Cable Deal for T-Mobile USA?

With the Justice Department having filed suit to block the proposed AT&T purchase of T-Mobile USA, what is T-Mobile's plan if the deal falls through? It doesn't appear that T-Mobile USA actually has had a "plan B." But many speculate that if the AT&T acquisition is blocked, it will also signal that Sprint will not be allowed to buy T-Mobile USA, either.

That will leave T-Mobile USA in a tough position, as it needs spectrum to launch Long Term Evolution, and will emerge from the merger process weakened in the retail market.

Bernstein Research senior analysts Robin Bienenstock and Craig Moffett say the most likely scenario is not a Sprint merger but a spectrum deal with cable operators Comcast and Time Warner, both of which own spectrum T-Mobile USA could use to launch LTE services. The cable operators could monetize their spectrum and provide backhaul services.

To the extent that cable operators sell a wholesale service, they might then use T-Mobile USA rather than Clearwire. That would be more bad news for Clearwire.

Cable Deal Could Be T-Mobile 'Plan B

How "Sticky" are Bundles When Consumers See Value Mismatch?

It now is conventional wisdom, and also rational thinking, that bundles create barriers to customer churn.


The obvious value is that consumers save money when buying a triple-play bundle, rather than each of the products separately. 


The same thinking applies to "family plans" for mobile services.


In fact, bundled products traditionally are seen as effective in many industries. Product bundling


But bundles arguably only work when consumers want the products in the bundle, or when the value-price relationship is seen to be acceptable That increasingly might not be the case for video entertainment services. 


Roughly 25 percent of customers from major U.S. triple-play providers are not satisfied with their service, primarily because they don’t think it offers enough value for the money, says Yankee Group analyst Sheryl Kingstone.



And that's the key issue: video subscriptions keep getting more expensive, and consumers arguably are starting to rebel. 


In western Europe, prices for mobile services arguably are high enough that if another global recession occurs, service providers could see resistance even for a "must have" product. That isn't to say people will drop mobile service. It is to note that they will likely reduce usage in ways that cuts their spending.


Mobile ARPU in Western Europe in fact declined by 9.1 percent cumulatively during 2009 and 2010, says Yankee Group analyst Declan Lonergan. During the same two-year period, ARPU declined in Greece by almost 30 percent and by over 16 percent in both Ireland and Spain.


If Europe slips into recession again in 2012, customers will change their mobile usage and spending habits, he argues. Voice and messaging revenue will suffer most, while spending on the mobile Web and apps will hold up relatively well.


The point is that bundling reduces churn when buyers seen a good fit between value and price. It doesn't take much insight to note that buyers increasingly see a mismatch in the video subscription category. 

Cable’s Packaging Dilemma

Video service providers are caught in a vice, and so are many of their customers. The problem is escalating costs for content access, and contact clauses that it make it difficult for distributors to restructure their service packages in ways that would allow customers to opt out of some pricey offerings.

ESPN charges cable operators an average $4.69 a month for each subscriber. And ESPN contracts mandate that ESPN be carried on the most-popular tier of service. Cable networks such as CNN or TBS charge less than a dollar, says SNL Kagan analyst Derek Baine. 


So if a distributor created a new tier of service without ESPN and other pricey sports programming, and consumers responded, distributors would have to put ESPN back into those lower-priced tiers, which would destroy the retail pricing advantage again.

And even in a hypothetical full a la carte environment, when all subscribers would have the option to buy each channel one by one, ESPN parent Disney Co would likely have to charge about $30 just for ESPN to make up for lost advertising and affiliate revenue it gets from distributors.


In part, the lost revenue would come from advertising revenue on ESPN, and in part the lower revenue would represent the value of the fees Disney gets from contracts that say distributors must carry a number of other networks, to get ESPN, argues Sanford C. Bernstein analyst Craig Moffett.

The end result would likely be that consumers wound up paying more money for just a relative handful of channels than they pay for hundreds of channels today. 


