Telephony and cable: Pacts, future plans, market competition

In addition to technological pressures, an aggressive competitiveness comes into play nuanced with no little fear. Perhaps most obviously, the video market is experiencing a colossal cataclysm as it moves hesitantly towards the electronic superhighway of tomorrow. The hallmark of this mode of change is the dynamic fusion of what was a number of different communications businesses: television, telephone, computer, cable and wireless.

But significant technical and systems challenges must be faced in the construction of the electronic superhighway of the future. A potential viable, broadband, switched, digital, integrated, home system, including fiber optic convergence, computer systems, video signal compression, digital video switched networks, storage systems for video archiving service, semiconductor devices, consumer electronics, software interface with complex navigation and very fast flexible communication networks.

There will then be a need for huge data storage systems, smart bases and a new hybrid of fiber/coaxial cable systems to bring compressed signals to home video terminals or "smart" interactive set-top boxes. In solving technical problems, the complexity of the system must be hidden from the consumer through the use of sophisticated software methods for navigation. It will be tested steadily over the next three to five years in preparation for the large-scale development of interactive digital video switched models in the late nineties. During this period, special emphasis will be placed on such important issues as the cost of intelligent user terminals, the interoperability of system components to communicate within an isolated system and, even more importantly, between different systems in the network.

As for the strategic alliances that are emerging between companies globally, the common denominator is the aggressive pursuit of business opportunities. Opportunities not only in the construction and operation of the future electronic superhighway, but, even more importantly, in owning and providing the multipurpose interactive video, data, text, telephone and computer services that will be transported by these networks.

The next chapter examines the challenges of market convergence from various perspectives.

The telephone industry has to follow a series of ways in updating its infrastructure to support interactive services on demand. Within the various modes of employment available, three important proposals are expected to eventually lead to greater use of fibre optics. The main upgrade strategies now in demonstration, or announced to be implemented by several companies in the North American telephone industry, include the implementation of ADSL technology, a limited use of fiber in hybrid/coaxial cable system architectures, and a more accelerated or extensive use of fiber optics in FTTC systems where fiber nodes will be used to connect, perhaps only about 50 to 100 neighboring houses. The Yankee Group has estimated that the cost for each of these implementation strategies will range from $800 to $1,000 per line to retrofit ADSL protocols, $1,000 to $1,400 per household when upgrading to a hybrid fiber/coaxial cable network and will increase to $1,200 or $1,600 per household for the fiber-based system where the main nodes are built to serve large blocks of neighboring houses (see Figure 1).

The telephone industry has diverse approaches and plans for the future, but the distribution of interactive video services is expected to play an important role for all industry participants, regardless of size or individual corporate strategic vision. The convergence of market and business is being handled by a variety of merger pacts and cutting-edge technology, causing considerable delay in establishing policies and regulatory environments that become obsolete in the face of recent events. Interestingly, the judicial branch of the U.S. government has been key in making important decisions, seen as points to promote the accelerated convergence of today's communications.

The cable industry has the advantage of being a well-established market provider of video service subscribers.

Currently, cable systems cover 98% of U.S. TV households with 62.5% subscribed to basic services and 27.5% paying for cable services. There are 78 cable network services available for 11,385 local cable systems in the country. In the short term, the cable industry is preparing to develop the pay-per-view market. By staggering the initial times of popular shows presented on various channels, at least the current video-on-demand services can be covered by the existing infrastructure of cable systems. With notable developments in terms of compression, video servers and decoder interfaces, the industry is focusing towards a complete platform of interactive transactional services.

In 1992, the cable industry invested $3.8 billion in programming and generated $21.7 billion from the combination of core revenue and subscriber payment profits and earned another $3.4 billion in advertising revenue. Only 10.4% of U.S. cable systems have 54 or more channels; the majority (54.9%) have 30-53 channels. Texas has the largest number of cable systems (887) and the District of Columbia has the lowest (3). The top 10 multiple cable system (MSO) operators account for more than 56% of total subscribers.

The cable's response to the rapid development of telecommunications business plans is clear: it's not about "attacking" them or "joining" them but both. The development of an interactive 500-channel hybrid fiber/coaxial cable system is in the crosshairs to become a platform for the cable version in the information superhighway of the late nineties.

