Cast Aside?: Why Comcast and Other Cablecos Are Struggling

As the cable industry convenes at the CableLabs’ annual R&D technology-fest in Colorado this week, operators must be thinking sadly: What a difference a year makes.

Just 12 short months ago, rival AT&T Inc. was struggling mightily to meet its 2006 U-verse deployment plan, and Verizon Communications Inc. eagerly was applying for newly allowed statewide video franchises for FiOS. Meanwhile, many assumed, cablecos were laughing all the way to the bank.

Fast-forward one year and you’ll find the cable industry, its suppliers and partners working to drive forward a suddenly backsliding industry that’s facing threats on all fronts.

What’s changed?

For starters, newer and more powerful telco networks are catching up with older and less enriched cable plants. Verizon’s symmetric 20mbps FiOS Internet has overtaken the best cable can provide with no immediate help in sight, and newer TV entrants such as AT&T and Verizon are flexing their massive wireless muscles. These telco TV providers are landing significantly more customers every quarter, taking an increasingly bigger bite out of cable’s one-time secure customer base. Witness Comcast Corp.’s advertising attacks on all providers in seemingly all directions, a tactic that’s perhaps a sign of extreme measures in a now extremely competitive industry.

The trials and tribulations of cable colossus Comcast, the largest U.S. cable operator, are considered by most in the industry to be fairly emblematic of those impacting, or threatening to affect, the overall cable community.

Despite the season, the last few months of 2007 were not exactly a holiday for the kingpin cable operator. On the upside, Comcast and its brethren survived an FCC attempt to regulate the cable industry; still, FCC Chairman Kevin Martin pressed on in hopes of limiting Comcast’s size. (For more about this, read "FCC Order Likely Headed Back to Court.") And, in December, Comcast revised its revenue forecast down and capital spending up, sending its stock plummeting to an all-time annual low. Shortly thereafter, it decided not to participate in a wireless spectrum auction. And on top of all that, the cableco was out-marketed by Verizon on triple-play offerings, with the telco offering a bundle for $99 per month for two years, as opposed to the cableco’s one.

What’s a cableco to do?

"As an MSO, I’d be asking ‘How do we compete against offerings like Verizon’s 20/20 service?’" says Jeff Heynen, directing analyst for broadband and IPTV at Infonetics Research. "‘Is there a way we can not only increase the downstream bandwidth available to our customers but also the upstream bandwidth?’ knowing very well that more and more people want to play online games, upload videos and photos, and participate in peer-to-peer applications."

Verizon began offering 20mbps symmetric Internet access service as part of FiOS in Connecticut, New Jersey and New York as early as last October with plans to deploy the landmark offering in 13 other states where it offers its video-driven, triple-play bundle.

Tom Nolle, president of CIMI Corp., already sees FiOS as stronger than Comcast’s triple-play bundle. {vpipagebreak}

"Verizon FiOS could hurt Comcast big-time because it offers both good-quality broadcast video at a reasonable cost and higher-speed Internet than the cablecos can match," warns Nolle. "And as telcos get better at video, Comcast can push voice. But voice pricing is falling year over year, and they can expect the FCC to step in faster here than anywhere else. In the end, I think Comcast is afraid that they’ll be forced into a big plant modernization to counter competition, and that they’ll see their stock tank as a result."

Cablecos know they can compete with Verizon on the downstream side with wideband and DOCSIS 3.0, but how do they counter symmetric bandwidth, which they can’t really offer, asks Heynen. DOCSIS 3.0 promises 160mbps downstream, but only 120mbps upstream.

The other issues cablecos must address include delivering more high-definition and pay-per-view channels, getting key technology supporting interactivity into set-top boxes, implementing new applications as voice business flattens, and figuring out a wireless strategy, Heynen says. The common thread: A more robust, enhanced and expanded infrastructure.

Comcast CFO Michael Angelakis told an audience at a UBS Warburg conference on Dec. 5 that Comcast had revised its capex spending up $300 million, from the $5.7 billion mark it set in February 2007, to $6 billion. Nonetheless, the substantial capex increase begged two important questions. The first is what the money would be used for. The second is whether the extra spending could be considered good news or bad news for Comcast.

