Werner

Cable operators are getting ready for competition from Google and other fiber providers with an upgrade to the cable broadband standard DOCSIS that will support up to 10/1Gbps service.

Comcast chief technology officer Tony Werner told attendees at the Washington, D.C. Cable Show that DOCSIS 3.1 will deliver about a 50% improvement in spectrum efficiency.

The new standard relies on orthogonal frequency-division multiplexing (OFDM), a standard already used by the wireless industry to get tighter performance from existing wireless spectrum.

The cable industry’s weakness remains its broadband upstream capacity. Standards originally developed for cable broadband assume users will download far more content than upload, so the focus has always been on download speeds. Upload speeds have been anemic in comparison. Until recently, cable technicians worried they would have to dedicate considerably more bandwidth for faster upstream speeds, but with improved standards, that may no longer be true.

Time Warner Cable’s chief technology officer Mike LaJoie is convinced his company will not have to widen upstream bandwidth. Time Warner has been among the stingiest providers of broadband speed upgrades,  still offering residential customers in most service areas a maximum of 50/5Mbps service, even as Comcast has upgraded to 305Mbps in certain markets, mostly in the northeast. This week Comcast demonstrated 3Gbps broadband, primarily to prove the cable broadband platform will be able to compete with fiber technology.

LaJoie

The first trials of the new broadband standard are anticipated in 2014, with modems for sale later that year or early 2015. Comcast is expected to begin buying and deploying DOCSIS 3.1-capable modems “when it makes financial sense.”

Major speed increases will require cable companies to accelerate the transition to all-digital video platforms to free up available cable spectrum. The faster the offered speeds, the more channels must be dedicated to providing broadband. Operators don’t see a space crunch anytime soon, especially if they move towards an all-IP platform that would support all services through a giant broadband pipe.

Cox Cable, for example, is planning to move more of its analog channels to digital to free up capacity for faster broadband speeds.

But exactly when consumers will be able to use the faster speeds possible from DOCSIS 3.1 is up to your provider.

Time Warner Cable is not convinced customers even need or want 100Mbps speed, so expect some cable companies to not even attempt gigabit broadband for years to come.

LaJoie dismissed triple digit megabit speeds as a novelty that is not “very deeply penetrated” in the marketplace — marketspeak for “not attracting many customers.”

“There has not been a demonstrated appetite for it,” LaJoie said.

Cable companies, including Time Warner Cable, are offering a mix of threats and financial incentives to keep popular cable programming away from online video competitors.

Bloomberg News today reported the private discussions primarily target upstart streaming video services from companies like Intel, Apple, and Google, which are all proposing multichannel streaming video services that could one day replace the local cable company.

All three would-be competitors have been stymied, some for years, from signing contracts with popular cable networks like HBO, USA, ESPN and Comedy Central. If a viewer wants to watch those networks, they usually have to authenticate themselves as existing cable, satellite, or telco-TV customers to get access to live and recorded programming. The cable industry prefers it that way as a customer retention tool.

Time Warner Cable CEO Glenn Britt admitted to Wall Street analysts attending this week’s Cable Show his company probably insists on contract language that bars programmers from providing content to online video services.

“We may well have ones that have that prohibition,” Britt said at the conference in Washington. “This is not a cookie-cutter kind of business.”

Some cable company contracts are more benign, only requiring programmers to license content on the same terms offered to their online competitors. Britt said some of Time Warner Cable’s contracts fall into this category.

Britt

Britt has repeatedly emphasized Time Warner wants to license content more broadly to allow the company to include it in its TV Everywhere platform, which streams video content to wireless devices. The cable operator adopted a policy in 2009 that sought to deliver content to customers on any device they wish. Restrictive contracts have kept that policy from being fully implemented.

AT&T U-verse says it won’t pay full price for cable programming sold to its online competitors.

“If they’re going to go over-the-top, then that’s a very different conversation and a very different value for our customers,” Jeff Weber, president of content, said last month at an investor conference. “Exclusive versus non-exclusive has materially different value for our customers. And I think we would want that reflected.”

Restrictive contracts are all about protecting the existing pay television ecosystem, according to Charter’s chief financial officer, Chris Winfrey.

“It’s in everybody’s mutual interest that we are protecting the ecosystem in a way that continues to keep the value of that programming that we have and the way it’s delivered to our subscribers today,” Winfrey said added.

Consumer groups say restrictive contracts are the epitome of anticompetitive industry behavior that should be examined by the Justice Department.

“Is it anticompetitive generally? Of course it is, they are keeping programming from their competitors,” said Gigi Sohn from Public Knowledge.

Satellite companies were originally in this same position, unable to carry popular cable networks on reasonable terms at fair prices until the 1992 Cable Act mandated reforms that required non-discriminatory access to cable programming. Online video providers have not yet been able to demand the same terms for their competing services.

Powell

You and I may think America can do better providing fast and inexpensive broadband service. But a former chairman of the FCC now representing industry interests waved shiny keys of distraction to explain away why cable companies are still delivering Internet speeds slower than those found in Romania, Latvia, South Korea and Japan.