Unless distributors can force major programmers to sign different contracts, it is going to be very difficult to create the lower-cost packages many consumers actually may want, or even tiers that are cheaper because they do not include the pricey sports channels. 

Cable’s ESPN Dilemma

IP Could Change Conditional Access and Need for Dedicated Decoders

 

Will Third Quarter Confirm Notion that Multichannel Video Business has Peaked?

The second quarter decline in multichannel video subscribers--the first ever in industry history--might not have been a statistial abnormality.

Rob Marcus, Time Warner Cable CFO says Time Warner Cable is on track to lose customers in the third quarter, with the weakness attributed to the economy. If that winds up happening at some other leading cable, satellite or telco companies, we could have a trend developing that could suggest the multichannel video industry finally has hit the wall, and has stopped being a growth industry.

According to researchers at SNL Kagan, the multichannel video entertainment market, which basically has grown in virtually unbroken fashion for decades, suffered its first-ever decline in the second quarter of 2010.

There was some continued shift of market share from cable and towards satellite and telco providers. But those shifts also were accompanied by an apparent net loss of 216,000 subscribers in the multichannel marketplace as a whole, compared to a gain of 378,000 in the second quarter of 2009.

Observers who have been watching what has been happening in some other legacy businesses, especially fixed-line voice services, are familiar with similar processes: gains for competitors and losses for the top incumbents. But there is more at work that market share gains and losses. Over the last decade, the total number of customers available for anybody to get has been dropping.

"Cable TV" has been a mature market for some time, but still has managed to eke out small gains, year after year, despite gains by satellite and telco competitors. But that appears to have hit a possible inflection point in the second quarter. More data, over more time, will be needed to confirm the possible trend, but it would be a historic watershed if the market actually shrank for the first time.

Cable was down a combined 711,000 subscribers, with six of eight top cable companies recording their worst losses ever. By contrast, satellite providers added a combined 81,000 subs and telcos netted 414,000.

Cable's combined share of the market was down to 61 percent from 63.6 percent in the second quarter of 2009.

Telcos now claim six percent of the video market, up from 4.3 percent year over year. It is tough at this point to figure out how much the economy and moribund housing market had to do with the results. Both those trends would normally be expected to slow the market.

But most observers also are watching for signs that alternative channels, ranging from online video to DVD rentals, are having an effect as well. So far, there has been scant evidence of any significant shift of viewing habits.

Some people, for all sorts of reasons, seem willing to live without paying for cable, satellite or telco-provided multichannel video entertainment. But most people appear not to see the advantage of cord cutting.

To be sure, there is an argument that the second quarter was a statistical anomoly. There has been no break in the growth trend line for multichannel video subscriptions, argues Michael Turk, a political and communications consultant. He chalks up the second quarter decline of 711,000 total industry subscribers as an artifact of "artificially" higher sign-ups as the broadcast digital TV transition occurred, a process that lead to higher-than-typical signups, followed by slower demand in the aftermath, but well within the historical growth profile.

The digital TV transition a year ago caused cable operators to offer temporary subscription discounts as a way of luring formerly-resistant consumers. It is possible that the expiration of deeply-discounted offers has lead some customers to churn off.

More likely, the temporary offers had similar effects as auto and housing credits recently have had: demand was simply pushed forward, leading to a decline of growth rates in subsequent quarters as the promotions expired.

If one subtracts out those who dropped cable when their discount expired, cable actually netted about 100,000 new subscribers in the second quarter of 2010.

But Time Warner Cable's guidance about the third quarter suggests there might be something to the notion that the video business has topped out.

Marcus said that Primary Service Units (or PSUs, a measure of voice, video and data customers) will likely fall below second quarter levels, for example.

"Video in particularly has been challenged," Marcus said. "Video net losses are pacing ahead of where they were in last year's Q3, voice growth is slower than it was last year and HSD [high-speed data] while the strongest performer, is still lower than last year. The net-net of all of that is that we may actually see a PSU loss for Q3."

