Revisiting cable’s competitive advantage

With the FCC’s triennial ruling approaching, there’s been a flurry of publicity about whether or not the RBOCs and ILECs should still be forced to provide unbundled network elements (UNE) to competitive service providers. Well and good. But let’s take a different perspective for a moment, shall we? Why aren’t we seeing any push for the cable companies to provide “UNE-like” access for other content and communications service providers?

This question occurred to me while “daydreaming” in a recent meeting; a group of us got into a discussion about the trend of PUDs (public utility districts) that are becoming telecommunications service providers. We saw three points of view. First, we recognized that PUDs and municipalities--public service providers--are in a unique position to level the competitive playing field, by wholesaling a network platform upon which all service providers can retail their services. I recently devoted a column in The Analyst’s Corner to this phenomenon (see Competition isn't just from cable and satellite anymore, October 2002), so I won’t travel that railroad any further here.

Another point of view was that, taken as a whole, PUDs and municipalities have little to no experience as telephone companies. Accordingly, we have seen some public-private partnerships wherein the public service provider provides the telephone company with an avenue to the subscriber. But these are still rare--the idea being that if a PUD was to offer the “triple play” of phone, data and TV service, only a telco could do the phone part of it right. OK, so let the PUD provide the access platform and the telco be the retailer.

The third point of view is that the cable company has all the programming, making it the most “valuable” player for any PUD that wants to serve residential subscribers. So logically, if the public service provider could partner up with a cable company for its programming, the cable company can use the PUD’s access lines, avoiding the expense to build the last mile itself and therefore lowering its costs to serve the subscriber. The makes even more sense when we’re talking about rural areas, where many cable systems are still analog. After all, if the PUD can help shoulder the cost of the digital upgrade, why not?

All of this, of course, assumes an ideal world, where companies act rationally and in the interest of the public. Unfortunately, in the real world, telcos and especially cable MSOs do not act in accordance with such logic. Instead, they act in the interest of their stockholders. Not that shareholder interest is a bad thing, but it also creates biases, and we should understand this fact and all of its implications when it comes to the new media world. At this point, our group went into a discussion of the advantages held by the cable industry.

To make things clearer, let’s look at what the three types of service providers own. Telcos own the access network and own or lease metro and long-haul network facilities. CPE hasn’t been the telcos’ exclusive domain since the 1969 Carterfone decision. Telcos don’t produce or own content (a.k.a. TV programming, Internet content, etc.). What does that leave for the telco? Network services; and they do a darned good job, thank you very much. In contrast, in addition to a (closed, or “walled garden”) network, the cable folks own TV programming, movies, have sweetheart deals with the network and CPE suppliers, have financial interest or ownership in the companies making the software that controls the distribution of programming and which controls the subscriber experience. They have armies of creative professionals that make it all look and work great. Oh yes, they offer data and voice services.

In short, while the telco has a network over which they can provide communications services, the cable company controls its (separate) network and nearly everything that makes the network valuable. And yes, the consumer is worth more than the network, else the MSO would in fact be partnering with the least-costly access provider. The public service provider can offer a great network infrastructure for the telcos and cable companies to lease, and they will do a great job serving their core constituencies, such as their schools, law enforcement and other parts of their communities’ infrastructure. But as soon as they extend their mission toward serving residential customers, they will face resistance from cable and phone companies. And I’m sure that some of you have seen this happening already, as I have.

So, we’ve established that cable has a significant value advantage, particularly in high-density markets. In fact, the number of competitive advantages accruing to cable are growing steadily--seemingly, almost every day. Earlier in 2002, the FCC decreed that cable modem service, the primary competitor of DSL, is an information service. Observers that don’t focus on public policy, like me, may have initially missed the significance of this: that cable modem service providers are not subject to common carrier regulation. Also meaning that the cable companies do not have to pay into universal service funds. Another advantage given to cable (and, to many, a shirking of public responsibility).

Another cable industry trend may be even more troubling: the control of content. At the recent Broadband Plus conference (formerly the Western Cable show), cable executives lined up against PVR (“TiVo”) service, the ability for the consumer to record digital content. And just this week (December 18), a group of seven cable MSOs and 14 consumer electronics companies agreed to work together to develop consumer electronics devices that don’t require a set-top box. Implicit in both of these developments is that the cable (a.k.a., the vertically integrated media) companies want to use technology to constrain the public’s use of content as much as possible, maybe even to force you to pay every time you view the same piece of content, challenging the longstanding “Fair Use” doctrine itself. The FCC’s response? They applauded the move, saying that such industry cooperation is preferable to regulation.

What’s the bottom line--are we hearing the whole competitive story? I say that we are; it’s just that many of us haven’t understood what the cable industry has been so busy doing.

As long as the cable companies are the only network-based service providers that hold all the keys--the content and the right to use it, the access network, the CPE and all the underlying technology--and as long as they don’t share, and especially as long as the cable industry has such strong allies in the FCC and the consumer electronics industry, the playing field will not be level. It will do us all good to recognize this, take a stand and even to push our public officials toward taking some corrective action.

If you’ll promise not to throw stones and rotten tomatoes at me, I’ll tell you that I’d like to see both the cable companies and the telcos subject to the kinds of regulatory parameters that allow multiple service providers to use their network facilities, fairly. That would help level the playing field, create more opportunities for competition, more media outlets and suddenly, make the public broadband option more palatable to service providers that might leverage it to lower the costs of access and distribution. Then we’d be sure to have more than just two or three competitors in any given local market. It may sound corny, but that would be nothing less than good for democracy itself.

Steve Hawley is principal and consulting analyst of Advanced Media Strategies. He may be reached via his Web site, www.tvstrategies.com.