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By Paul Kagan
All the talk we hear about weapons of mass destruction reminds me that this year is the 10th anniversary of the Al Gore-inspired, FCC reregulation of cable. That heavy-handed era stopped telcos from buying cable MSOs, rather than trying to blow them up. The phone companies spent the next decade losing customers to telecom start-ups, which eventually saved the Bells by committing financial suicide. Now the telcos have come full circle and are again trying to compete with cable in video.
As the talking computer, Joshua, told his creator, Dr. Stephen Falken, in the 1983 movie WarGames, thermonuclear warfare "is a strange game. The only winning move is not to play." As virtually every overbuilder has learned the hard way, no financier wants to back a cable operator who commands less than 50% of the market's subscribers. The numbers don't work. So the telcos can't simply divert subs, they have to drive the incumbent completely out of business. That's hard. Widows, orphans and pension funds?the telcos' stock- and bondholders?don't appreciate the costs and risks associated with that kind of enterprise.
On the bottom line?and for telcos there must be one?the presence of the Bells in the game, to use baseball relief pitching metaphors, is to play the setup role and not to be the closer. In response to cable's new forays into telephony, telcos are forced to add to their marketing bundle, even if it means reselling satellite service. But they can't go all the way in a game they shouldn't have to play. So far, these deployers of "otherwires" have always been video-challenged.
Back in those troubled days of '94 (sounds like a century ago), when bond funds were crashing and the Dow Jones Average. was one-third of what it would be six years later, I pondered a future made up of four multichannel competitors: cable, telco, satellite and wireless (MDS).
"It must have been something like this for Jack Kennedy and Nikita Khrushchev in 1962," I wrote in my Cable TV Investor newsletter on May 18, 1994, "when they each had their fingers poised over The Button. How many people must suffer to prove which side has the better bandwidth?"
That's when I first quoted Joshua, the WarGames computer. At the time, there were 59 million cable subs, 2.3 million satellite and MDS subs and no telco video customers. Looking out to 2003, I projected 67 million cable users and 23 million of the other kind. I almost hit the eventual numbers on the nose, although the "other" users now all subscribe to satellite. The telcos spent the decade defending basic phone while lobbying heavily to get back into long distance. A few of them wasted hundreds of millions of dollars overbuilding cable. They did, however, get their DSL act together to block cable from a high-speed monopoly.
By the same token, most of the cable industry (exceptions: Cox and AT&T) was so focused on satellite competition, it had little interest in squaring off against the telcos in their own ballpark. Most MSOs, ever cautious on technology spending ahead of its time, waited patiently for voice over IP to develop. That time has now come. Now, I no longer fear thermonuclear digital devastation, even though it has been posited by Friedman Billings Ramsey analyst Susan Kalla (Barron's, June 21).
Based in part on the belief of ex-cable exec Leo Hindery that "aggressive bundling practices... will be a period of almost mutually assured destruction," Kalla forecasts that telco, satellite and cable companies will price-compete to oblivion. But as video distribution platforms matured, cable and satellite have shown the internal strength to coexist, and to operate within their means. The notion that telcos (and cable in defense) will sacrifice high-speed Internet access profits for subscriber retention, thereby joining the CLECs in hari-kari, doesn't compute.
For sure, the battles will be tough in telephony because there is so much to gain and to lose and because there are so many competitors. But the prospects in these media wars have been changed by the consumer appeal of multiservice packaging and the myriad choices it offers.
I used to think the future of media competition would be a fight among different technological platforms, but that's old now. Most consumers have learned zero about how telephone, broadcast, cable and satellite work over the 108 years since the first phone line was hooked up to Philadelphia. They just care about programs, voice and data services, the price of the package and someone to talk to in a crisis. Instead of nuclear fission, we're into electronic global warming, a war game that does have winners after all: those bundlers who know how to turn up the heat.
Paul Kagan is an analyst, investor and money manager. Information in his columns is not intended to be a recommendation to buy or sell
securities.
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