Cable as Broadband

The rise of digital communications and fiber optics initiated cable’s third incarnation as a broadband telecommunications network. Fiber optics became economically competitive with coaxial cable in the early 1990s, and systems began upgrading their infrastructure. Fiber was cheap and had a higher signal capacity, which meant it could carry more channels, and was installed in bundles, which meant separate fibers could be used to send sig- nals in different directions. As installed fiber networks came closer and closer to homes, a truly interactive cable system became economically viable. The development of digital packet-switched communications allowed virtually any kind of communication signal (video, voice, data) to be sent over the same network, not only toppling the old boundaries between telecommunications services, but offering the promise of bringing interactivity to traditionally broadcast services. As cable upgraded capacity, they also added a greater degree of interactivity and became poised to enter new markets, particularly in data communications, telephony, and the emerging interactive television services.

The breakdown in old service boundaries was an integral presumption underlying the 1996 Telecommunications Act. The 1996 Act presumed that competition would emerge between and within telecommunications industries, if only regulatory boundaries were removed in support of the al- ready evident destruction of technical and market boundaries brought about by technological advances. The 1996 Act removed both cable and telephony’s local monopoly status and encouraged those industries to compete directly with one another. The Act specified cable price regulation would disappear in 1999, arguably under the assumption that the newer definition of effective competition would be satisfied.

In a general sense, Congress was correct. The new definition of competition required that there exist at least one competing multichannel video service provider, that reached at least 50% of the local community and was subscribed to by at least 10% of the homes in the cable service area. In the 1990s, opportunities for several new forms of multichannel services developed and began to compete with local cable systems (see Table 8.1). Home satellite reception (as HSD) had been around, primarily in rural areas, since the 1980s, yet remained a fairly expensive alternative, achieving only 1% to 2% penetration. Satellite Master Antenna TV (SMATV) systems had also been around for decades, but those systems were restricted to single build- ings or small complexes, as they lacked the access to utility rights-of-way. Thus, they could never achieve the necessary market penetration levels. The FCC had repurposed several broadcast services to open up the potential for wireless cable systems (as MMDS), but these were not widely successful. Telephone companies had planned and tested videodialtone

8. THE ECONOMICS OF THE CABLE INDUSTRY

TABLE 8.1

Cable and Competing Technologies

Technology

June 1998 June 2000 TV Households

Dec. 1996

98,000,000 100,801,720 Multichannel Video

76,634,200 84,423,717 Cable Subs

940,000 1,500,000 HSD (satellite)

7,200,000 12,987,000 Open Video System

66,000 60,000 Note. From National Cable Television Association, Federal Communications

Commission.

services (a variety of video on demand), but these had not proven to be economically viable under existing technology. Still, the potential for a new open video standard (OVS) emerging from telephony was being developed and tested.

What had become a viable competitor was DBS (direct broadcast services). Using digital compression technology and higher powered satel- lites, DBS offered the potential of hundreds of channels accessible from a small, inexpensive, fixed dish. Their service area was national, clearly satis- fying the service-area penetration requirements. And the DBS services were successful in attracting customers. By the end of 1996, roughly 5% of U.S. households were DBS subscribers, and by 1998, it was roughly 10%. By December 2001, DBS accounted for 18.6% of the U.S. multichannel market (over 17 million homes; National Cable Television Association, 2002b). Al- though DBS penetration may not be consistent across markets, it clearly has developed into a significant competitor for cable.

Developments in fiber optics and digital communications have created new broadband and multichannel video distribution options as the low cost of fiber networks and the increasing demand for cable and other telecommunications services are encouraging broadband overbuilds. Through DSL, local phone companies and other telecommunication network pro- viders can offer limited multichannel service (OVS), once the necessary network upgrades are completed. In some markets, new firms are seeking to provide a mix of cable, data, and telephone services.

Continuing increases in audience demand for cable programming, cou- pled with growing interest in cable modems have created an attractive eco-

BATES AND CHAMBERS

nomic atmosphere for the cable industry. Despite a slowing economy, industry analysts continue to project growth for cable television in terms of advertising revenues, subscriptions, and advanced digital services, pre- dicting that cable will become the largest segment of the communications industry by 2005 (Mermigas, 2001).

Cable as Broadband