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.

Verizon Fiber Gamble Pays Off?

As this Wall Street Journal graphic illustrates, shares of Verizon and at&t have outperformed the shares of leading U.S. cable companies over the past year. One suspects that a changed investor understanding of the value of broadband access is at least partly the reason.

Verizon executives, in particular, took lots of heat from the investment community for embarking on what was seen as an expensive and unproven fiber-to-home upgrade. Verizon's compatriots at at&t essentially were rewarded, at least in part, for taking a less-ambitious, less-costly upgrade tack.

The cable companies have been saying for decades that all telco fiber-to-home networks were uneconomic compared to cable's hybrid fiber coax alternative.

And though other forces are at work, investors seem to have warmed to the idea that the upgrades are value-producing, after all. If we have learned anything over the last decade or so, it is that bandwidth demand can change quite sharply, quite quickly, and always, so far, in the direction of more demand.

Getting caught shorthanded could be quite destabilizing.

Also, Verizon has shown that it is able to compete effectively for consumer dollars in the video entertainment area, while the FiOS service has drawn raves from users who have access to it. There might be nothing so churn-reducing as knowing there is one provider of fiber-to-the-home in one's service area.

The point is that Verizon executives were right to stick to their guns, despite the avalanche of criticism they received for building the FiOS network. In the competitive race with cable operators, Verizon might be positioned quite well.

It isn't that cable operators cannot push their upgrades further, by pushing fiber closer to customers. It is that they will face opposition from their investors for the same reasons Verizon got slammed. Investors get nervous every time the cable industry starts talking about the need to increase leverage to upgrade the networks in some serious way. And it wasn't so long ago that the HFC 750 MHz networks were described as "the last upgrade" cable ever would have to make.

It no longer looks that way.

LG TV-to-Mobile Platform Coming

LG Electronics Co. says it has developed a low-cost way for North American TV stations to transmit digital signals to cellphones and other portable gadgets.

LG's technology, which it calls MPH for mobile-portable-handheld, requires TV stations to buy relatively inexpensive add-on devices to their digital transmitters and the makers of cellphones and other portable devices to install a reception chip. The reception technology can also be incorporated into other chips in portable device.

Embracing Failure

"We're not afraid of occasionally falling flat on our face," says Richard Branson, Virgin Group CEO. And therein lies a noteworthy difference in thinking about innovation that obviously has implications in the global telecom business. One of my business associates at Verizon would react in horror if anybody suggested Verizon itself should be more venturesome in trying new things. "We have a reputation to protect," he constantly says.

Of course, so does Virgin Group. But that's one reason why innovation is going to come from outside the ranks of the tier one global carriers, though some carriers are showing themselves more amenable to working with innovators.

Virgin, like Google, has a culture that values experimentation and risk-taking. And if the game is innovation, as I suspect virtually everybody in the global telecom business would acknowledge is the case, then the likes of Virgin and Google, which also isn't afraid to try things that don't work, is the way forward. on the innovation front.

What the incumbents can do is figure out how to work with Google. That's heresy in some quarters, but the conclusion seems logical enough. If innovation is essential, and if one knows one cannot innovate quickly, or take many risks, as a matter of policy, then one has to have partners who will do that on one's behalf.

And as the graphic suggests, even successful and important innovations ultimately can run out of steam. Dell turned the PC distribution business upside down at one point. But its competitors have long since caught up, leaving Dell the contestant that has to change.

Motorola Launches Mobile Video Device

Motorola has developed a stand-alone media player, the DH01 device that works with the DVB-H mobile video standard and also plays on-demand video clips and programs saved on digital video recorders. Motorola, Nokia, Samsung Electronics and LG Electronics already make phones that can receive live TV streams. What is different here is that Motorola wants to gauge demand for a stand-alone video device.

At some point, the user desire for simplicity will outweigh the desire for multiple functions in a single device, even as designers work to simplify inherently-complex devices so they will support multiple applications.

Up to a point users seem to enjoy having multiple functions in one device. Email and text plus voice is one example, while voice plus text plus music provides another example. What is less clear is what happens when users are offered devices that add Web services, enabled by Wi-Fi as well as mobile broadband, as well as video. At some point, the cost of a "do everything" device starts to get pretty high, while the functionality has to be balanced, possibly decreasing user satisfaction as a multi-function device will tend to perform less elegantly than a purpose-built device.

The issue is that the range of applications people want to access is growing all the time: gaming, navigation, video, audio, radio frequency identification and sensor network access. At some point, the complexity overwhelms the user experience, which has to be kept as simple as possible.

The other issue is how much tolerance end users exhibit for higher device prices when those devices break, get lost and wear out fairly frequently. It might be one thing to expect replacement or loss of a $100 device. It might be quite another to risk the loss and replacement of a $700 device. With volume and time, the issue arguably becomes less pointed, as features found in $700 devices migrate down the product lline.

Still, some point likely will be reached where users simply find "do it all" devices less desirable than carrying a couple devices that are highly optimized for the applications those people want to use most.

Is Mobile Substitution at the Tipping Point?

Something interesting might be happening in the mobile-only household segment. Wireless-only households, especially households including only a single resident or multiple young adults, have been increasing for some years.

But there is now some indication that mobile-only usage is higher in the general population than it is among more technologically-savvy users. If that trend holds up, it indicates that cutting the landline now has reached a possible tipping point.

In the first six months of 2007, 13.6 percent of households did not have a traditional landline telephone, but did have at least one wireless telephone, according to the National Center for Health Statistics.

Now here's the other bit of interesting data: The Harris Poll, which surveyed Internet users only, found that 11 percent of those respondents were mobile-only. Going only slightly out on a limb, let's assume Internet users are more open to new technology-use behaviors.

Indeed, the Harris Poll shows that two percent of Internet users only have VoIP services, and do not use mobile or landline phones. Another five percent say they use mobiles and VoIP.

Adding the "mobile only" users with the "mobile and VoIP" users gives you 16 percent of users who do not use a landline. Add the two percent who use only VoIP and one has 18 percent of Internet users who do not have a landline. So it still appears that Internet users are "different" from the general population.

That is as many of us would expect. Still, it is startling that "wireless only" usage seems to higher in the general population than among the arguably more-advanced Internet users.

Overall, the percentage of adults living in wireless-only households has been steadily increasing since 2005. In the first six months of 2007, one out of every eight adults lived in wireless-only households. One year before that just one in 10 adults did.

What might be new is some new spread of such behaviors beyond what we have tended to see, up to this point.

Last Music Domino Falls: Sony Drops DRM

Sony BMG has been the last of the major music labels to insist on the use of Digital Rights Management for sales of its music in digital form. Apparently even Sony now has thrown in the towel, according to Business Week.

Sony is expected to start offering some portions of its catalog in a no-DRM format sometime in the first quarter, probably using Amazon.com's download store. Oddly enough, though music labels earlier insisted on DRM as a way of deterring piracy, DRM arguably accounts for Apple iTune's dominance of the download business, as DRM means songs can be downloaded only to specific devices.

Presumably, the announcement will helpl boost sales of downloaded music, as this projection by Enders Analysis suggests.