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The Future of TV Is... TV

"The potential for video over the internet is huge, and always will be," says Mark Cuban, Dallas Mavericks owner and technology investor. That isn't a new argument: Cuban has made the argument repeatedly and forcefully.

"The future of TV is TV," he says. "That is what consumers want." Arguing that forecasters need only follow the money, he notes that consumers have made their choice to spend money on new HDTVs because they want a no-hassle way to watch TV, and do not want all the hassles associated with PC-based or Internet-delivered video.

"I don’t understand why so many people think that having millions of videos available online to watch any time is some big deal," Cuban says. "Consumer choice is about having the brand new device on which you just spent hundreds of dollars or more work immediately and just as you expected.

"When you buy a car, you don’t want to have to figure out how to make it work. You don’t want to have to bring someone in to make sure the engine starts, or have to buy some 3rd party device so that you can go full speed or blast the stereo. When you buy that car, you want to jump in the driver's seat, smell that new car smell, be excited when you turn it on, and crank that stereo and roll down the road in your brand new car. You made your choice as a consumer. You spent your money. You want immediate gratification.

The Future of TV Is... TV -- Seeking Alpha:

Competitive Pressure Remained the Story in 4Q 2009, Says Fitch Ratings

Competitive pressures remained strong throughout the industry in the fourth quarter of 2009, say analysts at Fitch Ratings, especially among local exchange carriers and cable companies, as those firms increasingly compete in identical spaces, with similar products.

The fourth quarter revealed especially aggressive marketing and competitive pricing and discounting strategies, Fitch says. This trend is expected to affect the competitive landscape going forward, especially putting pressure on average revenue per user and profit margins on discrete products.

The big problem for telco contestants is fixed voice line losses. Although high unemployment continues to affect sales of business lines, and the effect of wireless substitution continues, affecting residential lines, total access-line losses began to decelerate toward the end of 2009 as service bundling, including network-based video services offered by operators such as AT&T and Verizon continued to gain scale.

Cable operators had an arguably easier time, gaining high-speed data subscriber market share growth during the fourth quarter of 2009 despite a decrease in overall broadband additions caused by the persistently weak economy and maturation of the broadband market.

The wireless segment of the business arguably faced the fewest problems. Total wireless net additions were strong, says Fitch.

The industry’s capital spending grew by approximately 20 percent from the third to the fourth quarter of 2009 but remained below fourth-quarter 2008 levels. It is Fitch’s opinion that all communication service providers must invest in their respective networks in 2010 in order to maintain or improve their competitive positions.

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2009 Was Tough for Cable and Telcos, 2010 Will Be a Bit Better

Fitch Ratings analysts say 2010 will be a better year for telcos and cable providers. There are challenges, to be sure. But the biggest question is whether cable and telco companies will be able to keep finding new revenue sources to replace those being lost.

European telcos face further stagnation of top-line revenues and likely have further to go in the process of cutting operating expenses, say analysts at Fitch Ratings.

The weak economic recovery, continued regulatory pressures, maturing service penetration and strong competition, are some of the key forces putting pressure on cash flow and profit margins.

At the same time, service providers are forced to continually invest in mobile and fixed network upgrades  to keep abreast of burgeoning data traffic demands, Fitch says.

To be sure, operators are introducing new services to replace declining revenue sources. But it "looks unlikely that the network operators will benefit from new service revenues in the way they did from SMS data," Fitch says.

Incumbent cable and telco providers in the United States will face many of the same pressures, including increased amounts of competition, wireless substitution and a sluggish economy.
Traditionally, U.S. telecommunications and cable service demand has lagged economic recoveries, and high unemployment, despite the recovery, as well as pressure in the housing sector will put pressure on 2010 financial results.

Fitch expects this lagging trend to continue and any U.S. economic improvement in 2010 will likely not be reflected in telecommunications and cable results until 2011.

