There's nothing like The National Show to showcase the best of what
cable has to offer. While this year's show felt a bit more hectic than
usual given the shorter duration, it was still packed with great opportunities
to learn about the industry.
Below are six insights from my time at the show. Obviously the
sessions I chose to attend, the people I spoke to and the remarks that
stood out to me are completely self-selected. My apologies in
advance to those I will quote. My steno is a bit rusty (well,
non-existent actually), but I've done my best to be true to the essence
of your remarks.
So with Jeff Bewkes's (Chairman, Entertainment and Network Group,
Time Warner) admonition that "Everything has been said, but not everyone
has said it" , pick and choose what interests you from the observations
1. Cable Is on the Brink of a Historic Business Transformation - But
to What ?
There was a palpable sense throughout the conference's sessions that
the cable industry now acknowledges that it must move beyond its traditional
So what's ahead? From one industry exec to another, conference
attendees were told that the new focus (why "new", by the way?) of
the industry must be on giving customers what they want. While "personalization" was
often cited, left unanswered was specifically where (and indeed whether)
the industry (including programmers and advertisers) will find profitable
opportunities in fulfilling their new mission. The answer to
this $64,000 question is at the heart of understanding all of these
players' future health.
What is clear is that at least two of the industry's highest profile
initiatives, Video-on-Demand and set top boxes with built-in Digital
Video Recorders, carry significant risks. VOD is the industry's
much-promoted competitive answer to DBS competition. Despite
talk of new-fangled revenue models, it has left many programmers scratching
their heads about what they stand to gain. Further, they're in
the uncomfortable position of choosing between complicity with MSOs
in disaggregating their linear audiences (and thereby triggering huge
longer-term uncertainties about what role their brands play as well
as how to sustain their advertising revenue), or "Just Saying No" to
VOD and therefore risking a backlash from their largest MSO distributors.
Meanwhile, the belated but now headlong rush by MSOs to deploy set
tops with DVR capability raises still larger questions related to linear
audience disaggregation. DVR's fast forward, ad-skipping button
empowers viewers to easily unburden themselves of years of pent-up
frustration with irrelevant and obnoxious ads with a simple flick of
the finger. (If you don't believe me, ask your favorite TiVo-obsessed
friend when he/she last watched an ad.) Numerous panelists commented
on the short and medium-term disruption awaiting advertisers, though
held out hope that in the long-term things will get far better.
Bob Iger (CEO, Disney) elicited a huge (and empathetic) chuckle from
the crowd when he volunteered his affection for the counter on his
browser's "pop-up-ad blocker". Was I the only one wondering whether
he's been introspective enough to speculate how many millions of his
networks' viewers will find themselves similarly excited when they
discover that ad zapper button on the remote control of their newly-delivered
DVR-capable set top box from their MSO or satellite provider? Mmm..
In a not-so-subtle message to cable and dish providers, Bob Wright
(Chairman and CEO, NBC Universal) reminded everyone that, at $60 billion/year,
advertising provides the largest single support to program producers
and that it is "important to be sensitive to both customers AND advertisers
and not to alienate either" . He followed by soberly wondering "how
programmers will afford to develop their product without an ad model",
and pointed out that "DVR does nothing positive for the content business" and
that he "can't put any food on his table with VOD today".
All words to consider carefully.
2. Forget Content, "Customer Experience" is King
The battle over whether content or distribution is king became three-dimensional
with numerous panelists introducing "customer experience" as the true
source of value going forward. For anyone who's worked in the
software, consumer electronics or web design fields, customer experience
is well-known to be at the heart of creating strong (and self-reinforcing)
loyalty for customers as they interact with products. Think about
today's great products and how loyal their users have become: iPod,
TiVo, Google, etc. As Len Lauer (President and COO, Sprint) said "Apple
wasn't first with MP3s, but it was first with usability".
While product expectations have increased across all age groups, the
customer experience ante is even higher when it comes to pleasing the
next generation of paying customers. To illustrate this complexity,
Brian Roberts (CEO, Comcast) and Jonathan Miller (CEO, AOL) regaled
us with stories of their multi-tasking 11-year olds simultaneously
juggling multiple IM windows, cellular phone calls and emails, all
while watching TV. These echoed hallway conversations about attendees'
own teens' and tweens' gadget-mania and technology literacy.
But discovering the secret sauce to capturing customers with great
experiences in a highly fragmented world isn't trivial. Miller
cited AOL's deep experience in instant messaging (IM), noting that "the
opportunity to wrap communications around content" is most valuable
to his customers. Separately, Jeff Huber (VP Engineering, Google) drew
the biggest wows in his session showing off how Google's Keyhole acquisition
has been integrated with other Google capabilities. Starting
with a global view (literally), he was soon diving down to check relevant
weather, get driving directions and discover good restaurants around
the convention center. Very cool.