The complex installation of fiber on main lines and often on link devices is a strategic move by cable operators to counter the competitive impact coming from telecommunications fiber and copper ADSL services.

Rebuilding with fiber in general will enable cable systems to increase capacity, deliver clearer signals, provide more reliable service, and enable new interactive services.

The main decisions or questions that must be solved are not technical but: 1) how to offer services that meet existing demands or those generated by new consumers? And 2) how to make technology "friendly" enough to win over those who have a phobia? The cable industry's answer to these questions, unlike phone companies, is to offer more choice and more control.

To meet consumer demand, cable has focused on offering more varied programming, both broad-based and niche market, and with better pay-per-view services in the hope of achieving market leadership. In order not to overload the consumer with this universe of interactive programming and services, cable tries to offer sophisticated control systems and computer-driven navigation that give people with fundamental ability to choose the options that most satisfy them. The powerful microprocessors of the new computer will be the basis of the technical interface that aims to expand the new universe of video services. Alliances between computer companies and the cable industry to develop the new interactive digital converter are developing at high speed. And, with the emergence of advanced ATM multiplexing at the end of this decade, new multimedia programming products will be broadcast as easily as current pay-TV channels.

The permanent increase in the cable operator's profit margins will result in offering new value-added services that could include telephone-based voice services or other digital information services. Easing restrictions on telephone companies' entry into the provision of video services (and perhaps their re-entry into other lucrative businesses including long-distance and equipment manufacturing) would seem to point to a similar restructuring of the rules relating to cable telephone services. Currently, regulations prevent this option and there is still not enough bandwidth or appropriate switching capabilities. The eventual upgrade of fiber/coaxial cable and steps toward a star-switched network architecture will help enable cable systems to offer telephone services with "dedicated alternate access." Industry analysts suggest that the transition from offering dedicated alternate access services to fully switched, long-distance services is the next logical step for cable operators.

Businesses over or near improved networks will be important targets for new cable telephony services at competitive costs. The next uphill step for cable could undoubtedly be the ambitious jump to the local home phone market. In the case of the United States, regulatory restrictions and technical impediments in cable systems cannot change overnight; however, the climate for making major legal and regulatory changes is increasingly responsive and technological advances are happening at an astonishing speed.

Given the relatively mysterious nature of existing U.S. telephone regulations, the key for cable operators choosing to offer telephony services will be to separate local calls from those sent to the cable operator by long-distance carriers. The reason is that under existing rules, a cable operator acting as a Competitive Access Provider (CAP) cannot transmit even a portion of a locally generated call to a local cable subscriber.

To handle this separation of services, local calls made by local cable telephony users must be made directly to the local switching telephone company (LEC), while long distance calls made by cable telephony users may be handled by the cable system operator. At some point in this flow, customers will be able to make both types of calls through cable telephony services, although this may take a few years. By then, perhaps the telephone industry has merged with the MSO (main operator of the service), or has acquired a significant part of it, in which case it will not matter where a call is generated, or which lines are used to transmit users' telephone services.

To gain an advantage of the information superhighway, it may be enough to use cable systems to connect to the burgeoning interactive information market instead of using traditional PC modem phone lines. Great interest has been generated in hundreds or thousands of users looking to enter the Internet. Several major equipment producers, system operators and sellers of online and data services announcing tests to study the possibility of opening up the interactive marketplace in the near future. The cable-PC connection could accelerate the advent of at least a portion of the electronic superhighway that is promised as part of the massive improvement of cable and telephony network infrastructure nationwide, but without the cost or wait involved in the full development of these projects.

Thanks to the combination of large increases in the use of fiber and signal compression, a growing segment of the cable industry is trying to make its investments in fiber optics in new business platforms from which they can offer telephony services in direct competition with the local telephone company. In particular, cable operators are considering future business opportunities in new personal communication services (PCS) or pocket telephone services, among other options for interactive and telephony/video services. In the United States there are more than 30 cable operators, including major MSOs such as Cox, Comcast, Cablevisión, Continental, and TCI that have received experimental licenses for PCS services.