To the first question, Angelakis said the $300 million covered a number of things, including advanced STBs, high-definition DVRs, some churn, and $40 million to $45 million on a cable company it had acquired earlier in 2007 and in a cable partnership it had dissolved. The Comcast CFO also mentioned spending on "customer enhancements and network improvements that are more competitive in nature." Angelakis did not elaborate on the last point.

As for the second question, CIMI’s Nolle comments: "It’s really not so much about what the capital budget is or what the overruns are, but rather what’s causing it. If it were on DOCSIS 3.0, which is not finished yet, I’d say it’s a poor stepchild of things to come. But with most going to STBs and HD DVRs, they’re upgrading customers to higher-revenue services, which is a far more immediate financial plus."

And while Wall Street reacted to the initial guidance revision by slamming Comcast’s stock, Nolle believes that upping the capex spending, largely for in-home devices, didn’t warrant the extreme action on the stock front.

"Spending on STBs and HD DVRs does not represent a significant change in behavior for Comcast, nor is it indicative of a sizable plant modernization," stresses Nolle, noting that the spending was for 2007, a pre-DOCSIS 3.0 period.

Comments from Comcast’s CFO seem to track closely with those of Nolle.

"We will spend a significant amount of money this year on HD DVRs and actually spend significant money above our original plan on HD DVRs," Angelakis said last year. "We get a really good return on that deployment, and we get a little bit of less churn. So from my perspective, from capital allocation, I’m very bullish on that particular component." {vpipagebreak}

Further, Angelakis said Comcast has seen some slowness and softness in the business. "We’ve seen a bit of uptake in churn," he said. "That does absorb some capital above what our [plans are]."

Comcast historically has increased capex spending. The cable giant spent a total $4.6 billion in calendar year 2006, after initially providing a guidance of roughly $4.5 billion earlier that year.

So why, in the eyes of Comcast CEO Brian Roberts, did Wall Street hit his company’s stock after the change in financial guidance?

"I think it’s a combination of factors: heightened competition, the potential softness in the economy, the maturation of broadband. A majority of homes now have broadband. There’s growth, but it will be slower growth," Roberts said in an interview with Fortune magazine. Comcast denied xchange’s request for an interview with Roberts, however. "What I hope we will prove with subsequent performance is that we have new products — telephone, [services for] small and medium-sized business, more digital subscriptions and broadband. When you add those together, we’ll continue to grow at a very exciting rate."

Double Jeopardy

Of course, well-positioned telcos see things differently.

For example, Verizon’s early FiOS and especially 20/20 rollout began primarily in the densely populated territory of Comcast, pitting the telco’s FTTH plant against the cableco’s more coax-rich network. Although Verizon’s entry into the video business required the telco to make massive investments in fiber and video infrastructure, the telco believes building the offering from the ground up gives it a solid market advantage, says Jerrlyn Jwata, director of programming for Verizon.

Comcast CTO Tony Werner pledged in late November that his company will have DOCSIS 3.0 infrastructure in place in 20 percent of its footprint by end of 2008, with initial focus on faster downstream channel bonding.

In lieu of DOCSIS 3.0, cablecos must deploy switched-digital technology to enhance their networks, in an effort to deliver more HD and pay-per-view channels to their customers as soon as possible. Comcast declined to detail or update its plans for switched-digital technology in its network infrastructure.

Why is the move to switched-digital technology so key for cablecos? Because with prices for HD sets continuing to fall and with more units flying off the shelves in the last year than ever before, HD lineups have become a huge focus for marketing efforts by service providers of all types and sizes.

"I’d do this to keep my customers from switching to DBS providers," emphasizes Infonetics’ Heynen. "Switched video can’t come soon enough, but what’s the impact on my existing STBs? Do my customers have to switch out their boxes?" Another question the expert poses is whether cablecos can expand their access node frequency to 3GHz to let them offer more HD programming in addition to switched video. {vpipagebreak}

Analysts still don’t have estimates as to the exact cost of upgrades to cable company networks.

"The upgrade to DOCSIS 3.0 itself won’t be too expensive, relative to what Verizon has to spend to pass and turn up a FiOS subscriber," claims Heynen. "But, when you add in the upgrade to switched video, the total cost to upgrade their existing infrastructure to keep pace with the satellite operators on the video side and the telcos on the broadband side will be pretty significant."

Not everyone is sold on cablecos needing substantial network upgrades to deliver their current content-driven services, however.

