May 12, 2009

Should Cable Let Go?

By Michael Grebb

Over the years, cable operators have faced plenty of criticism. Most has revolved around pricing and customer service in the macro-world of public opinion. But within the more insular community of cable vendors and suppliers, griping has centered more on the industry’s “closed off” nature. Cable operators have always wanted to control the box. And anyone who tried to wrest that control got squashed. Meanwhile, efforts to at least standardize that control have been slow and, at times, woefully inadequate (Even tru2way has its detractors who claim it’s not open enough). Yet cable is a wildly successful industry. So much for the openness argument, right?

That was then. The question now is whether cable can continue on this course as the rest of world moves forward at breakneck speed. Compare the VOD experience of the typical cable set-top to that of the Playstation 3 or X-Box (both sell VOD movies and TV shows over a broadband connection). It’s like comparing a Model T to a Ferrari. Cable is largely the victim of its own legacy boxes that became obsolete before they were even fully deployed. But everybody is stuck with them now and loath to spend billions putting better boxes out there en masse. That’s understandable from a business standpoint. And the boxes from Verizon and AT&T—while a bit more advanced—aren’t supercomputers either.

But perhaps it’s time to examine the cable industry’s lease model. Is having all of those logo-branded boxes on the balance sheet worth the pittance consumers pay to rent them? Is it worth dooming customers to a clunky experience when a third-party box could do the job better? Heck, gaming consoles, DVD players and other CE devices could simply double as cable set-tops if the cable industry could just finally… let go. All of this was supposed to happen years ago, by the way, with set-tops proliferating at retail. But it never came to pass for a variety of reasons. And now competition is fierce, online video is the boogeyman and gee… wouldn’t it be nice if all those advanced boxes were out there right now?  

Recent signs suggest cable operators are starting to get it. They know they need to change. At the Cable Show, for example, Comcast’s Brian Roberts showed off Starz’s new EBIF application (very similar to Time Warner Cable’s Start Over feature) on the show floor. Other execs trumpeted the potential of EBIF and tru2way to free up previously closed off silos in the cable infrastructure—all in the interest of giving consumers more flexibility (so they don’t “cut the cord” and get all their content from other sources). Many continue to believe that 2009 could be the year when the cable industry finally starts unclenching its hand from the box—albeit very gradually and with an abundance of caution.

Perhaps cable should take a cue from Apple, which is famously restrictive when it comes to its devices and software—especially its mega-successful iPhone. Yet, the App Store has cultivated one of the most open and eclectic software bazaars in history, making it easy to purchase applications that do everything from find nearby restaurants to tune musical instruments to organize expense accounts. Imagine what kind of world such an App Store could create for cable? And Apple has proven that giving third parties the ability to innovate doesn’t mean sacrificing all control over the hardware or software. Furthermore, the iPhone shows what a bit of “letting go” can do for the bottom line of the infrastructure owners: AT&T Wireless was floundering, so it agreed to a raft of unusual concessions to Apple to get exclusivity over the iPhone, including forgoing the AT&T logo on the device and letting Apple dictate all the manufacturing specs and software. AT&T has nothing to do with that wonderful app store either. Has this lack of control put AT&T into a death spiral of despair? Quite the opposite: AT&T is the envy of Verizon, which has been making overtures to Apple lately in an attempt to match its rival’s accommodating stance. What if Apple exclusively built an “iSetTop” for the cable industry under similar restrictions? Would it be the end of the world or a new competitive superweapon?

Cable has been trying to let go for years, but it has been a painfully slow process. Big cable CEOs often argue that the industry moves slow but over time figures it out and creates multibillion-dollar businesses that eventually thrive. That has been mostly true. But the world moves faster than ever. Hulu’s traffic continues to grow. Cable nets are putting more stuff online every day. And gaming consoles and other third-party set tops are essentially using broadband networks to compete with cable operators at their own game (Even TV sets themselves are becoming competitors: See Sony’s Bravia). That hardware competition—combined with a persistent threat from the telcos—was never a factor in cable’s largely blessed past. Everything is different now. Sure, cable can restrict bandwidth or otherwise create disincentives for users to “go around” linear TV. But the days of being able to control that user experience in every way are coming to an end. Cable operators need to let go—at least partially—in order to hold on. It seems paradoxical because it is. Welcome to the 21^st Century.