Taming the Telco TV Threat

I recently moderated a Light Reading and Cable Digital News Webinar on the timely topic, "Solving the Cable Industry's Capacity Crunch." (The archive will be online for viewing very soon.) Scrolling through the participant rolls during the session, there was a long list of MSO and telco executives tuning into the topic. That's to be expected. What caught my eye, however, was that a representative from just about every Wall Street firm covering the cable space was logged in to the call. Clearly, they are keenly interested in this topic.

The catalyst for much of this capacity discussion in the North American market is Verizon Communications Inc. (NYSE: VZ)'s and AT&T Inc. (NYSE: T)'s video rollouts. Each telco hopes to offer video services to some 18 million homes within the next five years. This leaves some MSO investors skittish, as telco TV may eat into cable's video and Internet market share, and force a new round of MSO capital spending for network upgrades. While legitimate concerns, Wall Street needs to take a chill pill.

Yes, cable operators face some capacity challenges. (See Cable Has Plenty of Capacity and Cable's Looming Bandwidth Crisis?) Why? Simply put, cable's lineup of digital video, voice, and Internet services are proving to be hugely popular in the marketplace. To meet demand, MSOs may need to add some more shelf space. And this is a problem?

It's important to remember that Verizon's FTTH-based FiOS and AT&T's DSL-based U-verse are very different animals, and together, they will only cover one-third of homes passed by U.S. MSOs by the end of the decade. Not exactly ubiquitous.

MSOs may well be able to toast AT&T's U-verse offering with technologies currently available, like switched digital broadcast and Docsis 2.0 (and soon 3.0). AT&T's entire offering of multi-channel digital TV (including HDTV) and Internet is being delivered over a 25-Mbit/s DSL pipe. Making 30 Mbit/s Internet cable's standard offering in U-verse markets ought to put a damper on Ma Bell's bundle. The incremental capital cost to MSOs? Well under $50 per home passed.

FiOS, on the other hand, is formidable. That's what you'd expect with Verizon spending nearly $900 per home passed to deploy its residential FTTH network. (See Verizon to Pump $18B Into FiOS by 2010).

During the "Capacity Crunch" Webinar, executives from Narad Networks Inc. , Scientific Atlanta , and Vyyo Inc. (Nasdaq: VYYO) discussed solutions – including 1GHz digital upgrades, spectrum overlay, and carrier Ethernet – that can help MSOs quickly gain competitive parity with FiOS. The cost? Well under $200 per home passed for capabilities that include extra HDTV capacity and symmetric 100-Mbit/s access over HFC. In other words, MSOs can match their toughest telco competitor's offering for less than a quarter of the cost. That's a deal.

— Michael Harris, Chief Analyst, Cable Digital News