Analyze That!

Analysts believe cable will face a series of challenges in the next five years, requiring that it keep winning broadband and HD customers while refining the bundle. By Michael Grebb You’ve read in this issue what top cable operators think the next five years will look like. For perspective, we asked analysts, consultants and professors to ruminate on the same subject. Their verdict: While cable executives have spent the last decade transforming their businesses, they shouldn’t expect to sleep anytime soon. In fact, the next five years could bring even bigger changes as cable defends its turf against DBS and video-wielding telcos. "Cable is in a very interesting juncture right now," says Lloyd Sams, managing director of BIA Capital Strategies. "For the first time, it’s facing serious competition." In addition to this competition, consumers are calling for more interactivity, content on demand and integration with the Internet and mobile devices. "We’re in a period of transition," says Fritz Messere, chair and professor of broadcasting and telecommunications at State University of New York at Oswego. "And I think the cable industry is probably going to refocus itself as an IP cable service." Already, MSOs are deploying new technologies such as IP Multimedia SubSystems (IMS), which will allow more IP integration. The trick may be convincing customers that cable has the best mousetrap. "Over the next five years, the industry is going to have a pretty good run," says Sams. "But now is the time for cable to really get a lock on the subscriber—while there’s still time. There’s got to be more of an emphasis on customer service and proactive marketing." The near term could be crucial. As MSOs fight for new broadband and digital cable subscribers (including HD tier customers), they are also racing to gain market share in voice over IP telephony. And don’t forget mobile services. "Clearly, wireless is a significant revenue opportunity for cable," says Bill Opet, principal and VP of cable and broadband services for TMNG. "One wireless subscriber could spend $50 or $60 per month. That could double the size of some people’s cable bill." None of that is lost on cable executives: In November 2005, four major MSOs—Comcast, Cox Communications, Time Warner Cable and Advance/Newhouse Communications—announced a partnership with Sprint Nextel to integrate mobility into the cable mix. But Verizon and AT&T are already touting their mobile component—albeit somewhat gradually. "Time is on cable’s side at this point," says Teresa Mastrangelo, principal analyst at BroadbandTrends.com, a service of the Windsor Oaks Group, "but IPTV has forced things to happen more rapidly." Of course, MSOs will face a crowded mobility marketplace. "The problem is that cable will start out with a me-too product," says Enda Flynn, leader of Business Edge Solutions’ broadband practice. "I expect them to create more integration." While that seems certain, it’s unclear what form that will take. While opinions on the market potential for mobile video vary, operators appear ready to test the waters on mobility—whether that involves transmitting video to small screens or just letting subscribers set their DVR set-tops remotely. While Messere is certain "there’s going to be a market for mobile service," his feeling is it will be "an avant-garde video service," appealing mostly to a younger demographic. In addition to providing innovative new services, cable operators also must perfect integration and bundling to set themselves apart. "It’s not going to be just about getting faster," says Mastrangelo. "It’s going to be more about converging and enhancing the experience of entertainment." As part of that effort, MSOs are partnering with programmers to offer multimedia content on the Web and planning to integrate cable modems into next-generation set-tops. MSOs also plan greater integration with PCs and wireless devices. One integration challenge is the closed nature of the cable architecture. Sun Microsystems, for example, has been pushing cable operators to open their networks to accommodate third-party software players without fearing loss of control. "If you own the billing relationship with the consumer, you’re still in the point position," says Andy Sheldon, Sun Microsystems’ executive director of industry marketing. Mastrangelo says the rollout of OpenCable Application Protocol, which enables interchangeable software across set-top boxes, is a step in the right direction toward seamless integration. But "one criticism [of OCAP] is that it’s such a closed network," she says. "It makes it difficult and expensive to upgrade those networks." Whatever happens with new services, increasing competition could create an ironic result: Fewer media service providers. James Semenak, director of media and entertainment for Teradata, believes traditional industry lines dividing cable, telcos and satellite players will eventually fade, leaving only four or five major entertainment/telecommunications delivery companies. In such a world, in which competitors offer similarly bundled products, only the best products and marketers will prevail. Accordingly, some analysts believe cable operators should start improving their efforts immediately. "They need to be more proactive," Sams reiterates. "They need to go door-to-door, perhaps even getting long-term contracts. Another leg is home security. There is no reason that cable couldn’t offer that." Who knows? In five years, cable operators may be discussing the quintuple play.