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Kagan's Column: Cable's Got a Leg Up In the 100 Meg Race

I had a dream this week. I was driving down a broadband highway when I heard Buzz Lightyear shout from the on-ramp: "To 100 megs and beyond!" But as I turned my pillow to the cold side, I saw that it wasn't my favorite animated spaceman, it was only a cartoon cable guy just back from a time warp. I woke up sweating with the conscious knowledge that we can't depend on the numbers we know now. Some people (including Gordon Moore, the creator of Moore's Law) are not sure chip power can continue to double every 18 months on into the future. But thanks to hardware and algorithms, communications networks are in a compounding rage. The speed race between cable and phone companies has only just begun.

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Newspaper pages are filling up with their customary rants against anything to do with coax. Print people love the telcos' new video venture and the traditional Bell ringing for obscure TV content that roils beneath cable's radar. But the real battle between the wired combatants, which gets little print attention, is over the Internet connection, where the subscribers, and so much of cable's profits, exist. Determined to hang onto its premium pricing--and thus high margins--cable has upped the ante in speed, staying at least a megabyte ahead of the challengers, while talking faster. The reason is, MSOs (the cable guy in my dream) have been to Korea and Japan and have seen their future. And it ain't 5 megabits.

Operators openly talk about 25-30 Mbps, hope to deploy 50-80 and are thinking 100. Cisco is talking 160. Meanwhile, telcos are looking to advance from their original ADSL technology to VDSL2, serviced by a bevy of start-ups with Greek-sounding names like Ikanos and Actelis of Fremont, Calif., and Aktino of Irvine, Calif. They're hardly myths, with a couple of hundred million dollars of venture-cap backing, global footprints and initial applications for networks and corporations. They're generating much higher rates of speed (Ikanos is talking 150 mbps) by bonding up to a dozen pairs of copper lines together. (Cable is looking at channel bonding.) But telcos' reach has long exceeded their grasp: Efficiency at the consumer level is still distance-restricted, low-priced subs churn like mad and kinks still have to be worked out.

DSL analyst Dave Burstein reports that "performance gains when two or three pair are joined is less dramatic, raising questions about how this will be utilized for consumer service." According to Burstein, Stanford engineering guru John Cioffi is "convinced DSM (Dynamic Spectrum Management) will allow 20-25 meg speeds up to 6,000 feet, although that may require more processing power than practical in today's chips."

Maybe there are too many acronyms in this column, but the letters spell out the deepening interest in all things speedy. (No wonder Warner Bros. is developing a new version of The Flash, a 1940s comic book hit. Will an MSO or telco cut a deal with Bayer for the rights to Speedy, the Alka-Seltzer kid? But I digress.) It's why Verizon is so committed to putting fiber at the doorstep of its nearly 40 million subs, which is the ultimate knock on the limitations of copper pairs. It also means it's taking light years (pun intended) and billions of dollars for the telcos to get on the right track for the high-speed sweepstakes.

One element working in cable's favor is consumer inertia, defined by Webster's as "a disinclination to move or act." Most cable subs don't switch to satellite. No cable sub drops the modem for DSL. I expect few to take up telco IPTV. This is the Splintering of American Media I've written about many times. What you get is what you're already seeing, and as each user gets what he or she likes, there's enough population to create a market within a market. But world domination is out of the question. The war for eyeballs and fingertips will really be fought over the younger generation, in formation. Telcos will get a share, but at a horrific price.

Analyst/investor Paul Kagan is chairman/CEO of Kagan Capital Management, Inc. in Carmel, Calif. Information in his columns is not intended to be a recommendation to buy or sell securities.

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Kagan's Column: Cable's Got a Leg Up In the 100 Meg Race

Cable World, May 23, 2005

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