to achieve the government's objective of a speedy, seamless transition to digital television.

Take localized programming to a new level.

Innovation in programming is the hallmark of this industry: Comcast's trailblazing VOD initiatives and enhanced Denver local community access channels; Cablevision's Long Island 12 and MagRack; TW's NY1 and regional news channels; Cox's Spanish-language news channel in Phoenix; the regional sports channel concept pioneered by Charles Dolan.

We should assume that cable's competitors have read its programming playbook. The enhanced capacity DirecTV and Echostar are adding almost certainly won't just be used for more HDTV networks and retransmission of local HDTV broadcast stations. It will give them the bandwidth to offer new, exclusive, local-into-local programming. Telcos, especially with FTP, will have the ability to provide a plethora of new, hyper local content offerings. Now, more than ever, cable must be the leader in programming R&D. Cable should help create channels it wouldn't want to see on competing platforms and find new ways to super-serve key constituencies in each local market. This would also give cable a potent political weapon in the DTV multicast must-carry battle. By offering its own impressive suite of local interest channels, cable can co-opt potential broadcaster multicast offerings.

* Put particular emphasis on innovative channels targeting young demographics accustomed to the Web.

* Roll out new interactive offerings, modeled after Cablevision's Metro Weather and Traffic Interactive, Charter's "iTV" channels and Insight's LocalSource interactive portal, which give access to interactive news, sports, weather and community resources.

* Partner with local daily or community newspapers to produce "Neighborhood News," using eager TV journalism and production students as VJs.

* Evangelical Christians are a growing and loyal customer segment. Many of these churches already professionally videotape their services; cable operators could create one or more channels for this content and other church-created and religious programming--Christian, Jewish and Muslim. Needless to say, this would provide powerful viral marketing for digital cable.

Fully capitalize on digital cable's interactive advertising and "T-commerce" capabilities.

T-commerce--digital cable's ability to provide instant order and information fulfillment tied to advertising--should be a boon to cable. Upgraded digital infrastructures and ad interconnects will enable cable operators to vastly expand interactive advertising and make it a "must buy" for local merchants.

TiVo and Comcast have demonstrated that relevant, targeted interactive advertising--far from being avoided--is eagerly absorbed by viewers. Relevant advertising isn't advertising--it's information. The targeting and interactivity made possible by digital cable and DVRs virtually eliminates waste--and garners CPMs 10 to 20 times that of conventional spots. So much for DVRs being the death of TV advertising revenue! Cable also has the ability to create "watch advertising for credits" plans--rewarding viewers who elect to watch ads (and answer quick questions) with savings on VOD movies and other digital cable services.

* Cablevision's Optimum Autos channel demonstrates that the Web isn't the only competitor to newspaper classified advertising.

* Cable should work with clients to craft new special interest linear channels and VOD content, combining advertiser-produced material with cable-enabled T-commerce.

* Cable maven John Malone's Liberty would be a powerful T-commerce partner. Its QVC home shopping service and portfolio company Interactive Corp. (IAC), headed by Barry Diller, bring a formidable combination of brands, expertise and infrastructure. Together, cable operators and Liberty could seed an almost infinite variety of T-commerce and interactive advertising-driven services. A few ideas:

--An "Ask Jeeves"-powered video search engine, combining the power of cable's superb video pipeline and massive servers with push-to-PVR.

--VOD concerts with instant featured artist ticket sales via Ticketmaster and music sales via QVC

--VOD dating services, modeled after Comcast's hugely successful "Dating on Demand" channel, in partnership with

--VOD travel channels with T-commerce links to Expedia and

Dominate WiMax before DirecTV and Echostar do.

Many believe that WiMax is superior to DSL as a last mile connection and will soon be sufficiently robust to leapfrog 3G wireless technology for mobile applications.

Fortuitously, Comcast, TW, Cox and Newhouse have already forged a joint venture with Sprint Nextel--the leading company in the emerging WiMax space. The other big WiMax player is ClearWire, controlled by early Nextel investor and wireless telecom guru Craig McCaw. And McCaw's original family business was...cable television. Cable can provide either or both firms a crucial marketing platform as they roll out WiMax services.

* IPTV over WiMax could supplement the existing cable networks--a de facto expansion of bandwidth at what would almost certainly be a lower cap ex cost.

* WiMax could enable cable to become the leader in high quality mobile video--beating Qualcomm's 700MHz MediaFLO to the mobile punch.

Cable can conquer the broadband battlefield, despite its well-armed adversaries. Its infrastructure is enviable; its legacy of innovation, history of sharing best practices and entrepreneurial spirit unsurpassed. But winning against DBS and the Telcos will require cable to move more expeditiously, market more adroitly and program more creatively than at any time in its history. Most of all, it will require cable to connect with the customer--not just to his or her television, telephone or PC--better than anyone else in the broadband business.