Michael Powell, the poster child of D.C.’s “revolving door” problem gave a well-compensated, rousing (yet fact-lacking) defense of an industry he was supposed to oversee in the public interest as the Bush Administration’s FCC chairman from 2001-2005.

“America is home to the world’s very best Internet companies,” said Michael Powell, chief executive of the National Cable and Telecommunications Assn. at the annual Cable Show in Washington, D.C. “We have worked hard to reach everyone, and now offer service to 93% of American homes. Despite our success, many people like to denigrate U.S. broadband by painting false comparisons to other countries. There are some nations doing very well, but it is foolish to compare countries like Latvia and France to the United States of America.”

Powell’s response is hardly a fact-filled defense for cable company broadband that still delivers slow speeds at high prices. Instead of attempting to call the statistics inaccurate, he tried to explain away the discrepancy by complaining people are ignoring the size of the country and its population.

In denial

Powell’s arguments might have some merit if the cable industry did not make a point of bypassing vast rural areas that do not meet Return on Investment tests. It is difficult to claim cable companies cannot deliver comparatively fast service in rural Iowa when they don’t offer any service at all.

The People’s Republic of China’s population is far larger than our own and is now a vital market for fiber optics manufacturers and suppliers. While some of America’s cable industry CEOs repeatedly argue America does not need fiber broadband or gigabit broadband speeds, the Chinese government has insisted that every new housing development be pre-wired with fiber that will easily and inexpensively supply those speeds in the near future.

Powell is correct to say speeds are improving in the United States, but there is growing evidence they are improving even faster overseas, especially in countries that are basing their primary telecommunication infrastructure on fiber optics, which can support enormously fast Internet speeds. As those fiber networks are lit, America will fall even faster in broadband rankings as long as cable operators continue to insist there is no demand or interest in the next generation of high-speed service. At the prices they charge, they may just prove their own “no demand”-argument, at least in this country.

Powell himself helped lay the foundation for America’s broadband duopoly by deregulating the industry with one hand while ignoring the need for competitive checks and balances with the other. At the end of Powell’s tenure, his greatest achievement was constructing an industry-friendly personal resumé to win lucrative employment as a telecommunications lobbyist.

Who better to speak with “authority” on telecommunications matters than a well-connected former FCC chairman that does the industry’s bidding? The NCTA hired him to deliver just the kind of defense cable operators hope Americans will believe.

Those that are aware of what broadband is like abroad don’t.

One of America’s lowest-rated cable companies and an industry legend labeled by consumer advocates as the “Darth Vader of cable” may be joining forces to buy Time Warner Cable, according to Bloomberg News.

The blockbuster buyout would leap Charter Cable from fourth largest cable operator to second place, although still behind Comcast in terms of revenue and number of subscribers.

The spectacular return of Malone to the top echelon of the American cable industry was the talk of the industry’s Cable Show, ongoing this week in Washington, D.C. Those attending are reportedly buzzing Malone’s imminent return is likely to spark a massive consolidation of the U.S. cable industry to as few as three major cable operators serving more than 95 percent of the American cable marketplace.

Malone

Driving momentum to merge, in Malone’s view, is increasing cable video programming costs, which are cutting into profits. Having a fewer number of cable operators could hand the industry more leverage over broadcasters and unaffiliated cable programmers, but could also cut costs through marketplace efficiencies and volume discounts.

“If you’re John Malone, you’re thinking: we’ve got to get bigger,” Jim Boyle, managing director of SQAD and formerly a cable equity analyst for more than 19 years, said in a telephone interview with Bloomberg News. “The bigger Charter can get, the more economies of scale discounts it can get,” he said. “If everyone else is playing checkers, Malone is playing three-dimensional chess.”

For many on Wall Street, the only thing left to do is plan the funeral for the country’s second largest cable company.

“If you’re going to do a transformational deal, your choices are Time Warner Cable, Time Warner Cable and Time Warner Cable,” Craig Moffett, a veteran industry observer told Bloomberg. “You can roll up all the little guys if you want to, but even if you did, you haven’t built something that’s truly large-scale.”

“Time Warner Cable is gone,” Chris Marangi, a money manager at Gamco Investors Inc., said. “I think Charter will buy them eventually, whether it’s Liberty facilitating that or Charter doing it directly or the two companies doing it in partnership.”

Industry observers predict Malone will signal his dream deal by initially launching smaller mergers and acquisitions before attempting a buyout of a cable company considerably larger than Charter itself.

The first target: perennially bottom rated Mediacom, where any buyer is likely to be hailed as a rescuer by beleaguered subscribers who have regularly dismissed the cable operator as incompetent. Next, the Washington Post’s Cable ONE, which may already be plumping itself up as at attractive takeover target through investment in improving its network infrastructure.

