Small Cable Operators Think Dumb Pipe Might be a Better Business Model

Not every cable operator thinks over-the-top video is a worse business model than providing cable TV. In fact, some believe providing what might be wholesale services to third parties might actually provide better profit margins than cable TV now does.

"Our video margins are going down year after year," said Colleen Abdullah, the CEO of WideOpenWest Holdings.

Wave Broadband COO Steve Friedman also agreed that the profits from an over-the-top model might be better than the current cable TV business, especially if the new model simply substituted a bandwidth usage model for the current monthly subscription model.

While the dumb pipe model may in fact be better for small operators, that probably is not the case for larger providers.

Probably the worst of all possible outcomes is over-the-top competition from firms such as Comcast, where Comcast sells the video content directly to broadband users, and the local cable modem provider is not able to charge for the additional bandwidth consumed. That is one reason why the dumb pipe model would not work unless some form of consumption-based charging were adopted.

"Over-the-top video will eventually emerge as a challenge to the current model of large, expensive bundles of programming," said Blair Levin, the executive director of the FCC's Omnibus Broadband Initiative. Levin thinks such a move is "inevitable."

The basic tradeoff is that cable operators would essentially trade current linear video subscription revenue for higher broadband access revenues. That essentially was the business decision Qwest Communications made years ago, when it concluded it was better off outsourcing linear entertainment to DirecTV, and building its optical access infrastructure in a way that ultimately is conducive for over-the-top or on-demand video.

"The final inevitability is mobile broadband," said Levin. "We know it's coming. We know it's going to be very, very big."

"In 1994, you could envision as inevitable the Internet replacing existing platforms for communications and entertainment," Levin said. "And based on numerous metrics, that transformation is well underway."

Levin also warned that consumer anger over the cost of cable TV now reminds him of similar sentiment leading up to the 1992 cable act, and that there will likely be "some kind of response, either from the market or from the government," to address those concerns.

Any such move would further limit the upside from linear video and likely propel more movement towards an over-the-top approach.

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