Nevertheless, Jim Robbins (President and CEO, Cox) told us that "MSOs'
expertise is in packaging and presenting compelling services to customers,
and that IP (internet protocol) is merely another technology for delivering
these services" . He urged his panel colleague Rob Glaser (CEO,
RealNetworks) to keep innovating and supplying IP services to MSOs.
In deference to the well-respected Robbins, my take is that with the
wide open nature of IP delivery, MSOs need to substantially elevate
their game in order to be contenders in the customer experience sweeps. Simply
offering their partners' services with no new value-add to their customers
is a prescription for MSO marginalization. Figuring out how to
create new value in their own great IP services is going to be required
to be successful.
Huber captured the point well when he pondered aloud "How can you
program infinite shelf space?" and urged the industry to think in terms
of "best-of-breed, not walled garden".
3. 54 Million Reasons Operators Need to Think of Broadband as a Programming
Todd Herman (Director, Media Strategy, Microsoft MSN Video) shared
the statistic that 54 million people are now streaming video from the
internet each month. Putative third-party video competitors from
MSN to Yahoo to CNET to iVillage are flooding the market with internet-based
video, taking advantage of the broadband access explosion. Much
of this activity is being supported by a robust and growing online
video advertising business that operators have yet to tap. With
MSOs not getting any of the upside (aside from monthly access revenue)
and these players' sharpening their already considerable online marketing
skills, it doesn't take a genius to see where this road leads. (See " Why
Yahoo Looks Like a Broadband Winner" for more)
As noted below, broadband is the biggest driver of growth and value
for the industry. Yet with so much on the line with broadband,
I remain surprised that cable hasn't aggressively changed its view
of broadband from being simply an access model to becoming a full-fledged
programming platform. With due respect to the industry's portal
efforts to date, these do not add up to a programming strategy. Throw
into the mix what's just ahead with portable devices, and the stakes
get even higher to get a foothold now.
In this context, kudos to Bob Greene (SVP, Advanced Services, Starz,
note: former client), for his Starz Ticket broadband demo which elegantly
showed how Starz is taking their movies to the web (and engendering " Long
Tail" customer interest in older titles to boot). Kudos
also for sharing the impressive statistic that "one-third of their
broadband subs have never subscribed to multi-pay services" . (Note
to MSOs - expanding the market is more important than maintaining historical
models.) Honorable mention to Synacor too for continuing to evangelize
the need for premium web content and add MSOs as distributors.
As Rich Bilotti (Managing Director, Morgan Stanley) said in reference
to DBS, "one of the biggest mistakes the cable industry has historically
made is underestimating the competition" .
MSOs can't afford a similar misstep in broadband.
4. Cable Goes Wireless
Despite much attention being lavished on telco fiber rollouts, another
new telco battleground is fast-approaching: wireless. While the
classic triple-play bundle of video, data and voice has long been considered
the key, the quadruple-play bundle that incorporates a wireless offering
is going to be essential to compete in the future. Both SBC and
Verizon are expected to aggressively incorporate their respective affiliates,
Cingular and Verizon Wireless, into customer bundles.
Robbins stated that "mobility is the next great leap" , while Iger
said "the world is a collection of screens" . One of the worst
kept industry secrets is that cable will almost certainly play in wireless
via a Sprint alliance. Lauer's presence on the Tuesday panel
gave the company great industry visibility. Sprint has been leading
the so-called "MVNO" (Mobile Virtual Network Operator) evolution, by
striking deals to wholesale network usage to partners.
But wireless carries a host of thorny issues yet to be resolved. Most
prominently, customer ownership (in the form of the phone number),
customer care, billing integration and, of course, economics. All
these need to be addressed before even thinking about developing applications
that leverage the best of digital cable and broadband with a wireless
product. For a window into how complex it is to build a model
for the termination and hand off calls between cable and wireless carriers,
I particularly liked Sanjay Jhawar's (SVP Marketing and Business Development,
Bridgeport Networks) presentation during the "Spotlight" session (see
below). Try to get a copy if you can.
Making the wireless scenario even more interesting is the pending
proliferation of dual mode WiFi/cellular-capable handsets that detect
broadband WiFi networks for in-home or in-office use versus cellular
for when you're out and about. As the panelists agreed, it would
be great to be the service provider for new FCC Chairman Kevin Martin
to keep up with his UNC Tar Heels in the final game, while he's out
Having cable deliver that experience is still several large steps away.
5. Forecasting the Industry's Financial Performance Isn't Easy
With all of these product and customer behavior variables in play,
it's no surprise that creating a framework for and actually forecasting
the industry's financial performance is no mean feat. That said,
this year's financial analysts' panel again proved to be a source of
great analysis and insights. Credit to Julian Brodsky (Director
and former CFO, Comcast) for his brisk, yet avuncular orchestration
(and to Peter Litman for reminding me this session is a must-see).
