Cable Ops: The Dumb Pipe Dilemma

Monday June 9, 2008

– Antonette Goroch

When it comes to new media content delivery, are cable companies just providers of a “dumb broadband pipe”?

In their traditional roll of delivering TV programming, operators don’t just sell hook ups to the pipes; they sell the stuff that flows through the pipes. That doesn’t take away from the rewards of selling just the hook up to the Internet. For nearly 10 years cable operators have deftly taken advantage of selling high-speed Internet access (with the Internet’s free content) hooked up to their big pipes thus locking in one of the few rock-solid revenue streams — plain old access. This revenue stream is now a staple for cable operators, bolstering revenues and subscribers, even in the face of significant competition from satellite operators.

But times have changed.

As the Internet becomes ever more entertainment-content rich, cable operators, as mere access providers, find themselves left outside of the magic revenue circle. For decades they’ve enjoyed the dual revenue streams of content tiers and advertising in their core TV business. Unembellished access service is a nice revenue stream but it can’t compare to the potential revenue from selling Internet content and advertising.

This is the dynamic surely at play in Time Warner Cable’s recent foray into metered Internet usage. In a market test, Time Warner Cable is placing a fixed level of usage for its broadband service with additional charges for overages. In this way, Time Warner Cable hopes to hone in on the “five percent of subscribers who use up half the capacity.” You know those pajama-clad peer-to-peer and Slingbox bandwidth pigs frequently parked in front of their computers.

The problem with this approach, and ultimately why it probably won’t succeed, is that this 5% are heavy users of content (whether it be free or paid). (Couch potatoes of the future perhaps?) By making its access product less attractive to those who consume more content, and in effect discouraging greater content consumption, Time Warner Cable puts itself in the position of alienating those very consumers who represent the future of on-line content and advertising revenues it would love to cash in on.

More importantly, as Internet entertainment content becomes ever more available, people will demand more bandwidth. Placing punitive limits on bandwidth will only make a cable operator’s access product less attractive in a highly competitive market. With telcos poised to nip at cable’s heels with a triple play package of their own, cable operators can’t afford to diminish what has become a fundamental part of their business.