"Although the telecom and cable industry has maintained strong liquidity and free cash flow, macroeconomic woes including unemployment rates and a struggling housing market will continue to limit financial growth for the sector," says Michael Weaver, Managing Director at Fitch.

Fitch estimates that aggregate access line losses for 2009 will be approximately 10.5 percent for retail local telecommunications providers. There was a bit of a change in 2009 as slower losses to cable voice providers was offset by higher business access line losses.
Business and residential access line losses should stabilize in 2010 and continue in the range of 3 million to 3.2 million each quarter, which would represent a yearly loss of approximately 12 percent, says Fitch. There is a statistical artifact here.

As the base of voice lines declines, a fixed number of lost lines represents a larger percentage change than it used to. So although it appears at first glance that line loss is accelerating, that is not the case. The decline is steady, but larger in percentage terms.

The loss of legacy revenue of course heightens the importance of new revenue sources for fixed network operators. Broadband access had been such a driver in the 1990s and early 2000s, but is less significant now that the market is saturated or nearly saturated. Fitch estimates that high-speed access subscriber growth slowed in 2009 to 1.7 million net subscriber additions.

In 2010, net new additions should slow further to 1.4 million accounts. But make note: Fitch believes wireless broadband substitution now is poised to become a material factor in line growth.
Multi-channel video likewise has been a growth driver for Verizon and AT&T, but also is slowing. Fitch estimates that net new video customers will grow by two million subscribers in 2009, slowing in 2010 to approximately 1.5 million.
Commercial service revenue will face a roughly flat situation in 2010 after 2009 declines over six percent for wireline companies. In 2010, commercial revenue will grow about one percent.

In total, Fitch estimates that aggregate wireline revenues will decline in 2010 near the mid-single-digit range, a modest improvement over 2009. EBITDA will similarly fall in aggregate by a low- to mid-single-digit range for the industry as benefits from headcount reductions offset losses of high-margin legacy services.

Cable operators also saw accelerating video subscriber losses in 2009 with a reduction of approximately 2.75 percent. Subscriber losses are the result of weak new home growth, but more important, they are the result of competitive erosion from direct broadcast satellite and telco video offerings.

The cable basic subscriber erosion rate will accelerate in 2010 as competitive pressure remains fairly constant, but there will not be the lift from digital television conversion that boosted cable performance in the first and second quarter of 2009.

Fitch estimates that basic subscriber erosion will increase to approximately 3.5 percent in 2010. High=speed access additions also slowed materially for cable  operators in 2009, and Fitch expects subscriber growth of approximately 1.7 million in 2010.
New DOCSIS 3.0 services should help cable operators in the commercial space, though.

Cable telephony subscriber growth rates fell rapidly in 2009 with a reduction of over 40 percent, but with operators still adding two million net subscribers. Fitch estimates that cable telephony net additions will fall to 1.4 million in 2010 as wireless substitution and weak housing-starts affect results.

Cable operators successfully increased their share of the small business and home office market in 2009. Fitch estimates that commercial service revenue increased by approximately 25 percent for cable companies in 2009.

In 2010, operators will start to move up to the mid-size business customer segment in 2010. Fitch estimates that cable revenues will increase in the three percent to five percent range in 2010 and that firm margins will lead to a similar level of EBITDA growth.

Fitch estimates that the total wireless subscriber base grew by about five percent in 2009 andwill slow to four percent in 2010.

Post-paid net additions declining by 42 percent for 2009 compared to a 36 percent decline in 2008. However, data services and advanced devices such as smartphones, netbooks and aircards kept post-paid gross additions relatively flat in 2009. That might not be too comforting, as it shows churn rates are greater than new customer acquisition.
Fitch estimates that prepaid net additions will increase by nearly nine million in 2009 compared to approximately five million for post-paid. Fitch expects that pre-paid additions will again achieve in 2010 a level similar to 2009.

