Monday, November 1, 2010

What Cable Will Do if Online Video Takes Off

Consumers should have the freedom to buy over-the-top video if content owners want to sell it. But one should not expect distributors to stand by and watch their current businesses be damaged as that happens. Neil Smit, president of Comcast's cable division, says that if over-the-top video starts to displace some amount of traditional cable TV viewing, Comcast is more than happy to change its product offerings to accommodate those demands.

"We feel very good about our capacity," says Smit.

Obviously, if a significant percentage of today's subscribers to multichannel video entertainment start to drop those services in favor of online offerings, providers are going to change. But some already are taking steps to protect their legacy businesses while adapting to online video.

To encourage consumers not to abandon cable TV, for example, Comcast has introduced Xfinity, which allows Comcast video subscribers to watch some of that content online. Should that effort succeed, there could be a more gradual shift of viewing and content packaging, as end user value simply is enhanced by the addition of new capabilities that encourage consumers to keep their subscriptions.

If the initiatives don't work, and customers start to abandon even the Xfinity style offers, though, cable and other distributors will confront declining revenues for the base business, which might cause distributors to weigh retail price increases, a shift of programming to emphasize networks that still offer a robust revenue model, price increases for the remaining customers, or renegotiated contracts with programming suppliers to account for the new economic realities.

Of course, the increased over-the-top consumption will drive higher usage of broadband access connections. Under those conditions, it is reasonable to expect that access providers will move towards more reliance on usage-based charging for use of broadband access services.

"People should not think of cable companies as media companies," said Craig Moffett, a senior analyst at Wall Street equities research firm Sanford C. Bernstein. "They are infrastructure companies."

Rather than raising prices on cable broadband across the board, it is logical to expect tiered pricing that reflects usage. That actually makes sense, if one assumes broadband access increasingly might be a differentiated product, offering different buckets of "best effort" usage, as well as services that might be optimized for real-time services. Beyond that, cable operators and telcos have other ways to repackage triple-play or quadruple-play services in ways that optimize value and pricing for multiple products.

Broadly stated, distributors can tweak traditional video subscription prices, terms and conditions in ways that compensate for higher broadband access consumption, and perhaps equally importantly, reward customers for using bandwidth "efficiently."

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