For cable operators, being a dumb pipe may be a smart idea

Much as any cable operator would be loathe admitting it, the idea of being a dumb pipe is a smart move right now--to an extent. After all, with the Internet as a bottomless pit of content, interactive links between the cable operator and the end user and, of course, higher and higher broadband speeds, there's hardly anything dumb about today's cable pipe; it's just that the operator no longer has to control every bit of information that travels over that conduit.

"The bits that want to travel in and out of your home are surging, not flatlining, and we want to be the best company at bringing that in and out of your home," Comcast Chairman-CEO Brian Roberts said at Citigroup's recent 21st Annual Global Entertainment, Media and Telecommunications Conference.

Roberts is not alone in suggesting that the network--that dumb old pipe--is the key to a future where the cable industry is inexorably losing its core audience for traditional video but finding ways to bring new-age replacements into the home and onto the TV and other devices within the residence.

Ted Schremp, executive vice president and chief marketing officer of Charter Communications took it even a step further. Speaking at the same Citi conference, Schremp said that Charter would solicit, not ignore, consumers who chose to pay for someone else's TV service.

"There's certainly no reason if somebody chooses to have a satellite dish on their roof (to get video) that we shouldn't be their broadband provider," Schremp said. "Between phone and Internet, driving that non-video relationship is a key for us."

Of course it is; that non-video relationship pays the bills while franchise fees and other programming costs dig deeply into narrow video margins.

"Broadband, by far, is the most profitable service. Voice is somewhere in between," said Vince Vittore, principal analyst for the Yankee Group.

Not that Vittore--or really anyone for that matter--thinks cable will abandon its video subscriber base.

"They're going to fight tooth and nail because as a publicly trading company it has to be pretty brutal to be conceding a core revenue stream," he said. "It would be like telcos saying ‘Let's give up the wireline voice.'"

Exactly.

Yoav Schreiber, Current Analysis"It makes sense that (the consumer) would buy a broadband package and part of it would include as an app access to certain kinds of content over broadband."

Telcos have conceded that their wireline voice services are in decline but rather than worry about it--other than over the occasional analyst's briefing--they're emphasizing 21st Century revenues flowing from data and wireless and even video. Cable is going in another direction, perhaps where it will use video as its loss leader until it can get its IP act together and then make it just another application in a broadband triple play package.

"At the end of the day what they have is a broadband pipe and you might as well get more out of that," said Yoav Schreiber, senior analyst-digital media infrastructure, at Current Analysis. "It makes sense that (the consumer) would buy a broadband package and part of it would include as an app access to certain kinds of content over broadband."

There are clues that this is already happening. At the Consumer Electronics Show, cable operators were linked with connected TVs from Sony and Samsung, among other former CE competitors, with cable guys emphasizing how their networks can deliver content--even competitive over-the-top content--to non-cable consumer devices.

Of course it's not in cable's DNA to give outsiders much wiggle room, and it's unlikely that they'll do it now. Cable's modus operandi is to let new ideas bubble around the edges and, when they become fully cooked and popular with the public, pour them into the cable stew.

"That's what they've done up ‘til now with every other technology; they just folded it in," said Schreiber. "I think they'll do this with the over-the-top stuff. They'll start delivering it as an app."

The model promises a double win for cable: Recapture subscribers who have wandered by offering new, cutting edge interactive video applications like social networking and other OTT fare while selling a profitable high-speed broadband network as the conduit. Rather than seek out the OTT video and other content, cable would make it part of a video package.

"You have to have great flexibility," said Roberts. "The consumer wants to just push a button and make it happen. I think we're in that business: Make it easy and be the best at this."

If that means posing as a dumb pipe to lure in new and old customers so be it. After all, that pipe right now is the most valuable part of the cable equation.

"Today in Internet we go from a 1 meg product at $20 all the way up to a 60 meg product at $100 and we primarily use speed as the way we differentiate between each of the tiers in between," said Schremp. "There's an opportunity over time ... to use usage-based pricing as a way to deliver higher speeds at lower price points based around a particular consumer use case."

That use case could target consumers who buy triple play cable packages that start with a certain level of broadband speed and tack applications, even video, on top of that.

"They can be a dumb pipe and maybe add something for later (but) I don't think across the board that's how they're thinking about it," Schreiber said. "I think they're basically saying there's some tier that we're just going to lose as a subscriber because they don't want to buy the package. What can we do to keep them? There's a broadband play there."

There's also IP and the connection to the Internet. Comcast is already working with Pace to trial high-end Internet-connected boxes and Cisco, which never moves without an MSO's say-so, introduced an Internet-connected set-top at CES. IP would remove some of the constraints of video by making it an application--perhaps (and here's an even more dreaded term), an a la carte application.

"I think they'd like to keep the triple play and I think they could provide really cheap services over it as an application," Vittore suggested. "But I'm not sure any of them are thinking in that direction yet."

Maybe not, but it sure seems as if it's on the radar.

"In the subscription business there are lots of ways to access video," said Roberts.

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