"If cablecos use what they know about their customers — such as what they’re watching from their set-top boxes — and extrapolate from that, they can pre-cache all types of content either close to their homes or in home gateways to avoid having to send the content through known chokepoints in their networks," explains Rod Randall, senior managing director at venture capital firm Vesbridge Partners.

While this may require cable operators to up storage close to and in home devices, the associated expense would be far lower than big bandwidth upgrades, contends Randall, who started his career as an engineer at the original Bell Laboratories. This architecture would ease bandwidth demands placed on net bandwidth by transmission of HD programming and, he stresses, also could set the stage for follow-on, revenue-generating, functionality.

For example, switched video technology also can be used to enable cablecos to deliver dynamic, targeted advertising, which is fast becoming an operator focus area.

Randall believes the revenue opportunity for this type of advertising will be in the range of $12 billion to $15 billion in 2012.

All this said, it’s important to remember that cablecos still hold several key advantages over newer entrants in the landline entertainment and communications services business. They start with cableco networks reaching many more homes than telco nets, resulting in a far larger customer base. U.S. cable companies served a combined total 65.7 milllion households last year, according to the National Cable & Telecommunications Association (NCTA). By comparison, Verizon said it had 717,000 FiOS TV customers at the end of the third quarter, while AT&T claimed it had 126,000 U-verse TV and Internet customers in the same period, together representing nearly 850,000 customers. Cablecos also have long-standing relationships with content owners and producers with whom telcos fight an uphill battle just to approach — ties that could translate into a key edge with cable’s Web video efforts.

At least for now, the cablecos typically are better at marketing to consumers because they’ve been doing it for decades while telcos have done almost none, until recently. "That specific advantage is not necessarily durable though," says CIMI’s Nolle, citing telcos’ improving customer marketing efforts.

Cablecos also work as a group through venues such as CableLabs to achieve common business and technology goals, while telcos typically see each other as archrivals.

Meanwhile, Comcast, in particular, is seen as an innovator and pioneer on several fronts in the content industry. In November 2006, Comcast announced a long-term programming deal with The Walt Disney Co. that Disney said marks the first time ABC broadcast programs will be available on video on demand by any cable company. Several ABC primetime series will be offered free by Comcast in ABC-owned television station markets. The companies also said they will work together to make promotional content from the Disney-ABC Television Group available on Comcast’s portal.

"This agreement reflects our ability to distribute content on multiple platforms and signals — another first for Comcast and Disney as we continue to explore the evolving possibilities of digital technology," said Roberts, at the time of the deal. He called putting ABC’s, Disney’s and ESPN’s popular content on Comcast VoD "a watershed event for both companies."

The cable colossus also has since cut a deal with CBS whereby it provides the network’s top series, including the CSI franchise, NCIS, Numb3ers, Survivor and last year’s hit Jericho episodes free on VoD the day after they air. What’s notable about this is how the two dodged the feared ad-skipping issue. CBS keeps the "ad breaks" to one short spot for an exclusive advertiser, or to one short promotional spot for another CBS property. By the time the fast-forward kicks in, you almost always advance into the continuation of the show, making the functionality unattractive.

By contrast, many telco TV providers have yet to deploy pay or free VoD, citing content licensing requirements and the cost of security wares and infrastructure such as servers.

On the Web media front, Comcast launched its social network-type site, Ziddio, in 2006. And while not nearly as popular as a MySpace or Facebook, the cableco teamed with the latter nearly a year ago in a deal to allow Facebook users to create and share user-generated videos and vie for a role in a new television series titled "Facebook Diaries." Comcast and Facebook created a program that includes contests asking users to submit short video segments about their lives. Throughout the contests, Facebook users are encouraged to upload, view, share and rate the videos. Selected videos are featured prominently online on Facebook and Ziddio.com and on television, including Comcast’s on-demand service.

This arrangement represents Comcast’s realization of the importance of harnessing user-generated video and social networking as a form of TV programming. While other companies have dipped their toes in the water, partnering with a major player with a huge audience also should help boost use of its own portal. {vpipagebreak}

Two months after the Facebook deal, Comcast announced plans to buy movie-ticketing Web site Fandango and launch an online entertainment destination, Fancast.com.

At CES in Las Vegas last month, Roberts launched Fancast, calling it "the first-ever one-stop destination for entertainment content."