Three things stood out for me:
Data Rules : A breakdown by Doug Shapiro (Managing Director, BofA
Securities) identified high-speed data as the source of one-third of
future growth and one-quarter of current valuations. The only
bigger contributor to current valuations is good old analog video. However,
he provided the sobering assessment that cable enjoys a 30% larger
footprint advantage than telcos' DSL, which is what accounts for cable's
continued competitiveness in growth, in spite of its higher price points. He
noted that in markets that are head-to-head, telcos are now getting
50+% of the growth. (By the way, what ranked last of the seven
revenue streams creating value? VOD)
Satellite is a Question Mark: A number of compelling slides were shown
by both Shapiro and Craig Moffett (VP, Sanford Bernstein) depicting
a historic equilibrium between cable and DBS for percent of gross adds,
that held true until 2004, when DBS's share sharply ticked up (along
with its per subscriber acquisition cost, now close to $700). Both
of them are making the assumption that going forward equilibrium will
be re-established, despite DBS's average 15% price discount vs. cable
for basic and 1-pay packages. DBS has targeted the weakest of
the MSOs, and Moffett shared a clever slide graphing MSOs by density
and cluster size. This showed Adelphia and Charter as the two
biggest sources of subs to DBS. The three big influences on how
share will be divided up in the future will be ongoing price differences,
DBS's SAC aggressiveness and how well then new owner(s) of Adelphia
compete against DBS.
Telco may not be as large or imminent a problem: I came to conference
looking to learn more about the investment thesis behind private equity
investors' recent pursuit of cable assets. My assumption (confirmed)
has been that these investors discount the telco threat, which I thought
might be their wishful thinking. However, it does seem that even
a success scenario for telcos may not be that harmful to cable. Moffett's
assumptions that even if the telcos can pass 45.2 million, or 37% of
homes, by 2010, and achieve a 14% video penetration, they'll still
only have a 6.2% share of multichannel video homes. And that
involves a lot of great execution to get there.
Brodsky wrapped up by noting that "there's a lot of runway before
the industry sees real telco competition, but the telco threat remains
the single biggest depressive factor for cable stocks".
6. Technology is the Key and the Industry Needs to Play Better
Last but not least, the "Spotlight on Innovative Cable Technologies" panel,
co-sponsored by Comcast Interactive Capital and CableLabs, underlined
the critical role that innovative vendors play in strengthening the
industry's competitiveness. Sam Schwartz (Managing Partner, CIC)
said that by his count "$500 million was invested by venture capitalists
in 2004 in cable-related vendors". He added that this number
has fluctuated with the overall market of the last few years, but things
seem to be on the rebound. A more interesting gauge would be
how much money specifically went into "A" round or initial investments,
and how purely cable-centric these particular ventures were.
Cable has a huge opportunity to make itself into the go-to-place for
entrepreneurs' innovative ideas. Given the notoriously difficult
nature of working with telcos, cable is positioned to become a huge
beneficiary of technology advancements. Yet I still heard lots
of consternation from investors and technologists about how to engage
profitably with the industry. The usual suspects were cited:
industry consolidation that has given big MSOs ever greater leverage,
endless trials that don't result in meaningful P.O.s, and the clubby
relations with traditional vendors. All of this has left some
VCs swearing off cable-related investments and many entrepreneurs thinking
they can only pursue cable after they've established profitable beachheads
in other segments.
For everyone's sake, these dynamics need to change, ASAP.
Random Final Thoughts
I got my first look at the Sony PSP and was very impressed. Have
a look yourself and don't forget to listen to the audio as well as
watch the video. If you've ever doubted people will consume full-length
video on a portable device, prepare to be surprised. I'll bet
you a buck you'll never have those doubts again.
For those that spent time in the cleverly designed, circular Comcast
programming booth, did you hear the joke going around that by the 2010
National Show, attendees will walk into the exhibitors' hall and simply
find they've stepped into a gigantic, all-encompassing Comcast programming
booth? I thought it was cute.
This was the second time I saw Peter Chernin (President and COO, News
Corp) speak and he burnished my opinion of him as the most impressive
exec in big-media. If you haven't seen his "10 Rules for Media's Survival",
check them out here. I
particularly liked his comment that "the main challenge is to grow
the new opportunities faster than the disruptions occur." He's realistic,
aggressive, responsible and playing to win. If you're competing
against him, make sure you bring your A game.
Was it that long ago that the HBO booth dominated the National Show,
with a giant booth front and center? Now they're back in the
Executive Suites. How times have changed.
Finally, thanks to many of you who gave me gracious and positive feedback
on these e-newsletters during the show. I appreciate
keep it coming!