Place Your Bets and ‘Pay As You Go’
PLACE YOUR BETS AND ‘PAY AS YOU GO’
Brian Roberts, Comcast
Brian Roberts is the president of Pennsylvania-based Comcast, the fourth largest cable operator in the United States, with 2.8 million customers.
Comcast is the second largest cellular network operator outside of the telephone companies. (McCaw Cellular is the largest.) Widely diversified in the communications business, Comcast also sells combined cable-and-telephony services in the United Kingdom (competing with state-run British Telecom) and is a majority investor in Barry Diller’s home shopping channel, QVC Network Inc. The company also recently agreed to purchase 150,000 digital cable boxes from General Instrument for delivery in 1994.
In a fascinating contrast to Ameritech’s vice chairman Richard Brown, Roberts laid out the fundamental reasons why he believes the cable television industry is best positioned to lead the way in creating tomorrow’s broadband information and entertainment networks. In the process, he also highlighted the difference between his “here and now” focus on what sells and Richard Brown’s focus on the greater good for society.
DRIVEN BY COAX AND COMPUTERS
The convergence of the telephone, television and computer is being driven by two factors: the cable industry’s massive installation of coaxial cable — 98 percent of the country’s 93 million so-called “TV households” have physical access to cable services (though only 60 percent of them subscribe) — and what Roberts called “the breathtaking pace of computer technology development.”
In addition, Roberts said, he believes the entrepreneurial spirit of the cable industry will continue to drive this convergence — implying that the telephone companies are too old, stodgy and complacent to make a difference.
According to Roberts, the economics of implementing a broadband network heavily favors the cable industry because the addition of services for the cable industry can be incremental, whereas the phone companies require large-scale plant upgrades before new services can begin.
OVERSIMPLIFICATION OF A COMPLEX PROBLEM
In what appears to be a great oversimplification of a complicated problem — and one that is echoed by many cable operators revving up interactive TV test sites — Roberts proposed that some advanced entertainment and information services can be added just by delivering a new settop box. “It’s pay as you go,” said Roberts of the cable industry’s strategy. “It’s not ‘build it and they will come’.”
Most cable operators are talking about significant investments to upgrade their backbone systems to digital fiber, so from the industry’s perspective, it’s not quite pay as you go. In addition, in order to keep the cost-per-box at a reasonable rate, cable operators must order sufficiently large numbers of settop boxes from manufacturers like General Instrument and Scientific Atlanta to achieve economies of scale. This also requires cash — and a leap of faith that the operators will have enough customer demand to install the number of boxes they order.
But Roberts believes those investments can easily be paid back from revenues generated by providing services that are almost certain to win consumer approval — movies on demand and interactive home shopping.
(This, of course, is exactly what Ameritech would like to do: take a cut of the revenue generated by movies on demand and home shopping to pay for the cost of upgrading its plant. However, since the phone network is considered a public utility, it cannot do so without a change in the regulatory structure — a burden that the cable industry does not bear.)
FOR THE CONSUMER, IT IS ‘PAY AS YOU GO’
From the consumer’s point of view, however, interactive services are “pay as you go.” A customer who wants nothing more than basic cable service gets just that. A customer who wants new services, such video on demand and interactive shopping, can ask for a new set-top box and will be charged higher fees accordingly.
Most cable operators say that $5–$10 per month of additional revenue is sufficient justification for spending an extra $100 per box. Assuming pricing that’s competitive with video rental stores, this translates to approximately two or three pay-per-view movies a month.
Desire vs. hyperbole.>> Roberts elaborated on this idea during the question session after his presentation. What happens, he asked, when (he did say “when,” not “if”) the phone companies spend $200 billion upgrading their plants, and no one buys into the new system or services?
They are asking government to allow them to pass a percentage of these costs on to their customers, Roberts said, regardless of the change in usage. He believes the role of government should be to balance the “desires and hyperbole of industry,” not enable spending without return.
(Phone companies are forced by law to ask government’s permission to raise their rates, whereas the cable industry has been able to do so at any time it wants with no government intervention, much to the obvious chagrin of cable customers. The Cable Act of 1993, recently passed by Congress, forces cable operators to limit rate increases.)
Snuffing video rentals.>> Roberts claimed the cable industry, which has revenues of $22 billion per year, would spend only $15 billion to upgrade its system to fiber and go after the $10-billion-per-year video store business. Roberts called movies on demand an “intuitive offering,” and believes that it’s a “reasonable revenue shift” to assume. In other words, movies on demand is the only application for fiber to the home that anyone will care about in the short term.
“I don’t know that people want to sit around at home with virtual reality helmets and talk to somebody in Chicago…. I live in the here and now, and I think the regulators have to do the same thing,” Roberts said. “So I can’t see writing off perfectly good equipment to go after telemedicine commuting [see Richard Brown's comments]. Maybe it’s there, and maybe it’s not. You’ve got to start slowly, that’s our point.”
A PHONE COMPANY THAT HELPS UPGRADE CABLE SYSTEMS
To drive home his belief in cable’s supremacy over the phone companies for interactive entertainment services, Roberts cited the recent investment by US West in Time Warner Entertainment. Instead of investing $2.5 billion in its own physical plant, the regional Bell operating company instead decided to help upgrade Time Warner’s cable systems because “it was a better investment.”
(Ameritech’s Brown responded during the question session, saying that the US West investment makes sense only because it is prohibited from making a good business case in its home market due to the cross ownership ban. This ban excludes the regional Bell companies from owning cable operations in their home regions. Brown wants to try to change the policies so that true competition can take place, for both telephone and video service.)
Look, ma, no Bell.>> Despite his apparent disregard for the viability of the phone system to deliver interactive entertainment, Roberts said the real task is to ensure that the national system is interconnected, with shared facilities and interoperability.
Comcast is a part owner of Fleetcall, soon to be renamed Nextel; its corporate goal is to become the first national wireless cellular system. The company is also a partner in Teleport, an alliance to provide alternative telephone access to office buildings through the local cable infrastructure. Its partners in this venture are TCI, Cox Cable and Continental Cablevision. It is through this venture that these players are hoping to leverage the cable infrastructure into the corporate market. Interoperable systems would enable Comcast to integrate its cellular and cable operations.
To demonstrate this point, Comcast initiated a conference call across five different locations: a car, hospital and office in New Jersey and two locations in London. The call used cable, cellular, alternative access and personal communication systems and completed the phone call over existing highways and switches without ever interfacing with Bell switching facilities.
As this demonstration shows, the cable industry’s goal is not just interactive entertainment, but full telecommunications. Apparently its desire to provide telephone service is fine, but the phone company’s move into traditional cable services should wait.
Effective competition.>> Roberts believes that a model already exists for a migration from today’s (partially) regulated environment to a truly competitive market for local services. He is willing to live with current regulations (including programming restrictions) until there is “effective competition” in the market. Then, he would expect restrictions on products and services to dissolve and competition itself to become the best regulator.
What is “effective competition?” Previous FCC rulings in this area have defined this as the point at which a competitor (presumably the phone company) is physically able to provide interactive digital services to 50 percent of the customers in a market, and is actually serving 15 percent of the customers in that market. With the present-day regulatory structure, Roberts knows that competition so defined will be a long time coming. For the foreseeable future, cable operators will have a substantial edge — which is as he wants it.
David Baron, Denise Caruso