The site features more than 7,000 hours of streaming video and more than 11 million pages of entertainment information, according to Roberts. The cableco claims Fancast lets user search for content across TV, the Web, on-demand assets, DVDs and trailers for movies in the theaters. It also tracks user history and recommends content based on that. Fancast also features integrated message-access capabilities and will be equipped to enable users to instruct their DVRs to record specific content, or receive an e-mail notification of the content if they don’t have a DVR.

On the TV side, a new version of Comcast’s guide that includes the Fancast application will debut in the first quarter of 2009.

For its part, Verizon cut a deal with social networking site Revver Inc., whereby it pays the site for the videos it uses, revenue Revver shares with those it equips to create the content.

But despite the edge in content and advertising/marketing cablecos seem to have, telco rivals claim they’re poised to win.

"Content is a scale game with us having 65 million wireless customers, many whom want to access it from a [mobile] device," says Tyler Wallis, assistant vice president for wireless convergence at AT&T. "I don’t see content ties as a huge advantage that they have. We’ve already assembled the broadest array of entertainment and communications services in the industry. It’s good to be us."

Cable's Wireless Worries

What about wireless? That’s what telco execs started asking loudly in November when the Pivot consortium of cablecos that joined with Sprint to offer wireless services said it had no plans for expansion.

Bright House Networks, Comcast Corp., Cox Communications Inc., Sprint and Time Warner Cable launched Pivot, a co-branded wireless that the telco offered in conjunction with the large cablecos. Pivot initially became officially available in late March 2007 in eight metropolitan areas (Cincinnati and Dayton, Ohio; Austin, Texas; Boston; Phoenix; Portland, Ore.; Raleigh, N.C.; and San Diego), with expectations for it to launch in a total of 40 metro areas last year.

However, citing "provisioning complexities," Sprint decided in early November to halt deployment of the wireless service in 33 markets, with no plan for additional expansion.

And while Cox Cable and Cablevision announced they would bid on the 700MHz spectrum against the likes of wireless giants AT&T Inc. and Verizon Wireless, Comcast said in mid-December that it would not bid in the auction.

At the time, the cable giant was coming off adjusting its 2007 revenue down and capital spending up, news that sent its stock to a then all-time annual low.

Noting its close and fierce combat with Verizon for triple-play customers, pending regulation and looming network upgrades, industry experts have said the last thing Comcast wanted to do was spend more money, and in an auction no less.

With that in mind, one expert sees it as a self-preservation move.

"Infrastructure for mobile voice is a low-ROI proposition," says Tom Nolle, president of CIMI Corp. "So the cable guys wanted someone else (like Sprint) to do the dog work for them. Comcast got whacked hard for lowering its financial guidance and raising their projected capex. Imagine what would have happened if they’d said they were bidding billions for spectrum and spending billions more in rolling out a service."

Others believe that the Pivot effort was an effective move because it showed consumers and others that cable had and has an interest in wireless. However, it largely was ineffective because cablecos didn’t plan to do all the billing and OSS creation, integration and evolution for a network owned by someone else.

Meanwhile, the cablecos’ archrivals, AT&T and Verizon, have more than just seemingly bottomless wireless assets, analysts stress. They also have work well under way to bridge wireless and wireline networks in what could allow the anytime, anywhere communications customers have been salivating for.

Both companies last summer added differentiating, wireless-powered features for their IP video services. The features enable users with certain mobile devices remotely to control and program DVRs in their homes.

"Customers are increasingly mobile and want their data and entertainment to be mobile with them," says Tyler Wallis, assistant vice president of wireless convergence for AT&T. "That goes right to how we deliver what they want, having the largest wireless and wireline networks in the country."

"Good luck to our competitors," says Jerrlyn Jwata, director of programming for Verizon.

But for cable, winning and paying for the spectrum is only one step. What to do with that spectrum and the investment around executing a plan also are huge tasks.

"Today, they’re in something of a balancing act, with cable holding video and telcos holding wireless," says Jason LeBorgne, a financial analyst at JSI Capital Advisors. "But cable getting into wireless will affect their performance, as they’d have to play huge catch-up with the likes of a Verizon Wireless and AT&T. It’s not just buying spectrum. Cable operators will have a long way to go to provide an actual service to customers."

Read more on the FCC’s moves to limit cableco marketshare.

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