Kagan's Column: How to Fight Telcos? The Secret's in the Plant

Cable World, July 25, 2005

By Paul Kagan

Supreme Court justices must be reading the papers. Late in June, they followed weeks of congressional vitriol about how they vote with a quintet of rambling, divided decisions that will have an extraordinarily significant impact on the future.

First, on June 23 they ruled (5-4) that a city (New London, Conn.) could take an individual's home. Is that a slap at the real estate bubble or a tactic to drive home values even higher by selective retirement of property? Then, on June 27, the juggling judges denied (6-3) access to cable for wannabe high-speed independents, ruled (unanimously) in favor of content providers in the Grokster file-sharing case and moved (5-4) in two directions at once with a split-the- baby call on the Ten Commandments in government buildings. For kicks, they also refused to consider the case of a CIA agent's name being leaked to the press, exposing journalists to prosecution for refusal to reveal their sources.

For cable, the Brand X decision protects its own, highly profitable modem business but at the same time could lead to similar treatment for the phone companies. Not that the telcos exactly need government help: Their worldwide drive to lower Internet access rates is likely enough to discourage most competitors, other than cable.

Those who thought telcos would stay underneath a duopoly pricing umbrella are watching in awe as the Bells make a bold play for the late adopters, a tactic cable has been unwilling to embrace. Operators, acting like the telco did in England when cable showed up, have protected the margins of their larger base. But that may change. At SCTE's Expo in San Antonio June 15, Time Warner CEO Glenn Britt said, "If I have a 50% margin and can create a new dollar of revenue with a 25% margin, I'll take that extra dollar." The next battle, however, may not be over price, but over reach and accuracy of data rates.

Also at Expo, Cisco's John Chambers--speaking by video stream--sounded positively dot-com-esque. "We're moving at a faster pace of change than many realize," he said on the keynote panel. "Five years from now, families around the U.S. will be able to see each other while watching the same sporting events." (Question is, does anyone want to?) "Moore's Law," Chambers said, "is coming into the cable industry. You have to double every two years. Thanks to IP, distance is now irrelevant. So is time, because you can store programming and control when you watch it. A real breakthrough in videoconferencing is two years away."

More currently, there's a new development that could strongly benefit cable's ability to compete, at a relatively low cost, with satellite and telco platforms. Switched video, which is to TV what packet-switching is to the Internet, has made a convincing debut. With software and equipment from BigBand Networks and set-top code revisions from Scientific-Atlanta, Time Warner's Paul Brooks told engineers that "switched broadcast is real and works on existing set-tops."

A trial in a 334-box node in Austin, Texas, has been expanded to 1,555 boxes, and "Time Warner is moving forward quickly to deploy," Brooks said. "It probably will take two years, companywide." Cox also has been testing these waters. BigBand believes its ability to direct bandwidth seamlessly from less- viewed to heavily viewed channels has the effect of tripling spectrum for popular content. Under-watched programs that now divert 100 megs of bandwidth will only take 30 to 35, according to BigBand's Seth Kenvin. The concept apparently shatters the belief in bandwidth democracy (equal spectrum per channel). The technology intuitively knows what kind of rating a given program or network gets, and shifts bandwidth to high-traffic locations. That spectrum allocation across the whole plant comes just in time to meet the bandwidth demands of hi-def and VOD.

As the telcos continue to pour billions into their slow-to-develop and market-selective video platforms of IPTV and fiber optics, I'm reminded that cable traditionally finds cost-effective ways to broaden and deepen its own capacity.

Analyst/investor Paul Kagan is chairman/CEO of Kagan Capital Management, Inc. in Carmel, Calif. He owns shares of Time Warner, and is an investor in privately held BigBand Networks via an early-round participation. Information in his columns is not intended to be a recommendation to buy or sell securities.

[Copyright 2005 Access Intelligence, LLC. All rights reserved.]