Cable industry responds to increased competition, says researcher

As IPTV and DTH satellite nibble away at cable’s subscribers, the industry is responding with several strategies to maintain its base and grow in the future.
In-Stat principal analyst Gerry Kaufhold says Switched Digital Video is the “game changer” that will allow cable operators to respond to the challenge of IPTV without breaking the bank.

Cable TV operators in the United States are beginning to face a challenge from alternatives like Verizon’s FiOS TV, AT&T’s U-verse, IPTV offerings for tier two and three telcos and direct-to-home satellite.

In-Stat researcher Gerry Kaufhold and an associate recently surveyed 50 U.S. cable TV system operators to learn how they’re responding to these new competitive pressures.

What they found was an industry that’s taking the shifting competitive landscape quite seriously and developing strategies to compete. IPTV Update spoke with Kaufhold to learn more about the In-Stat findings.

IPTV Update: What strategies are U.S. cable TV system operators employing to address increased competition from telco TV and direct-to -home (DTH) satellite operators?

Gerry Kaufhold: The cable industry has over 68.2 million total subscribers, and over 50 percent of these still get traditional analog cable TV service that requires no set top box, but does provide all the local TV channels for no additional cost. Satellite TV charges about $1.50 per local channel offered per month.

The first strategy we encountered was maintaining a strong commitment to local basic cable TV services, which means that most cable systems will continue to offer 60 to 80 channels of traditional analog TV service.

During 2008 and 2009, analog basic cable TV permits local cable TV service subscribers to keep their analog TV sets “live” even after the Feb. 17, 2009 cutoff of over-the-air analog broadcast service, so this commitment by cable TV to continue support for basic, analog TV services is actually a very strong competitive advantage. Existing basic cable subscribers need not do anything regarding the analog cut off deadline, and their service will continue, unchanged. What a selling point.

The second strategy is using Switched Digital Video (SDV). Cable TV systems can dramatically expand the number of high definition TV program streams and the number of video-on-demand streams that their systems can deliver without any new bandwidth upgrades. Switched Digital Video can be a “silver bullet” for cable operators because it leverages all their past investments and reduces the capital expenditure (CapEx) need to grow their service offerings.

The third strategy is a little surprising. The cable TV/Sprint Pivot joint venture for bringing mobile phone service into the bundle to create a “quadruple play” package may have some very strong near-term upside to it. Verizon’s FiOS service offers great broadband access and digital TV services, but Verizon Wireless operates as a separate business unit.

It will take some intense work for the telco TV operators to create a corporate culture that gets them to the quadruple play. During the next 18 months, the local cable operators will be offering some very interesting quadruple play bundles that may have some strong near-term competitive advantages. Here is a key point: Cable TV’s Pivot mobile service does not have to grab millions of subscribers to be successful. If they can sign up a few tens of thousands of subscribers in each market, it still represents significant new revenues for each cable TV system that has it.

IPTV Update: Did your research indicate switched digital architecture will play into staying competitive, particularly in light of the coming bandwidth crisis facing cable?

Gerry Kaufhold: I wouldn’t use the term “bandwidth crisis.” If there was a “bandwidth crisis” then cable operators would be “harvesting” some of their lesser-used analog TV channels.

Switched Digital Video certainly gives cable operators a great deal more control of how they manage their bandwidth. It’s important to understand that Switched Digital Video provides real-time, instantaneous re-allocation of the cable TV system’s digital bandwidth.

I’ve seen presentations where a cable operator actually allocates increased 6MHz-wide QAM channels for high-speed data between the time when schools close and the start of Prime Time (8 p.m. Eastern).

During prime time, the kids are doing homework or text messaging, so then the cable system re-allocates the bandwidth to support increased usage of their VOD services.

Switched Digital Video, in my opinion, is a “game changer” for the cable operators, and it will help them respond to increased competition while keeping CapEx under control.

IPTV Update: What aspects of IPTV service most concern cable operators?

Gerry Kaufhold: Probably the No. 1 item is going to become high-speed data services. Verizon’s FiOS service already touts a 20Mb/s service. In places like Japan and Korea, telcos are providing 100Mb/s and 1Gb/s services directly to upscale homes, so Fiber-to-the-Home (FTTH) certainly has tremendous upside for providing amazing high-speed data services.

DOCSIS 3.0 will become available during 2008 for the cable TV industry, and it can readily provide 160 Mb/s downstream speeds and up to 100 Mb/s of upstream speeds.

So the market will have to figure out just how many bits-per-second is going to be enough. I believe that a Fast Ethernet connection (100 Mb/s) ought to be enough for any household. As MPEG-4 compression becomes the norm for high definition TV services, even those offering next-generation 1080p HDTV services will be able to do it in less than 15 Mb/s per channel.

So a 100 Mb/s high-speed link to your home could provide five super-HDTV channels simultaneously, and still leave 25Mb/s for data services.

It’s going to take several more years until the market actually settles on what the high-speed data number needs to be, but I believe that DOCSIS 3 holds up through the next five years, at least.

IPTV Update: Is there anything else you would like to add?

Gerry Kaufhold: Broadcast TV’s analog cutoff scheduled for Feb. 17, 2009, is going to provide opportunities for the local cable TV operators to look like a “good neighbor” if they continue to support analog TV delivery in their basic cable packages. If cable does this right, and I believe that they will, they will be able to gain incremental new subscribers, even in the face of growing competition.

Addressable advertising, ala cable’s Project Canoe, is going to provide new “avails” for TV programming to sell. It would be very, very smart for local TV broadcasters to get into discussions with their local cable TV operators and find ways to connect the TV station’s “content” to the addressable advertising capabilities that will be coming to the local cable TV system in the future.

The local cable TV operators can provide video-on-demand of local TV newscasts, sports and special events. The cable TV system’s cable modem service has a local Web portal that can deliver high-quality streaming video, and the cable system’s Pivot cell phone service extends their reach to mobile services.

If I were a local TV broadcaster, I’d be working the issues with my local cable operators and trying to break down as many barriers as possible, and discovering a lot of new revenue streams that supplement whatever is on the table for retransmission consent of the primary TV channel.

A final note, U.S. television broadcasters really need to start talking to their local cable TV operators and try to create a more co-operative environment. The local cable TV operator can provide many new revenue opportunities for the local TV broadcasters.

The local cable TV operator “must carry” each local TV station’s primary video feed, but all of the ancillary services like multicasting, local news to cell phone services, local news on the Internet and video-on-demand options should each provide up-side revenues for both the local TV broadcaster and the local cable TV operator. These discussions need to be taking place now and use analog cutoff as a motivator to get the talks going.

Editor’s note: To learn more about the In-Stat research, visit:

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