Trading Places

In Jason Meyers’ May 1 opinion piece, “A call to action,” he lambasted the telephone industry for not having the vision to get itself out of its rut. 

What's the problem? 

Have America’s traditional telecommunications powerhouses lost their power to other players--the cable companies, the Independent operating companies (IOCs) and broadband service providers?  Why haven't they joined most of the world's carriers in embracing a multimedia future?  In the past few years, an unsettling scenario has emerged, involving role reversals and reversals of fortune.

Ma Bell was so powerful 70 years ago and so convinced that telephony was only suitable for large urban areas that the U.S. government had to establish programs to assure equal service for urban and rural areas. These programs have helped the smaller Independents become the standard-bearers in the deployment of telco-based TV services, even though the BOCs were the ones to first attempt telco-based video services a decade ago.

IOCs see the introduction of video services as a logical extension of their commitment to be the reliable providers of all the communications-based services that their subscribers need. Big carriers instead seem to be kowtowing to their investors, whose fortunes are tied to flucuations in the stock price. As cable operators have concentrated their digital upgrades in larger markets, and the BOCs and major Independents have been slow to act, the IOCs have filled the gap by offering a full menu of triple-play options in smaller and rural markets.

Since the passage of the Telecommunications Act of 1996, it seems that the Baby Bells have been paralyzed.  Perhaps they felt so victimized by federal requirements to unbundle their networks and by federally mandated pricing that they couldn’t evolve with the times, sticking instead with the familiar. This inertia has allowed powerful competitors to move in and cannibalize their customer base.  Now it's the Baby Bells who are fighting to retain their historic market share. 

Maybe it’s their fate to think that they can remain vital simply by staying in the lower layers of the OSI network model, investing in DSL and fiber and offering new kinds of wireless conduits into everyone’s home and business. They also apparently assume that time is on their side, since some are so vague about their network deployment plans.

The cable companies (and the IOCs) are proving the BOCs' strategy wrong, as they continue to make a fortune not just in the lower end of the OSI stack, but also up through Layer 7, chipping away at telcos’ traditional access business by replacing it with theirs and adding value with applications, not just features. But cable companies will always hold the trump card: They have a programming advantage.

Despite recent statistics that appear to indicate a slowing of the cable companies’ voice and broadband data growth, traditional incumbent voice and broadband carriers cannot continue their risk-aversion behavior much longer. If they do, in the major U.S. telecom markets they will trade places with the likes of Comcast, Cox and Cablevision. In a mid-2003 J.D. Power and Associates report, Cox Communications was in fact shown as the CLEC (not cable company) with the highest customer satisfaction for telephone service in the Western U.S. This statistic not only communicates that Cox is in the phone business; it says they are serious about it. 

To paraphrase William Shatner’s famous comment to the Trekkies when he hosted Saturday Night Live, “Get a life!”  Or, perhaps more appropriately for the BOCs, “Save your own life!”

Because Qwest and SBC (and Canada’s Alliant) have placed their TV bets on satellite, they will always be in contention with satellite partners Hughes and EchoStar (and Bell Canada) for ownership of the subscriber (in other words, who gets the upsell?).  Do that know that it probably is just a matter of time before Hughes is part of Rupert Murdoch’s worldwide Sky Broadcasting satellite TV empire?  Sorry guys, this race for the customer is a long-term sprint, it's not just about the next quarter. It’s about market control, not short-term cost containment.

Perhaps BellSouth’s newly-announced relationship with video-on-demand supplier Movielink, a partnership among the major movie studios, demonstrates that at least one of the BOCs is finally ready to step up to these challenges and deploy content-based services through their own broadband resources.  If the FCC’s decision to loosen media ownership limits stands up against current challenges and has the kind of impact that some say they will have, the media conglomerates, and therefore cable, will be even more powerful in the years ahead. 

Now that the BOCs can harness their own new broadband networks and don't have to share them they can reap of the rewards of taking a calculated risk. Local Independents in places like Fallon, NV; Warwick, NY; Chillicothe, Ohio; and Roseville, CA have proven that the risk pays off handsomely.

Steve Hawley is principal consulting analyst of Advanced Media Strategies.  Contact him via e-mail at steve@tvstrategies.com or at www.tvstrategies.com.
If any management officials from any of the major telcos have comments--on or off the record--Hawley welcomes the opportunity to discuss this issue. He'll report comments in a future column.  If officials don’t want their identities or their companies revealed, he'll respect that.  Of course, if he doesn’t hear from any, he’ll report that too.