Voice average revenue per user (ARPU) continues to erode at a growing pace approaching double digits in 2009 in part due to lower roaming revenue. This trend will continue in 2010 and at a level equal to or even higher than 2009.

Data ARPU growth has limited the impact of voice ARPU erosion on total ARPU, which has remained relatively steady. Fitch continues to believe that strong data growth will again be achieved in 2010.

In aggregate, Fitch forecasts that wireless revenue will increase in the mid- to high-single-digit range in 2010 and that margins may erode slightly because of higher marketing and retention costs and the success of unlimited prepaid plans.

Fitch expects that capital expenditure will be flat in 2010. Free cash flow increased by 20 percent in 2009 as companies materially reduced capital expenditures.

Fitch believes that FCF will again increase in 2010 by approximately 10 percent due to modestly higher aggregate EBITDA and continued low levels of capital expenditure.


Fitch Ratings

Consumer Price Points for Recurring Subscriptions are Fairly Clear

One might infer from average pricing for a variety of services ranging from fixed telephone service to broadband access, wireless and multi-channel video service that consumers have price sensitivity for any single service above $50 a month.

According to researchers at Pew Research and the Federal Communications Commission,  fixed voice costs about $48 a month. Wireless costs about $50 per user, while multi-channel video costs about $60 a month and broadband access costs about $40 a month.

Some of you immediately will note that your own spending is higher than these average figures suggest, with the greatest variability occurring in the mobile arena, as that is a service bought a person at a time, where the other services are bought household by household.

That's worth keeping in mind when surverys suggest there is robust consumer demand for just about any new application or service. Very few products ever have gotten mass adoption at prices above $300. Very few subscription products ever have gotten mass adoption at prices above $50 a month.

That doesn't mean it cannot be done; obviously it can. It simply is to point out that getting lots of consumers to buy a new recurring service at prices ranging from $5 to $10 a month is a big deal.

That's the reason so much consumer-focused content is advertising supported.

Giving Up on Hulu, Going Back to Cable

It's just one subscriber's view, but Dan Frommer of Silicon Alley says his experiment with getting all his entertainment video from Hulu and other sources has failed.

Two years ago, he thought he could do it.

Now, he says, "I really like having it." High-definition programming is part of the reason. But the main reason is that "there's still way too much good stuff that's not online."

"Anything that relies on a live, nationwide cable audience, like most live sports, or the Oscars, or "MythBusters," isn't going to be available for free online for a long time," he says.

"So while the "Hulu household" experiment was fine, I'm actually pretty glad it's over," he says.

"I agree with Henry Blodget that the TV industry is eventually going to be severely disrupted by the Internet, and eventually, I hope that I'll be able to get everything I want to watch online," he still maintains.

But it's going to take longer than it should, because TV companies are still fairly insulated -- especially as Comcast buys NBC -- and can protect their legacy business models for a while longer.

Is Google Crazy, or Simply Unusual?

Cable and satellite providers of video entertainment have different financial interests from content providers, even though both are essential parts of the multi-channel video entertainment ecosystem.

Likewise, handets manufacturers, mobile application providers and access providers have distinct financial interests, though all are part of the single mobile ecosystem.

That being the case, conflicts between ecosystem partners are an ever-present reality. The issue is how much cooperation and conflict is possible, and whether enough benefit occurs, despite some conflict.

Google's release of the Nexus One, and its apparent plans to release a Nexus Two and other devices are prime examples. Some observers, including Google's competitors, will note that it is risky for a partner to compete with its other partners in a single ecosystem.

Microsoft of course questions the wisdom of Google's mobile strategy, insisting Google will have trouble attracting and keeping handset partners for its Android operating system now that the company is selling its very own branded devices.

That certainly is the conventional wisdom. But even a valid conventional wisdom can have exceptions. What "most" partners cannot envision, attempt or succeed at is not to say that "all" partners are so limited. Nor are relationships immutable; they can change over time.

