Changing the way cable operates might be a very good thing

The cable television industry is finding itself at a crossroads, facing both exciting new possibilities and the twin specters of government regulation and increased competition lurking around the bend. At the recent Western Cable Television Show in Anaheim, CA, cable industry leaders shared their views, vented their anger and promoted their visions of the future.

With the phone companies cut loose to deliver video, and everyone from Penthouse to the Washington Post talking “information services,” one of the most important effects of the Western Show may be its cross-pollination: many industries and organizations are now thinking about how to take best advantage of the vast physical infrastructure — i.e., a wire into some 95 percent of U.S. households — that cable TV has to offer. But obstacles remain, both from within and without the cable industry itself.

FACING THE THREAT OF NEW REGULATIONS

Foremost in the collective mind of Western Show attendees was the recent spate of both proposed and adopted changes in public policy. These include recent court rulings allowing the Regional Bell Operating Companies (RBOCs) to provide information services over the phone lines they operate, as well as the related Federal Communications Commission decision to permit “video dial tone” over the phone company wires and the possibility of government re-regulation of the cable television industry at a time when the industry is poised for growth.

The cable industry is scared to death of government interference. Its public reputation has not been squeaky clean, to put it mildly: cable operators have long been accused of providing poor customer support as well as charging exorbitant fees in the absence of competition.

Cable industry leaders, however, feel that the call for regulation is an attempt by broadcasters and telephone companies to handcuff the cable industry so they (the broadcasters and telcos) can compete more effectively.

William Cullen, the president of the California Cable Television Association (CCTA), which hosted the Western Show, claimed that these challenges, if successful, would make cable a bureaucratized delivery system with programming “as bland as network television and telephone service.”

John Malone, president of TeleCommunications Inc. (TCI), the largest cable operator in the country, and a popular spokesperson for the industry, believes that the image of cable’s bad reputation comes from “intra-industry squabbling” between the telcos and cable and that the regulatory efforts against cable are the result.

The interesting thing is that, according to Malone, the telephone companies are not supportive of the re-regulatory efforts.

In fact, Malone feels that the regulation bills before the U.S. Congress, S. 12 and HR. 213 (which will be heard in January), are backfiring on the phone company’s quest to de-regulate the delivery of information to the home. The telcos wanted a freer marketplace in which to compete, not a playing field of comparable regulations.

Draconian outcome. The fear remains strong among cable operators and programmers that the current regulatory sentiment in Washington could lead to a “Draconian outcome,” in the words of Cullen, especially in an election year. Operators and programmers are planning public relations campaigns as well as significant lobbying efforts to stall the implementation of new regulations.

According to Cullen, the various communications entities can work together to solve the “perceived” market problems without government interference. For that matter, Cullen sees no reason that anything other than side-by-side implementation of services is necessary. He sees no benefits to, nor public desire for, a system based on the concept of a single wire, or cable, into the home. He believes that hybrid systems can offer phenomenal possibilities without the phone companies spending billions of dollars to compete directly with cable.

Malone agrees. He points out, however, that such efforts will only be successful if common benefits exist, and that forced competition (through public policy changes) will not foster these kinds of opportunities.

NEW TECHNOLOGIES AND NEW CHALLENGES

Internally, there are a number of simultaneous developments that are changing the way the cable industry does business and will change the services it provides to its customers. These changes can also have an effect on many people outside the cable world.

The most significant of these changes is technical. The cable television infrastructure is moving rapidly to fiber optic cables — digital backbones to pure digital or digital/analog hybrid systems. Combined with new digital compression techniques, this infrastructure will soon give the operators hundreds or thousands of channels to fill. Some cable executives believe that decompression will be in the home within two years. (See Briefs item about CableLabs, page 18.)

Such a vast number of channels will mean a significant change in the way that cable operators do business, and those changes are already being implemented. Pay-per-view (PPV) may change cable from a subscription service to a transactional one in which the viewer pays for each service (movie, sporting event, news wire) a la carte, buying only those items he or she wishes to view.

Studio participation. This is music to movie studio executives’ ears, and money in their bank accounts. The studios, after all, lose out on the billions of dollars spent annually for video rentals. Once a video cassette is purchased, the movie’s producers lose all rights to that cassette. The studios have been searching for a way to resolve this problem, and no new delivery medium will escape their participation. Barry Diller, the chairman of the Fox television network and Twentieth Century Fox studio, has even proposed televising motion pictures on pay-per-view one week prior to the theatrical release, if only to see what the market would pay for such a service.

Tom Jokerst, vice president for the office of science and technology at CableLabs, stated (astutely) that the implementation of compression technologies is dependent upon programming; the technology is not going to be implemented just because it exists. Would the additional channel capacity provide enough value to justify the expensive upgrade (for both the consumer and the operator) to digital video signals?

Pay-per-view has the potential to generate enough revenue to pay for the analog-to-digital conversion. However, if PPV fails, and there are those who doubt its future, then cable operators will need to do a lot of head-scratching about other revenue streams that will justify the risks and expenses of a massive conversion to digital.

A programming renaissance. With compression, a digital system could send six or eight times as many channels to the home. But no one seems to believe that movies will be filling all of these channels. So the question remains: What will programmers use to fill the bandwidth?

