Six Insights from the 2005 National Show

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 below:

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 business model.

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 Platform

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 partying.

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 the feedback..please keep it coming!