Cable TV vs. Cable Broadband

By delivering high-speed Internet access, the cable industry has given its customers a way to bypass its monthly subscriptions to programming

By Jeffrey F. Rayport

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.

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