John Hendricks, president of the Discovery Channel, a leading cable programmer, said that by the turn of the century, the cable industry will be riding the second wave of programming, based on the technology provided for theatrical releases — but local programming and information services will take the place of theatrical programming.

John Malone of TCI has an even grander vision, where local computer networks, local access information and personal communications networks, in which wireless communications devices tune into the cable infrastructure for transmission of the data, combine to form a core of programming options.

Are you listening, RBOCs? Tom Elliot, vice president of engineering and technology for TCI, pointed out that the cable operators have an added incentive to upgrade to digital transmission technology: it would become phenomenally expensive for anyone else to compete with them. The cable infrastructure already has a five-year head start over the telcos in this area.

BEATING MA BELL AT HER OWN GAME

After only a decade of service, the cable television industry has become one of the most essential services in the home, yet it also causes the most animosity. Consumers do not understand what exactly they are paying so much for every month. Why do they have to pay for television over cable, when television over the air is free?

For their part, the cable operators feel that subscribers have not related the cost of the service with the development of the programming. John Hendricks calls cable “truly viewer-supported programming.” (This statement is no doubt ludicrous to Public Broadcasting System stations, since Hendricks failed to mention advertising revenue.)

Cable service providers and programmers are realizing that they must respond to the needs of the communities they serve, and they must do it themselves before they are forced to comply with regulations imposed from above. Digital compression offers the potential for cable to become even more important not just to the home market, but also to businesses, as it may offer alternatives to the communication networks provided by the phone companies.

And that is exactly what makes government regulators (and the phone companies) nervous. Are the cable operators providing a public utility, as has been the assumption with the phone companies, or are they corporations providing a marketplace service? If they are deemed a utility by Congress (you can bet that regulation is on the way), the question of whether the operators of a public utility can provide the services as well as the infrastructure will become as valid for the cable industry as it is now for the phone companies.

David Baron, Michael Shaughnessy

TIME WARNER’S 150-CHANNEL TEST SYSTEM

This month, Time Warner will be bringing its 170-channel system online in New York — Brooklyn and Queens, to be exact — with 50 channels devoted to pay-per-view movies. Each day, 15 different movies will be available; a total of 60 different movies will be available each month. The selections will be priced between $1.95 and $4.95 per movie, making this service extremely competitive with video rental stores. The most popular movies will be available every 30 minutes, with ten other movies shown on the hour.

Users will select the movie and start time from an onscreen menu (which is rather unattractive and looks like an onscreen VCR programming interface). When it is time for your selection to begin, the tuner will tune your television to the proper channel. It will even turn on your set if you have turned it off in the interim. Future implementations will allow the user to stop in the middle of a movie, and restart at that exact spot in the next showing.

The goal is true video on demand, and the technology is nearly there. Time Warner’s system uses a fiber trunk, which branches off to neighborhoods or streets. No subscriber is more than four amplifiers, or repeaters, away from the main trunk, which means that the signal quality will be very good. This system is a digital/analog hybrid, but most of the pieces are in place for conversion to all-digital when the time and technology are right.

The source for the system is a bank of 75 s-VHS tape decks, which begin playing on a pre-programmed sequence. While this sounds like low-end technology, in this system there is evidently no difference in the final picture when a higher-resolution source is used.

David Baron

WHERE DOES BROADCAST TV FIT?

Broadcast television is still an important part of the cable television picture. Retransmission of broadcast TV channels is a large part of the cable operators’ programming slate, and the goal of many cable subscribers is simply to get better reception of local broadcasts.

But broadcast networks are realizing great financial strains as viewership declines and news organizations continue to lose millions of dollars per year. In the meantime, cable networks are gaining subscribers annually and CNN is now an international powerhouse in news delivery.

New, expensive technologies such as high-definition television (HDTV) are arriving, and many people feel that the networks will not survive long into the next century. John Malone, president of TeleCommunications Inc., the largest cable operator in the country, feels that cable may offer the answer to the networks’ survival.

For example, why should the networks spend the millions of dollars necessary to upgrade their plants to be compatible with HDTV when they would not receive any increased revenue from such broadcasts? Why not rebroadcast programs in HD format over cable for those who want and will pay for the additional quality?

In this way, the cable industry pays for at least part of the new transmission technology, the cable operators pay the networks for the programming and the consumer pays the operator for the service. This could also be accomplished with value-added transmissions — simultaneous data transmission along with a news broadcast, for example.

Malone also feels that local broadcasters view their organizations as governed by their in-house technology — that is, they are “only” local broadcasters. If they used their facilities to create local programming to be transmitted over cable, they could realize additional revenue as well as increase their stature within the community.

So far, only the Fox network has actively embraced cable television as a distribution medium. It has created FoxNet, a pay service of Fox programs and movies. Barry Diller, chairman of the Fox television network and Twentieth Century Fox studio, foresees additional Fox cable-only services that will debut in the next 12 months — services that originate with the broadcaster, but reach the “basic” subscriber, who does not purchase additional channels or services. Some ideas that have been mentioned are an all-movie channel, a channel that provides prime-time programming from its broadcast television service at different hours (time shifting), and a children’s programming channel. All of these channels would be advertiser supported.

David Baron