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November 22, 2010

Cutting the Cable; Taking Down the Dish

People are dropping their pay TV subscriptions. According to an article in The New York Times, cable, satellite and telecommunications subscriptions for entertainment during the third quarter of 2010 declined by 119,000; it was the second consecutive quarterly decline. Although the economic situation indubitably has something to do with the decline, the third quarter of 2009 – when times were even worse – saw a gain of 346,000 subscribers.

Ian Olgeirson, a senior analyst at SNL Kagan, is quoted in the NYTimes story as saying that it is "becoming increasingly difficult to dismiss the impact of over-the-top substitution on video subscriber performance." In other words, people are increasingly obtaining their entertainment ala carte over their Internet connections. Most of the online content is free; some is ad-supported; and some requires a subscription or pay-per-view. Some of it is user-created as in YouTube; but some is very professional including first-run TV shows and Major League baseball (MLB.com).

This ala carte trend is an enormous threat to the profits of big cable companies whose profits depend on the huge margins they can get by buying content from studios at a low price based on tremendous volume and then selling us bundles of channels - only a few of which we really want. These profits have also shielded the big cablecos from effective competition; small cable operators, telcos, and ISPs don't have the buying power to get the content at a price which allows any profit on resale, even with bundling. The studios and sports leagues who originate content are still reserving the bulk of the their first-run material for distribution through the cable and over-the-air networks because they are afraid that over-the-Internet access will leave them in the same sorry state as the record labels. The content producers also know that true retail competition will eventually lead to unstoppable pressure to reduce the wholesale price of their products. Comcast has gone so far as to buy NBC Universal (regulatory approval pending) to try to assure its lock on content.

Former FCC Chairman Kevin Martin "suggested" that cable companies allow us consumers to buy channels ala carte and not require us to buy bundles consisting mainly of unwanted channels in order to get the few channels we do want. Choice is good and I'd like to have this option. But this begs the question of why we have to go to cable companies to buy this content at all.

Michel Guite, President of Vermont Telephone (VTEL), aided by a huge stimulus grant and loan, is building a high speed fiber and LTE network in Vermont. Knowing he'll have the bandwidth, he would like to be able to compete with the cable companies in selling content to subscribers but is realistic about the chokehold the cablecos' current relationship with the content gives them. In a letter to subscribers quoted by Jim Louderback in Advertising Age, Michel says that these subscribers should have "the right to pay for individual TV channels for $1, or $2 or $3 each"; he hints at legal action to obtain that right. Michel, who is a visionary, has explained to me that VTEL would like to compete as a reseller of these unbundled channels. In practical terms, it is difficult for ISPs to compete with cable companies to offer broadband service since the cablecos have the near-monopoly benefit of being able to offer content at high markup as part of their bundle. VTEL can offer content if it wants; but, not being national or huge, it can't make a profit on the content because it can't buy it cheaply enough. Unbundling would cut the cableco profits AND presumably leave the producers of content scrambling to find resellers – good for competition and good for VTEL.

In this, however, I don't think Michel Guite's vision goes far enough. Why do we need channels at all? It's individual shows or series or sports teams that we watch. And why do we need a network operator – whether an ISP or a cableco – to resell content which can be sold directly to us by its owners or through aggregators like Hulu or Netflix? Certainly we need high quality access networks – like the one that VTEL is building and like those that many cable operators have – to provide the bandwidth to bring the content to us. And surely we'll pay more for a fast and reliable network that delivers the content we want at the speed we need (always increasing) and deliver mobile as well as fixed access. But, IMHO, we won't buy the content from the operator of the physical network. VTEL will be able to compete with Comcast; not because VTEL becomes a content provider but because Comcast loses its lock on content profits and becomes just another access provider.

In the pre-Internet days, access providers like AOL did buy and package content as part of their service. Early Internet ISPs thought they would follow that model but didn't (too much content, too limiting). When we go to YouTube or Facebook or Amazon we don't say "mother, may I?" to our ISP. Even when we pay for Internet-delivered content – for example, The Wall Street Journal, The Rutland Herald, Major League Baseball, premium service on Hulu, we pay that money to the content owner or aggregator, not to our ISP.

This final disaggregation of content from access probably won't happen through regulation; it'll happen because of the self-interest of content owners and advertisers. People ARE cutting the cable and taking down the dish. People are already getting some of their content ala carte. In order to have the broadest possible reach, the advertisers, sports leagues, and studios will make more and more content available (not all free) on the Web. As an extra bonus to advertisers, ads can be targeted much more precisely to Internet users than they can to cable, satellite, or over-the-air viewers. We'll watch what we want when we want. VTEL will be able to compete with Comcast on price, quality of service, and mobility; and there will be even more content available for us to sort through.

Related posts:

WOW (about VTELs grant and network plan)

Daddy, What's a Channel?

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