Cable TV vs. Cable Broadband

Cable TV has come a long way since the 1990s. The industry's customer service record was so abysmal that it was lampooned in the Ben Stiller comedy The Cable Guy, featuring Jim Carrey as a mentally unstable cable repairman who turned a subscriber's experience into the stuff of nightmares.

While it hasn't completely cleaned up its act (remember the Comcast Sleeping Repairman?), cable TV has improved its reputation with respect to customer care, billing, and service. And the U.S. pay-TV market is thriving. Cable TV is a nearly $60 billion industry. If you include direct-broadcast satellite companies like DirecTV (DTV) and Dish Network (DISH), total pay-TV rises to $80 billion. That's not including the $25 billion to $30 billion cable providers collect for related communications services such as telephony and high-speed Internet.

Here's the problem. The game is no longer just about service. Forget on-time appointments, nice front-line service people, and attractive billing statements. Those are table stakes for pay-TV providers.

Broadband Video Content

Now, it's about the experience of broadband video content itself. The cable companies, known in industry circles as multiple system operators (MSOs), have proved more adept than telecom carriers at delivering high-speed Internet access. In so doing, the cable industry has given its customers a way to bypass its marquee product, monthly subscriptions to programming delivered over hundreds of pay and premium channels.

Lightning-fast connections provided by industry stalwarts such as Comcast (CMCSA) and Time Warner Cable (TWC) have few practical capacity limitations for the average user. Remember all those online video players in the late 1990s that went nowhere? Those startups failed because of online bandwidth constraints at the time—online access was mostly based on dial-up connections, which required lengthy downloads to access video content or video (and even audio) streaming that was herky-jerky, at best.

That's why YouTube didn't exist until four years ago, why it can now serve several hundred million video streams a day, why it controls 40% market share of the world's online video views, and why it sold to Google (GOOG) for $1.7 billion three years ago.

Until recently, cable industry executives dismissed broadband as a threat. They focused on YouTube, and saw it as a business almost completely unrelated to their own. YouTube specialized in short-form, consumer-generated, virally distributed video entertainment (read: cats stuck in trees). Cable specialized in long-form, professionally generated, and strategically marketed video entertainment (read: Mad Men).

Never the twain shall meet, right? Wrong.

TV Service Is Secondary

These days, just about every cable network with any digital marketing savvy uses its own site and others, such as Hulu, to give online users a chance to sample its content. Many networks make full shows available free of charge for limited periods of time, often in high-resolution formats. Even with a 1.7% market share, Hulu is now the third-largest video-playing site on the Web. The company, owned jointly by NBC (GE), News Corp. (NWS), and Disney (DIS), is expected to generate revenue of about $180 million this year, roughly equal to that of YouTube.

That means cable providers are seeing a whole new generation of online users who are perfectly happy to pay $30 a month for a "naked" cable modem or a digital-subscriber-line connection provided by telecom companies, but have no need for the $150-a-month premium programming package. "In the last year we're starting to see from consumers the indication that the broadband part is more the anchor part of the bundle than video—that they value that more highly," Time Warner Cable CEO Glenn Britt was recently quoted as saying by Multichannel News. "I think we're going to see more of that in the future."

You can't blame such customers, many of whom are cash-strapped college students moving into university towns, because they've figured out how to access great video entertainment online. Hulu alone hosts 110 broadcast and cable networks, along with a library of more than 1,000 television shows and 400 movies. Of course, college students aren't the only ones looking for savings these days. With the transition to digital TV taking place in the U.S. later this month, a $40 antenna will get you access to prime-time programming, much of it in high definition. That could further reduce consumers' willingness to pay cable operators hefty monthly fees for video entertainment.

Movie Downloads

Moreover, if you're sophisticated enough to figure out how to plug your Ethernet cable into an appliance—say, a Roku device or Apple TV—that accesses your big-screen TV, then, Presto! All that online entertainment is available on the big screen.

Of course, young consumers seem to have no problem watching TV and movie content on small screens. Laptops and iPhones do just fine for many viewers, which explains why you can now download or stream thousands of movies from Netflix (NFLX),'s (AMZN) Unbox, or Apple's (AAPL) iTunes. And on-demand movies may be big business for Big Cable, but they're also big business for Apple—which sold nearly $1.9 billion in movie and music content on iTunes in 2008.

Earlier this year, LG released new lines of plasma and LCD large-format screens with Ethernet ports built right into the sets—another way to skip the cable provider altogether. The price premium on those sets is a couple of hundred dollars. Buy one of those new sets, switch off your cable package in exchange for simple access, and you break even on that Ethernet port in, say, two months max.

Cable TV's Lack of Features

Of course, someone's got to pay for all that "free" content. On Hulu, it's the advertisers. For Unbox and iTunes, it's the retail sale for download or streaming. But, for cable providers, the bypass is clearly a major threat. After all, the cable industry pays $6 billion to $8 billion a year to buy premium content from cable networks. To sustain such payments, cable companies need more than a Net-access business.

But that means they've got to make the experience of using a converter box, digital or not, competitive with the video experience online. Last time I checked, my Comcast screens were appallingly devoid of compelling features. There were no options for customization or personalization; there was no access to rich data for TV or movie selections; no social media components; no tools to curate and collect what we like to watch; and an utter and complete absence of recommendation engines, user ratings, and other guides to selecting content.

If that's the cable industry's best response to the broadband Web, we're going to see an instant replay of the train wrecks that have transpired in the music, the newspaper, and, most recently, the magazine industries in the last decade. Simply put, pay-TV won't be an $80 billion industry for long.

    Before it's here, it's on the Bloomberg Terminal.