Video-on-demand is among the services cable operators hope to offer
Cable operators have spent the last few years getting their acts together. Now theyre ready to put on a show.
Since the mid-1990s cable operators have been pouring money into upgrading their network infrastructures. Theyve laid new fiber-optic lines, increased the bandwidth of their headends, and reconfigured their back-office and customer service capabilities all in the hope of moving beyond basic cable TV service and into the promising and profitable world of advanced digital communications.
Most operators are now on the downhill slope of their major infrastructure upgrades and can provide new services, such as digital cable TV and cable modem Internet access, to the bulk of their customers.
The success of their initial network upgrades and new offerings has encouraged operators to continue their expansions and begin exploring more sources of revenue to pay for network improvements.
"Cable operators are looking at rolling out six or seven new services over the next few years," says Michael Goodman, a senior analyst at The Yankee Group.
Beginning With Video-on-Demand
Topping the list is video-on-demand. Industry experts say the technology is now cost-effective and perfectly dependable. The bulk of operators are currently undergoing live trials with "true" video-on-demand systems that provide customers with full-feature VCR-like functionality, including pause and rewind controls.
Cable operators also view cable telephony, especially voice-over-Internet Protocol, as a promising source of new profits. But unlike video-on-demand, industry executives say the technology is still a couple of years away from practical use. Some operators are gaining revenue now via circuit-switched telephone offerings, but say they recognize the limits of that approach due to the cost associated with building a separate network for handling just voice traffic.
Cable executives are less certain about the promise of other services possible with their new digital networks, especially interactive TV. Most say it is hard to determine which interactive TV options if any customers will take a shine to.
E-mail, gaming, chat, electronic commerce or enhanced TV features, such as the replay of sporting events, are all under scrutiny, but have garnered few enthusiasts from the cable-executive ranks.
The development of next-generation set-top boxes, however, should simplify the deployment of interactive TV, executives say. The new boxes include such features as built-in Web browsers, hard drives, faster processors and local memory for storage of software.
Dennis Steiger, director of Internet engineering at Shaw Cable Systems in Calgary, Alberta, Canada, says the next generation of set-top boxes, such as Motorolas DCT-5000+, will make introducing advanced services such as video-on-demand and interactive TV much easier. The Motorola set-top box, for example, comes with a built-in cable modem and a hard disk for recording and storing programming.
While most operators are actively searching for other revenue sources to make the most of their network investments, their basic network build outs are still far from complete.
AT&T, for example, has upgraded 75 percent of its headends to two-way 550-megahertz-or-greater capacity enough bandwidth for effective cable modem and other high-speed data services.
By the end of 2002, Charter Communications predicts 93 percent of its network will have 750-MHz capacity or higher. It upgraded 40,000 miles of plant in 2000 and has budgeted for similar work on another 36,000 miles this year.
Others, such as Shaw, are building up fiber-optic connections between regional headends. Shaw is upgrading its fiber from OC-48 (2.5-gigabit-per-second) capacity to OC-192 (10 Gbps).
Only about 25 percent of its network has 750-MHz capacity, though Steiger says 750-MHz and higher capacity is unnecessary for expanding digital services. "You can do an awful lot in a 550 MHz system." Shaw, for example, is ahead of most operators on its digital TV rollout. The company started to switch from analog four and a half years ago, Steiger says.
But many operators, including Shaw, are still busy recruiting more customers to the digital video service. About 15 percent of Shaws customers have signed up for digital TV and own the all-important set-top boxes.
Cable modems, the first of the non-TV services offered by cable operators, have served as a test of their updated networks and customer demand. So far, the results have been good, and as a result, cable modem deployments are getting attention from operators that is equal to if not greater than that afforded digital TV upgrades.
Cablevision Systems, for example, already has 240,000 customers for its high-speed cable modem ser-vice, but is still working on converting its customers from analog to digital cable TV.
Operators say they have been very pleased with how high-speed access service is selling. The Yankee Groups Goodman says cable operators signed up more customers last year than the competing DSL high-speed access from telephone companies. By the first quarter of 2001, they had recruited 3.6 million cable modem customers, while telephone companies had 1.7 million subscribers, Goodman says. He expects cable operators will be able to maintain their advantage in the high-speed access market for the next two or three years.