Google might be one of the salient exceptions, as is Apple. Several years ago, most telecom executives were more afraid of Google than of cable operators. These days, executives are looking for ways to leverage and work with Google.

Apple has significantly reinvented business frameworks in the music and phone businesses, for example.

The other issue is that Google's relationship with some ecosystem partners can be qutie distinct. At least initially, HTC and Motorola have add a different relationship than other manufacturers, and T-Mobile as a service provider likewise was early to support Android.

Google's other partnerships are a bit more complicated and one has to think Verizon and Motorola are less than thrilled, even though both are key Android partners.

Still, the point is that ecosystem relationships periodically get tested. Content providers and cable and satellite operators are used to the possibility of significant conflict over carriage agreements. Also, at the margin, some distributors also are content owners, while some content owners have been distributors.

Some distributors are part of the equipment supplier segment, as well as distributors. Some equipment suppliers are becoming application providers.

Yes, Google risks some ire by distributing its own branded handset. But ecosystem "messiness" is growing throughout the communications and entertainment ecosystems. And some players can attempt strategies that would be considered suicidal if attempted by less powerful contestants.

There are rules, and exceptions to those rules. Apple and Google might prove to be right or wrong. What is indisputable is that they are different; they can attempt things most other players cannot think about.

Americans are Happy with their Products and Services, Sort Of

A new study by the Government Accountability Office suggests 84 percent of U.S. wireless users are "very" or somewhat" satisfied with their wireless phone service. That isn't to say there are no issues: there are.

The GAO says 10 percent of users are "dissatisfied" with their service. About 12 percent say they are dissatisfied with billing, 14 percent are dissatisfied with terms of service, 11 percent unhappy with call quality and 12 percent dissatisfied with customer service.

But 76 percent of respondents are satisfied with billing; 72 percent satisfied with terms of service, 85 percent satisfied with call quality and 70 percent satisfied with customer service.

In terms of complaints received by the Federal Communications Commission from end users, 55,000 were unhappy with billing and rates. About 14,000 were unhappy with call quality, 13,000 complained about contract early termination issues and 12,000 were unhappy with customer service, GAO says.

In terms of complaints, billing issues were more than 400 percent more common that complaints about call quality, contract termination or customer service.

In some ways, in fact, the GAO study suggests a higher degree of satisfaction with wireless service than other surveys might suggest. The American Consumer Satisfaction Index, which ranks consumer satisfaction on a scale running from zero to 100, with 100 being the top score, might suggest less happiness, not only with wireless, but also with cable TV and satellite service, with declining scores for wired voice service.

Motorola Seeks to Sell Set-Top Unit

Motorola is looking for buyers for the part of its business that makes cable television set-top boxes, and is seeking about $4.5 billion, the Wall Street Journal reports.

For anybody who has been in the cable TV industry any length of time, the potential sale brings back memories of a company headquarters in Hatboro, Penn. and known as "Jerrold." Few companies have roots in the U.S. cable industry as deep as Jerrold did, in its later incarnation as General Instrument representing one of the two big names in the old cable TV business, in addition to Scientific Atlanta, whose assets now are part of Cisco.

The big attraction for any buyer is the chance to become a major player in the cable TV infrastructure business overnight.

Logical potential buyers would include the ranks of any number of major electronics companies who want major exposure to the U.S. cable TV industry.

It makes you realize just how long it has been since you were in the cable business.

More Trouble for Cable?

Once upon a time, the cable TV industry was a struggling insurgent industry, long on hope, short on finding, basically a rural market service retransmitting urban market off-air signals to areas that couldn't receive them.

All that changed during the 1980s when major metro markets were wired, channel capacities grew into scores and independent programmers changed the business from "remote channel importation" to an "add choice" model.

By the 1990s cable gradually captured 70 percent of homes. Over the last 19 years, as video penetration saturated, cable modem and voice services emerged as the growth drivers. But cable now is an incumbent. Like the telephone companies, it faces negative growth in its legacy business, partly from satellite providers but increasingly from at&t and Verizon.

