The Dumb Pipe Era Advances

Cable and telecommunications multi-system operators (MSOs) have had one overriding objective since the dawn of the digital era: to avoid becoming a “dumb pipe” — i.e. infrastructure, a mere purveyor of another’s bits.

Today, that fate appears increasingly inevitable, with a twist.

MSOs have fought the dumbing down of their networks largely through the promise of high-quality video delivery over a managed network. While Netflix and streaming alternatives have to transport their packets across the wild and open Internet, MSOs promise a secure connection to your home—one unmarred by buffering and pixelation.

But multiple factors are leaching away the value of that managed network approach.

The first is better, more consistent video delivery from the over-the-top players due to technologies such as adaptive bitrate streaming. As streaming services embrace the more efficient HEVC for video compression outside of 4K delivery, the quality and consistency of the OTT experience should only improve.

Another factor is the penetration of connected devices—whether they be smart TVs, media players like the Roku or gaming consoles like the Xbox. By some measures, half of all Internet homes in the U.S. have a connected TV device, bringing dozens of alternative content sources within easy reach.

Finally, the costs of retransmitting broadcast TV content to the home continues to grow, pinching MSO profit margins.

Smaller operators have been the first to move, dumping their pay TV content to focus on selling broadband/phone connectivity instead. While the cable industry, in particular, has been losing pay TV subscribers, they continue to add broadband lines. There’s demand for a dumb pipe.

The bigger MSOs aren’t poised to dumb down just yet and abandon pay TV, but (and here’s the twist) they are now increasingly seeking to compete with one another for video customers outside of their network footprint.

AT&T’s recent announcement that it will bring DirecTV’s programming as well as video on demand offerings to subscribers over the Internet is one of the biggest steps in that direction. It’s not the first, though—Verizon beat them to the punch with its Go90 service. Comcast and other major cable players are being cautious, but the more live programming is offered over the Internet, the more tempting it will be for their TV customers to jump ship. If AT&T and Verizon are stealing Comcast’s pay TV customers, we shouldn’t be surprised to see Comcast roll out a national effort to poach users outside of their operating footprint.

Slowly, it seems, the major MSOs are coming around to the idea that they will have to compete with one another over the open Internet for video subscribers, even while they continue to grow their broadband users. In such a landscape, the consumer will have far greater choice and competition for their pay TV dollar.

Many consumers (and many in the media) would undoubtedly cheer the transformation of cable TV providers into broadband utilities. But they should be careful what they wish for. Almost all utilities in the U.S. have a usage-based fee model: the more you water your tomato garden, the higher your water bill. Major MSOs have only dabbled in usage-based billing to date. If the dumb pipe era does come to pass, those pipes are likely to grow more costly.