Cable operators that have upgraded much of their network say theres still plenty of potential for cable modems. Cox Communications, for example, has changed more than 80 percent of its network to 750-MHz, two-way broadband capability that reaches 8 million homes. So far, however, only 9 percent of its TV customers subscribe to its cable modem service, even though the company has been offering high-speed access for a couple of years.
Some operators, especially smaller ones, are focused on expanding digital cable TV and cable modem service before starting on other projects.
"We need critical mass with digital cable before we can go on to VOD [video-on-demand] and that other stuff," says Femke VanVelzen, director of marketing and sales at Bend Cable, an independent operator with 25,000 subscribers in Bend, Ore.
She says digital cable subscriptions lets her company cost-effectively deploy the digital set-top boxes that facilitate most other advanced services, such as video-on-demand, interactive TV and software downloads.
Most cable operators, however, are not waiting for all of their customers to adopt their initial digital offerings. The generally successful deployments of digital TV and cable modems have encouraged cable operators to explore new technologies.
Goodman says most cable operators are now aiming to introduce video-on-demand offerings to their customers over the next year. "The stars are lining up for video-on-demand," Goodman says, noting the service is an easy add-on to networks with advanced two-way broadband capabilities.
Though video-on-demand has been more of a promise unfulfilled than a profit center over the last decade, cable operators say it now is within their grasp and have begun field-testing the service.
Time Warner Cable, for example, is testing equipment in its Austin, Texas; Honolulu; and Tampa, Fla., markets. It plans to roll out the service to most of its customers within a year, says Michael Luftman, vice president of corporate communications.
Time Warner has exceptional expertise about video-on-demand and other interactive services, which it gained from its Orlando, Fla., interactive-TV trials in the mid-1990s. Luftman says new technology has now made many of the ser-vices offered in Orlando profitable.
But Luftman cautions that a successful video-on-demand rollout has as much to do with other factors such as marketing and network management as it does technology. Cable operators, for example, need to know how many videos an average customer might buy per month to accurately gauge pricing and profits.
And there is a risk of too much success with video-on-demand, The Yankee Groups Goodman says. State-of-the-art cable networks can only effectively provide video-on-demand to about 25 percent of all possible users for a given cable headend. If it proves popular, customers could overwhelm network capacity and slow or even stop the service.
Operators will need to improve video compression ratios or deploy more video servers to stay ahead of such problems, Goodman says. But likely adoption rates will be slow enough to give them enough time to keep up with demand, he adds.
Nontechnical issues also figure prominently in the success of video-on-demand. Cable operators are in the midst of negotiating rights with Hollywood studios for use of movies and other content. The movie studios are afraid attaching full playback capability to pay-per-view movies will cannibalize video and DVD rentals.
"Thats really the hill that needs to be climbed now," Luftman says.
Shaws Steiger says he is confident in the capability of video-on-demand technology, but is much more puzzled about how to package and sell it. For example, do customers really want or need full VCR capability? Research suggests that most consumers only use the pause and fast-forward features, he says.
Shaking out the Bugs
Andrew Johnson, Vice President of Communications at AT&T Broadband, says video-on-demand service requires technology upgrades, but also means adding more billing and customer care support. "You gotta shake out all the bugs from these things before going live," Johnson says, noting his company is now testing video-on-demand.
Personal video recorders, also known as digital video recorders or television recorders, are another possible entrée for cable operators digital services menu. Personal video recorders let viewers digitally record and play back TV content, such as sporting events or sitcoms.
Current set-top boxes dont have the capabilities for this type of service, though next-generation boxes will. That means such offerings are likely still a couple of years away, though operators can team with such companies as TiVo, which offers a stand-alone recorder.
In general, however, cable operators are unsure what digital communications services beyond cable TV, cable modems and video-on-demand will prove profitable.
Dallas Clement, a senior vice president of strategy and development at Cox, says his company has been testing software-on-demand, a ser-vice like video-on-demand that allows customers to download computer applications for temporary use. Cox has also been testing a home security service that lets customers remotely monitor their households via a Web connection and cameras. Clement says his company will likely start testing offerings such as video streaming or online games later this year.
Shaws Steiger says interactive TV is rife with challenges and pitfalls. Web pages, for example, look terrible on a big TV, so any page needs to be re-rendered, adding significant cost and complication to such a project. Steiger says Shaw will wait until Internet content creators build up a "walled garden" of Internet content redesigned for TV viewing.
While Steiger and other cable industry executives might have to wait for a few technologies to mature, they certainly wont be idle. Theyll be busy making money from their new digital networks.