As a result, cable stocks have dropped about 35 percent since last summer. UBS analyst John Hodluk thinks more pain is coming, as consumer spending slows, broadband access additions decelerate and the telcos start to make themselves felt in video service.

Hodulik says the two telcos will double the reach of their video services this year to about 18 percent of homes passed, and will double again by the end of 2010. As a result, cable basic sub losses could triple in 2008.

On the other hand, Qwest Communications might lose nearly 10 percent of its consumer lines this year as well.

The good news for most telcos is that revenue sources have diversified quite a lot over the past decade. Consider Cincinnati Bell, an independent telco.

About 83 percent of its service revenue in 2007 was earned from areas other than the traditional consumer wireline voice traffic. In 2006, Cincinnati Bell earned about 80 percent of its total revenue from sources other than consumer landlines.

Business market revenue is part of the reason. Revenue from data center managed services increased 43 percent in 2007, for example. Wireless service revenue from business customers grew by 17 percent and business access lines were actually up almost two percent. As a reflection of this growth business markets revenue represent a 57 percent of total 2007 revenue compared with 55 percent in 2006.

Which is largely what the Federal Communications Commission forecast would happen when it decided the basic competitive framework for the U.S. market would be to encourage the telcos and cable companies to have at it. That hasn't been helpful for other would-be competitors, including competitive local exchange carriers and independent VoIP providers.

But there's reason to believe the framework is working, at least to a significant extent. A great deal of the credit, though, is because of the contributions made by Internet-based application providers. That payoff seems clearer every day.

Competitive Cable Developing Too Slowly?

One year after the passage of a law designed to ease the entry into the cable market of competitive providers in Michigan, only 110 of 2,000 communities in the state have a choice of cable providers, according to Multichannel News.

That is to be expected. Cable choice requires construction of brand new networks, not just the granting of a franchise. That takes immense amounts of capital and time, as well. A single new network in a single community can take three years or more to build, if there are no competing demands on construction and installation resources.

And there is history to consider. New video service providers have been attempting to so just this sort of thing for several decades, using a variety of methods, of which the most successful so far has been the use of direct broadcast satellite. There have been scattered regional efforts to duplicate cable networks, but overbuilders have not been notably successful, in large part because it is difficult to justify building a network that gets less than 30 percent penetration, which is what overbuilders largely have been able to attain.

Voice and cable modem services have helped the business case, but overbuilding remains a challenging financial proposition, and few expect widespread new competition in the terrestrial space from any other than incumbent local telephone companies.

The point is that nobody should be surprised nothing much has happened in just a year. New ubiquitous broadband networks take time to build, as well as lots of capital. If it were easy, lots of people would be doing it.

Lots of SMEs Now Buy Video

Entertainment video of the sort delivered by cable, satellite or telephone companies often is thought of as a consumer application. But there's new evidence that lots of small and mid-sized businesses and organizations buy video services. To be sure, bars have long been a key business customer for video services.

What is striking is the degree to which lots of businesses now want to have video services available at the workplace. Whether for employee benefit or keeping up with the news (branch offices of financial services firms, for example), SMEs now appear to be far more willing than formerly to buy entertainment video services.

Unbundling Price Impact Unclear

The American Cable Association, which represents 1100 small, independent cable operators, has called for unbundling of cable channels, though the large cable operators and programmers oppose such rules. On the face of it, unbundling seems to offer an antidote to higher retail prices.

The thinking is that allowing users to pay just for what they want will drive lower prices. Oddly enough, it probably wouldn't. Once consumers start toting up the costs of discrete channels, and assuming most people have seven favorites, costs might be higher than what they are paying to receive lots of channels they don't watch.

Advertising is the reason. When cable channels are carried on the most-popular "expanded basic" tiers, they have a larger number of eyeballs to sell advertising against. Take away that access and advertising becomes a much-smaller revenue possibility, which then means programmers will raise their rates for carriage. So prices go up.

