Thursday, January 25, 2007

"Cable Confronts Bandwidth Crunch"

Light Reading reports that cable's technical guys are beginning to get antsy about bandwidth. This is news since cable in the US has had such a clear technical advantage in the bandwidth arena over their phone fella competitors that bandwidth has been something cable guys crow over--not something they worry about.
Shaking off two years of disbelief and dismay, the cable industry has finally started dealing with the prospect of an impending bandwidth shortage.
Cable operators and equipment suppliers, alarmed by an explosion in bandwidth use by cable subscribers over the last couple of years, are now drawing up plans to boost capacity at both the headend and plant levels. Instead of debating whether the coming bandwidth crisis is genuine, they're looking at ways to confront the crisis...
Verizon's running fiber to the home has changed that equation that gave cable unquestioned superiority, giving one phone fella the clear advantage in potential bandwidth over all cable. And, more importantly the customer is changing. Usually all you get from industry reps and executives is the party line. What's nice about this story is that the author talks to the tech guys at the SCTE conference. The upside is that you don't hear the usual pablum. The downside, of course, is that just because the tech guys think there is a problem don't mean the marketing ones do...and proverbially, its' the marketing types that end up running the company. While the tech guys tend to worry about how to meet a demand they see growing, the marketers have to ask if there is any reason to do so.

And in markets that confront Verizon's fiber--or homegrown alternatives like Lafayette's Fiber for the Future or Utah's Utopia--they do.

The issue seems to be video, video, and yet more video. HDTV takes more bandwidth than standard TV, Video on demand eats bandwidth, IPTV demands upgrades, and Downloaded Video (DV!) turns out to consume bandwidth pretty wildly. Tellingly, the tech guys don't try and make scapegoats out of point to point technologies like the spokesfolks do. The real issue is the enormous size of video files and the bandwidth expense of providing them on a one-to-one basis instead of "broadcasting" them in streams. And the only solution is more bandwith. Even including the ultimate solution:
They're even weighing such previously unthinkable moves as building fiber-to-the-home (FTTH) networks and adopting PON architecture, just like some of the big phone companies.
That's news, but that's also distant...while technicians instinctively go to the best, most permanent solution the cable guys know that they've got plenty of alternatives short of that. The cable plant is capable of adapting to the need in several ways but the question is, always, at what capital cost and at what cost to altering the basic business plan.

The issue of the cable's underlying and, frankly, outdated, business plan is a real one. Cable inherits and depends on a model born in the old network period of television--a time of three networks, half hour shows, rigid schedules, and free-to-the-viewer advertising support. Cable has been instrumental in destroying the rationale for such a model -- and has never ceased to benefit from presumed scarcity it assumes. They managed to get folks to accept that they'd see advertising on 200 channels of mediocre media they paid for but did not choose (a tough sell!) but it remains to be seen whether they can similarly contain the contradiction of offering a rigidly packaged product that they profit from multiple times (cable TV) beside a product that potentially cuts them out of content cash flow (the data flow of the internet).

I've made the claim that you ought to prefer DV (downloadable video) and this story provides a piece of evidence that the hoped for transition may be occurring—and that for cable companies the experience will be painful.
Knorr, whose cable system serves a major college town, said he's already seeing early signs that younger consumers are opting for Internet video downloads over traditional cable video service. In Lawrence, home to the University of Kansas, 5,000 of the cable system's 40,000 subscribers only take high-speed data service. These subscribers account for a sizable 20 percent of the system's cable modem customers.
"Customers are using the Internet more hours per day," he said. "There's an absolute risk of people dropping basic video service for Internet video."
Since selling video service is THE business that cable companies are in and its profitability accounts for cable's comfortable position in the business world the idea that they'd have to trade that cushy, near-monopoly business for selling easily commodified bandwidth. There's much less room for profit, and much more competitive uncertainty in that market. If you check out Knorr's site, Sunflower Cable, you'll find that the small cableco is "courting" this problem by offering very affordable 1o meg downloads in a student town! (At the same price point, more or less as expanded basic cable.) Locally, Cox doesn't even offer a 10 meg alternative and the only other cablecos that do, to my knowledge, are in the northeast corridor where they compete with Verizion.

Pretty clearly, at 10 megs sophisticated users will perceive that they have a choice...and if they decide to invest in internet services instead of another 100 channels of cable the cablecos bottom line -- and their business model -- will suffer.

Lafayette
But all that is a general analysis; what does the video wave mean for a local place like Lafayette? Well there are parallels: LUS is our local equivalent of Verizon; it is willing to offer serious competition that will technically out-class the cable competition. It will have video bandwidth to spare as DV becomes the dominant force and the market starts to reform around assumptions that favor download and hence bandwidth. (If content providers, or LUS, choose to locate servers on-system users will be able to download at 100 megs, magnifying its advantage.)

Cox's system can probably stay in the game--if it is willing to make local upgrades in response and run Lafayette's system on a business model that imitates LUS's advantages. But that would be a different model from the one that it uses everywhere else. That strategy would put them playing catch-up with a leader whose network resources are superior but with the advantages of being the video incumbent to slow down its market erosion. To draw even in capacity would require FTTH. I personally doubt Cox is willing or capable of making those local adaptations. I was surprised when they joined Baton Rouge and Lafayette regional systems, coordinating channels, pricing, and network architectures. That move makes adapting to a very different competitive environment in Lafayette unwieldy or even impossible without a re-separation. (Note: Cox Baton Rouge also faces local fiber in the guise of East Ascension parish's EATel. But that local phone company does not yet threaten to overbuild into prime Cox territory the way that LUS does.) Cox is also heavily in debt through a combination of expensive acquisitions and an even more exhausting expense of taking itself private. It seems unlikely to have the free capital to do really expensive network upgrades at this time. Cox is lucky that its footprint most often overlaps that of AT&T/BS--a company with a similar debt burden.

AT&T nee BellSouth will be the also-ran here, struggling to offer a pale imitation of the two leaders' vide products with a less capable network, me-too content, and not enough bandwidth to offer new, differentiating product categories. A purely local response to LUS is even less likely than with Cox and they are similarly weighed down with debt.

The video wave that the cable guys see coming boils down pretty simply to bandwidth. The full competitive situation, both nationally and locally will involve a plethora of other issues, including the power of incumbency, local trust, and the ability and willingness to integrate new wireless services. The outcome won't be determined solely by technical prowess.

We live in interesting times.

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