Smooth Sailing or the Perfect Storm?

Wed, 12/31/2003 - 7:00pm
Roger Brown and Jeff Baumgartner

We’ve checked the skies and the seas to help us determine how
some of the top broadband technology sectors will fare in 2004


Changing course

For much of the last two years, cable operators have been deploying VOD at a maddening clip. Time Warner Cable has the service virtually across the board. Comcast, Charter Communications and Insight Communications aren't far behind. Even MSOs that haven't rolled it out very aggressively–Cox Communications, among them–will put it out there with more vigor in 2004.

But VOD deployment growth, as it was in 2002 and 2003, won't develop into much of a trend in 2004. Instead, the focus will shift from where it's available to how much is available. That's because the old VOD model–pay-per-view on steroids–has quickly become a "me-too" service that can be replicated in some ways by services such as Movielink and MovieBeam. DBS, meanwhile, will continue to fill the gap by offering pseudo-VOD services via receivers with on-board DVRs that sport larger and larger hard drives.

Because true VOD is something that satellite can't do, cable operators will continue to offer more and more content on demand. In 2004, a 1,500-hour library of renewable VOD content will suddenly seem passé. Instead, expect to see most operators double and triple that figure, filling servers with traditional fare (movies and subscription-based content) to boost revenue, and tons of free content in order to add and retain digital subscribers.

2004 will also mark the first "big" year for HD-VOD–the combination of two things that cable can do better than its competition. Cablevision Systems was the first to get that ball rolling when it launched such a tier last year. Time Warner Cable is already doing some testing, and Comcast is set to do the same. By the end of 2004, we believe more than half of the top U.S. MSOs will test or deploy HD-VOD services. Though the cost of offering HD-VOD titles remains enormous, cable will do all it can to retain its base of high-value "trophy" subscribers.

VOD in 2004, by the same token, won't all be about technology. Although cable tends to blame release windows on VOD's sub-par take rates, the problem runs much deeper than that. The IPGs can be clunky and there's general confusion in consumer ranks about what VOD is and whether it's actually available to them. Because of that, VOD marketing will take on a key role in 2004, led by the On Demand Consortium, a program set-up by CTAM and its members. -JB


Full sails and speed ahead in '04

Circuit-switched technology, at least new cable voice deployments based on it, will all but go the way of the Dodo this year. After enough fits and starts to fill up the Yellow Pages, cable VoIP is set to finally take off in 2004. The technical and operational facets of that business have finally coalesced, and many MSOs will roll it out en masse throughout the year.

That's partly because consumers (and even some businesses) who have access to broadband can do VoIP with or without the direct help of their cable operators, but cable will only be more than happy to oblige, score some recurring revenue and take a bite out of the incumbent phone company's hide at the same time.

On the tech side, things appear to have solidified nicely. The beacon of light there is Cox Communications, which tested the VoIP waters during the technology's rougher days and held for a time that the platform was a bit undercooked. Well, that's no longer the case. Cox rolled out VoIP commercially in its first market (Roanoke, Va.) late last year. Expect plenty more where that came from in 2004.

Time Warner Cable expects to have it ready to go in every market by the end of the year, thanks to its partnership with Sprint and MCI. We expect all of the top 10 MSOs to have concrete VoIP plans in place by the end of 2004, setting themselves up to push the service aggressively in 2005.

2004 will also provide plenty of upside for "turnkey" VoIP providers such as Net2Phone, which is well positioned to make some serious hay with small- and medium-sized MSOs. Vonage will also continue to score deals throughout the year for operators who want to get into the business very quickly and don't mind giving up a chunk of that recurring revenue in doing so. By the end of the year, we think two dozen MSOs will have partnered with Vonage.

Plenty will also be said on the regulatory front when it comes to IP telephony. There will be lots of debate and a few wrinkles for services like Vonage to iron out. But we also believe regulators will retain a relatively hands-off stance, allowing the market to develop and evolve on its own without too much interference. -JB


Winds strengthening

Although operators, save the likes of Time Warner Cable, have been slow to adopt digital video recording technologies, much of that will change in 2004. We expect every major MSO to begin marketing digital set-tops with on-board DVRs sometime in 2004 to keep pace with EchoStar and DirecTV.

The S-A box is already available, but soon operators will have access to Motorola's HD-DVR combo products as well as new boxes from Pioneer Electronics and Pace Micro Technologies.