To be sure, smaller video providers do have to pay higher wholesale rates to get program access, but programmers counter that volume discounts account for the higher wholesale costs.

Smaller operators also object to "tying" policies that require carriage of lesser-viewed channels to get access to the most-popular, "must have" channels. The policy obviously is helpful to programmers, as they gain shelf space for niche channels.

Supporters of tying policies say program diversity clearly will suffer if tying policies aren't allowed. There are elements of truth to that claim. Lesser-viewed channels might be forced to on-demand distribution, which will reduce potential revenues, again compelling those channels to raise prices.

Distributors don't like tying policies since scarce shelf space gets eaten up by channels with low viewership.

Sometimes the obvious solutions actually produce results counter to what people think.

54% of U.S. Cable Operators Face Telco Video Competition

Fifty-four percent of the cable systems surveyed by In-Stat say they face a telephone company that already is offering video service in their cable TV service area, In-Stat says. Oddly enough, though rural areas often are considered to be service backwaters, lagging urban and suburban areas in broadband access, for example, rural areas often are places where telcos have moved early to offer entertainment video services.

Historically, rural telcos have been licensed cable operators as well. But some telcos that aren't wired competitors rely on satellite partnerships to get the job done. And there's a scale effect here. It takes a long time for a large telco to upgrade nearly any part of its infrastructure.

Small operators, simply because they are small, can upgrade much faster. Keep in mind that rural operators often have a few hundred to several thousand customers, not millions. The same sort of process works at the level of a country. A small country can upgrade its facilities much faster than a larger country, simply because of the differences in scale.

Video Penetration Higher than We Think?

By some estimates U.S. cable video penetration is in the mid-60s, at the upper level at 70 percent. Satellite video is said to be between 25 percent and possibly 28 percent. And yet at the same time some estimates show "no provider" other than over-the-air transmissions for as many as 26 million homes, something on the order of 23 percent of U.S. households.

The numbers don't square, and there are few explanations other than false reporting by cable and satellite operators; incorrect housing statistics or much-higher-than-expected numbers of homes where consumers are buying multiple subscriptions. False reporting of those sorts of numbers is so unlikely as to be implausible. One has the impression that consumers tend not to buy both satellite and cable video service. Try and think of someone you know who does this.

One can make the argument that multichannel video subscriptions are nearly 100 percent, or as low as 75 percent. So things are better or worse than we might think. It is hard to tell which is the case.

HDTV Transition Issues: How Big?

This summer, the Consumer Electronics Association estimated mid-year 2007 that 16 million high-definition televisions would be sold during the year, bringing the total number of HDTVs sold in the U.S. to 52.5 million.

Thirty percent of U.S. households had an HDTV in the early summer of 2007, likely rising to 36 percent by the end of this year. Among these HDTV households, almost a third own more than one high-definition set.

The issue is what happens as the analog TV broadcast shut off occurs in February 2009. Most surveys show a fairly high degree of consumer confusion about the coming change. That, in turn, has some observers calling for more vigorous programs to prepare the market.

The problem might not be as big as most people assume, irrespective of "awareness." For starters, most TV watchers in the U.S. market get their video from a cable or satellite provider.

Estimates of overall cable penetration range from 67 to 70 percent. Satellite providers have 25 percent penetration or more. Telcos aren't much of a factor yet, but the salient point is that these providers have a vested interest in making sure their customers remain customers, and will undertake most of the actual customer notification and equipment upgrade tasks when the time comes.

Some of those customers already get 100-percent digital signals using a decoder already in the home. Others already are outfitted with HDTV decoders as part of the upgrade process cable operators actively are pushing for "digital TV" tiers of service.

True, there are some viewers who get their signals over the air, and who will not own HDTV tuners by the analog shut off date. That's an issue, but affects a sub-set of over-the-air TV viewers.