But the most obvious foreshadowing of a big deal with Time Warner would most likely come if Charter first successfully acquires always-rumored-for-sale Cablevision, where the controlling Dolan family is rumored to be holding out for an exceptionally attractive buyout package other cable companies aren’t willing to offer. Time Warner itself has been rumored as a buyer, but current management has repeatedly stressed it will not pay a premium price for acquisition targets.

Malone may not be able to help himself. His long history in the cable industry includes a voracious appetite for merger and acquisition deals. For more than two decades, Malone led Tele-Communications, Inc. (TCI). When he arrived in 1972, TCI was a rural Texas and western states cable operation with 100,000 subscribers. By 1981, through mergers and acquisitions, he built TCI into America’s largest cable operator. In 1998, AT&T bought out TCI Cable. The phone company later exited the cable business and sold most of the operation to present owner Comcast.

The level of consolidation proposed by Malone is unheard of in the United States, but is familiar in Canada where two major cable operators — Rogers and Shaw — control the majority of cable subscriptions. Third largest Vidéotron leads in Québec and Cogeco serves pockets of Ontario and Québec bypassed by Rogers and Vidéotron, respectively.

Time Warner Cable has laid the foundation to eventually begin charging broadband customers usage-based pricing, raise the modem rental fee originally introduced last fall, and continue to offer customers unlimited broadband service if they are prepared to pay a new, higher price.

Time Warner Cable CEO Glenn Britt spoke at length at this week’s Bank of America/Merrill Lynch Global Telecom and Media Conference in London about how Time Warner Cable intends to price its broadband service going forward. The moderator peppered Britt with questions as investors looked on from the audience about if and when the cable company can raise prices for its broadband service or start a usage pricing plan that will generate higher revenues based on metering customer usage.

Britt

Britt repeated his earlier assertions that Time Warner Cable has no interest in capping customer usage. In fact, the company sees fatter profits from increased usage, as long as customers are willing to pay for it.

For the first time, Britt admitted customers seeking unlimited service should be ready to pay a higher cost for that option, telling the audience Time Warner would set a premium price on the unlimited tier and offer discounts to customers seeking downgrades to comparatively cheaper, usage-based pricing plans. The company hopes this new approach will limit political opposition and customer push-back.

Britt also said there is room to grow Time Warner Cable’s monthly modem rental fee ($3.95 a month), comparing it against Comcast’s current rental fee, which is $7 a month.

Britt complained that increasing usage and demand for broadband speed was requiring the company to invest more in its broadband service, something not clear on the company’s quarterly balance sheets. Real investment, except for expansion by the business/commercial services division, has been largely flat or in decline for several years. Time Warner Cable’s broadband prices have increased over the same period.

Britt also admitted that the costs to offer the service remain comparatively minor.

“In broadband there are the costs of connectivity and peering and all that sort of stuff, but they are pretty minor compared with (video) programming costs so it appears that broadband is usually profitable versus video.”

Britt also admitted the cable industry in general is increasingly dependent on broadband revenue and the profits it generates to shore up margin pressure on the industry’s formerly lucrative video service. As programming costs increase, pressure on profits increase. Yet the cable industry remains profitable, primarily because broadband earnings are making up the difference.

The meter is lurking

“I think if you look at the U.S. cable companies the EBITDA margins have been remarkably stable over a long time period,” Britt said. “The mix has [recently] changed. The video gross margin is getting squeezed, the broadband gross margin is larger and we are growing broadband so that is helping. The voice gross margin is higher than video and a little less than broadband and until recently that has been a growing part. And then we have business services which are growing rapidly and have a high gross margin.”

Additional Quotes:

Cable Modem Equipment Rental Charge: “It was received with a minimum of push-back and we’re still actually charging less than Comcast ($7/month), so I think there is room to charge more going forward. People can buy their own if they want and a small percentage of customers have chosen to do that which is fine with us.”

Usage-Based Pricing: “In order to keep up with the demand for throughput and speed which is going up every year, we are going to have to keep investing capital which we do on a regular basis, so we are going to have to figure out how to get paid for that. I think inevitably there is going to be some usage dimension, not just speed within the package, so what we have done is to put in place pretty much throughout our footprint, with a few exceptions, the idea that you can buy the standard service that [includes] unlimited usage and that costs whatever it costs, but if you want to save $5 (and that is the first thing we put in place) you can agree to a consumption limit, and we can start expanding on that.”

“I think the key to this — there has been push-back against caps in the past — I think the reason for the push-back is it was perceived in a sort of punitive, coercive fashion. The usual rhetoric is, ‘gee 20 percent of the people use 80 percent of the bandwidth or some number like that — we need to make them stop using so much.'”

“My feeling is we actually want everybody to use more, we want to invest the capital, we just want to get paid for it. So I think we should always have an unlimited offering and that should probably cost more than it costs today as the usage goes up and then people who don’t use as much should have the opportunity to save money. They don’t have to but they can, so I think that is a much more politically and consumer-acceptable way to do it than a sort of punitive thing people talk about.”