On the software side of the house, we predict that TiVo Inc., unless it gets gobbled up via acquisition beforehand, will finally strike a much-coveted cable deal. Without that, it could be a rough year for TiVo as it sees competitors offer similar services for free, rather than via monthly subscription.

Another growing development will be the multi-room DVR. The technology behind it remains unproven, but several operators will put it out in the field, test its mettle, and set the stage for larger commercial rollouts in 2005. -JB


Changing course

Lots of change is ahead for high-speed data services in 2004. DSL service providers will continue to slash pricing, causing more cable operators to figure out how to tier services more effectively.

Although the initial cable reaction in 2003 was to compete on value (e.g. raise speed caps) rather than on price, DSL will continue to apply the pressure and gain ground in 2004, causing operators to take another look at their cable modem strategies.

We expect several more operators to launch speed tiers, including $20 per month, 128 kbps "lite" packages that target the heart of the dial-up ISP market. Once the customer's broadband appetite is sufficiently whetted, operators will then move in with marketing campaigns designed to push lite subscribers to a flagship tier. Thanks to rollouts of DOCSIS 1.1 and DOCSIS 2.0 technologies, we also forecast that 2004 will mark a year in which cable operators begin to offer guaranteed cable modem speeds to residential subscribers.

But one trend in 2004 that appears primed to receive vicious subscriber back-lash is the use of monthly broadband consumption/usage caps. Unless operators are extra diligent in ensuring that customers can check how much bandwidth they are consuming at any given time, they are just asking for trouble. -JB


Full speed ahead

Ask a cable operator how he feels after seeing and hearing EchoStar's current "Stop Feeding the Pig" anti-cable marketing campaign. The ubiquitous radio and TV ads have many cable execs hopping mad–or rolling their eyes.

The jury's still out as to whether the brash campaign will be effective at bringing in new customers for EchoStar, but it definitely has had a motivating effect on the cable guys. Some say it's kinda like telling Tiger Woods he's all washed up–it tends to make him try that much harder to prove you wrong.

Maybe that's why cable operators are oh-so-quietly going about the business of business. They've all formed subsidiaries that have a single charter–leverage the existing cable network and go out and sell high-grade voice and data services to commercial accounts.

What's less known is the level of success they're having. In fact, most of what they do–from a network architecture perspective to financial–is happening under the radar. But where there's smoke, there's fire, and with Scientific-Atlanta, Motorola, ADC and others joining the ranks of Jedai and Narad with products aimed at this sector, there's plenty of smoke in the air.

We suspect cable operators will continue to extend their networks into business parks and strip centers to hook up even more businesses. But we also suspect they won't crow about it–for fear of angering the sleeping giant and suffering the wrath of the dazed but still-mighty telcos. -RB


Stormy seas ahead

The recent re-acquisition of broadband OSS vendor Sigma systems–which was sold to Liberate Technologies back in 2002–by its original executive team finally put to rest the months-long speculation of who would buy the unit, but did little to create any clarity in the sector.

For months, observers stood on the sidelines, watching and speculating about who would eventually buy the company. Billing vendors and other OSS vendors all made their play, but it was Tim Spencer and Andy Jasuja who finally made the deal.

The $3.6 million cash deal, which also included the assumption of $7 million in liabilities, (finally) helps value the rest of the market, which is dotted with seemingly scores of small shops and start-ups who are biding their time, waiting for MSO purchase orders that might never come their way.

Inevitably, cable operators will begin purchasing greater amounts of software, especially as they begin to roll out voice services in 2004. On one hand, cable operators want (and need) a cohesive, integrated back office that accommodates all the services they offer. On the other hand is the legacy software and platforms that have been put in place to support video and high-speed data.

The question is: can they construct an integrated back office that meets their needs, without having to rip out what they've already installed? –RB


Wind in its sails again

The yo-yo world of satellite broadband will be on the upswing again in 2004. Liberty Media finally appears to know what it wants to do after shedding its stake in Astrolink and focusing efforts on WildBlue Communications, which is set to launch Ka-band services in the second half of 2004.

The world also hasn't heard the last of StarBand Communications, which emerged from bankruptcy late last year.

2004 won't be the year for satellite broadband, but it will be its rebirth. Cable and DSL providers, which will continue to lock horns on pricing and features this year, will have to pay more attention to the satellite broadband folks in 2005, provided they can get the equipment costs down. -JB


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