Cable operators stand at the threshold of a massive broadband opportunity, one that could put them in possession of a substantial portion of the next-generation services market. But getting there will be a life-threatening challenge.

So says the latest report from the Optical Oracle, Light Reading's monthly subscription research service. Titled "Cable Broadband: The Sleeping Giant?" the report describes the evolution of cable TV providers into multiple system operators (MSOs) whose potential in the broadband market equals or exceeds that of their telecom rivals.

These MSOs will spend roughly $13 billion this year on capital equipment, much of which will go toward optical equipment and fiber to upgrade their broadband facilities. They're already developing their own state-of-the-art router backbones, rather than relying on third-party providers for Internet connectivity. They're also becoming tougher competitors with telecom carriers, developing tools that enable them to offer services with higher levels of quality and security, erasing a major differentiator for traditional telecom broadband providers.

It's a process that's evolved over the past decade. Since the early 1990s, MSOs have aggressively built out their last-mile fiber and access facilities and run rings around metropolitan areas in a bid to compete with telecom providers. Now, the demise of many CLECs, a series of mergers and acquisitions, and the bankruptcy of Excite@Home have set the stage for a small group of regionally dominant companies to take the market by storm.

"Cable is now a formidable competitor against all established broadband access players," says Optical Oracle research analyst Christopher Bulkey. "The cable operators are now well positioned. They have a good grip on a broadband customer base."

The MSOs are in a more financially favorable place than many of their telecom counterparts. Among a series of comparisons, the report breaks out the ratios of capital spending to revenues, over time, for telecom providers versus MSOs. While the telecom providers allowed their capital spending to exceed revenue by better than 100 percent in 2000, the MSOs held their ratios below 50 percent. Now, while telecom providers continue to pay the price of overbuilding, cable operators aren't as strapped.

Bulkey anticipates MSO spending in 2002 to be comparable to the $13 billion figure of 2001, perhaps slightly lower. The telecom carriers, in contrast, could see capex reductions higher than 30 percent.

But nothing's guaranteed. The MSOs face considerable challenges if they're to make use of the opportunity ahead. And there's plenty of chance to drop the ball.

Key will be picking the right services mix. Misreading subscribers’ and potential subscribers’ desires can lead to dire consequences. Video on demand, voice over IP, residential TDM phone service, games, and other emerging broadband services have separate sets of pros and cons, outlined in the report. Weighing these carefully will be vital to planning successful strategies.

For example, if the MSOs invest too heavily in VOIP (voice over Internet protocol) and the market takes too long to develop, they could be at financial risk.

The risks are high, but the rewards are in sight. Depending on how well they can step up to the plate, MSOs could move up to the first string of broadband service providers.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

Editor's Note: Light Reading is not affiliated with Oracle Corporation.