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A Switch in Time

Alan Breznick
11/29/2007

Switched digital video (SDV) technology, which cable operators once considered little more than a wild-eyed science experiment, has gone completely mainstream. Every North American MSO is at least testing the bandwidth-saving technology seriously right now, and four of the five biggest MSOs – Cablevision Systems Corp. (NYSE: CVC), Comcast Corp. (Nasdaq: CMCSA, CMCSK), Cox Communications Inc. , and Time Warner Cable Inc. (NYSE: TWC) – have already started deploying it in one or more major markets. Vendors are jumping into the increasingly crowded SDV equipment and software business, and CableLabs is seeking to craft industry-wide protocols and certify new products.

As a new Heavy Reading report due out next month will demonstrate, U.S. and Canadian cable operators plan to roll out SDV in a big way during 2008, after several years of lab tests, field trials, and limited pilot deployments. Based on interviews with leading MSOs and equipment vendors, Heavy Reading now expects that SDV will cover as much as 60 percent of the total North American cable footprint by January 2009, as leading MSOs such as Comcast and Time Warner introduce the technology in most, if not all, of their markets. This total could then rise to 75 percent or more by January 2010.

The desire to offer more HDTV programming will be the biggest driver behind the cable industry's increasingly enthusiastic embrace of SDV. Spooked by the plans of DirecTV Group Inc. (NYSE: DTV) and Verizon Communications Inc. (NYSE: VZ) to offer more than 100 linear HD channels apiece, cable operators will use their digital spectrum savings to add dozens of HD channels to their lineups. They will start switching some HD networks as well, freeing up additional capacity for even more HD channels.

Cable operators will also adopt SDV to add more niche, long-tail programming, as they seek to match the increasingly elaborate specialty offerings of DirecTV, EchoStar Satellite LLC , and Verizon. While the more cautious MSOs are switching as few as 60 standard digital channels today, the number of switched channels will multiply as cable operators add dozens, or even hundreds, of niche channels to their portfolios without increasing overall capacity. By the end of 2008, Heavy Reading expects that several MSOs will be routinely switching 200, 300, or even more standard digital channels on their cable systems, along with a number of HD channels.

However, SDV may well prove to be just a temporary band-aid, not a permanent cure, for the cable industry's greater, long-term bandwidth ailments. While it will buy time for the industry by freeing up some digital spectrum for other, more profitable uses, the technology won't actually create any new bandwidth for MSOs, particularly on the critical upstream side.

Plus, the freed-up digital spectrum could get gobbled up all too quickly in the end. Indeed, one veteran MSO official predicts that the typical cable system could wind up gaining enough room for no more than another dozen or so HD channels – not enough to make a huge difference in the long run. "Switched digital gives you a little bit, but not enough," he tells Heavy Reading. "It's more of a message in the marketplace."

In other words, SDV probably won't be a big enough fix on its own. Cable operators will likely have to combine it with other techniques – such as analog reclamation, node splits, MPEG-4 compression, 1GHz upgrades, and 3GHz spectrum overlays – to create enough bandwidth for all of the HD, niche programming, and other new digital services they plan to deliver.

– Alan Breznick, Senior Analyst, Heavy Reading

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