In addition to posing a challenge to the monopolies of local telephone service companies, PCS could use cable as a cost-efficient way to offer other services to the consumer, such as energy control and home security monitoring, or management services such as document viewing and interactive television.

MSOs, including Cox, Comcast, Cablevision, Continental and Time Warner, have participated in demonstrations of PCS links, either in connection with long-distance carriers or as part of an interconnected network of local systems in a local state or region. In November 1993 Boston's Cablevision, Continental Cable, and Time Warner established an interconnected statewide network in Massachusetts to demonstrate that cable systems can be interconnected to create a broad network infrastructure to support PCS telephony services.

Several equipment producers and distributors with vast experience in the sale of converter equipment are developing a technology that will integrate video data and cable telephony into fiber/coaxial systems.

Scientifi-Atlanta introduced CoAccess, a family of products developed to make cable-phone interconnects an option for cable merchants. First Pacific Networks and ANTEC are also developing product lines based on a SONET digital carrier wave system approach.

General Instrument and DSC Corporation have agreed to develop a cable telephony system that unites GI's extensive experience in cable boxes and DSC's expertise in digital telephony switching, transmission, access and equipment for private networks. The GI/DSC equipment will be based on DSCL's existing SONET Litespan and Starspan systems. The customer's equipment can be installed in a decoder box in the basement or outside the house. The further development and refinement of cable telephony technology will allow cable operators to use their fiber/coaxial networks to offer almost any telephone service including long-distance interconnections.

Convergence agreements and manoeuvres have made smaller cable systems wonder if they will be able to survive the great pressure to enter the information superhighway. In terms of numbers, the majority of U.S. cable systems (70%) are smaller companies serving fewer than 5,000 subscribers, with more than half (51%) serving 1,000 subscribers or fewer. These smaller systems reach approximately 2.1 million homes, or 3.5% of all households connected to cable TV service. Pressure is mounting to improve all cable systems but smaller operators, usually located in rural areas, find it difficult to develop their plans. The business climate, which includes stricter regulations for cable operations, is depleting banking and financial resources. With the scarcity of financial resources, the decision to leave the cable business represents an increasingly attractive option for small cable system operators, representing the most suitable time for many medium or large system operators to look for bargains. There are already less stringent regulations for cable systems with 1000 or fewer subscribers, but even greater relief is sought. Industry analysts are wondering if this won't simply be a tactic, especially when it comes to operations that are owned by the industry's top MSOs, such as TCI and Time Warner. In the face of today's rising operating costs, the pressure for future improvements are, in the concept of many, simple fantasies.

In his global vision, the cable industry is less diversified than that of the RBOC (Bell Regional Operating Companies), perhaps because the cable business and its strategic future is more a direct line of expansion of video distribution where cable is already an important element of the market. Consequently, the vision of cable operators in terms of the future remains that of a conventional business scenario: the continuous improvement of the business and the search for expansion opportunities.

These are not new components of cable business plans, as the industry has been successfully achieving them for the past 25 to 30 years. The obvious difference for the cable industry will be the impact it will suffer from the investments of telephone companies or the acquisition of companies by this sector. In any case, this means more liquidity for capital expenditures on network upgrades.

In addition, the emergence of cable telephony as a business option will undoubtedly be a growing point of interest for cable operators, especially those close to major commercial markets or more densely populated areas that could cause wireless service links. and long-distance networks were a new relatively profitable business opportunity.

Calculations of the overall upgrade costs for the cable industry and telephony services in general are speculative at best. Typically, these calculations are drawn on the basis of wide ranges based on various market factors, technology, policy, and regulations that can affect the schedules and costs of construction companies and enterprises. The critical aspects faced by phone companies and those in charge of developing strategic plans when preparing budgets for these expenses, are related to the fact that the demand for new services by users is just a guess.

In the next five years alone, cable and phone companies may spend $50,000 on building advanced two-way networks, and this is only part of the total expenses that can reach the sum of hundreds of millions of dollars.

According to a rough estimate by the Center for Telecommunications Management at the University of Southern California (USC), $422 billion is projected to be spent over the next 20 years. Local cable and phone companies already spend about $25 billion a year on new equipment and upgrades, according to calculations by the Federal Communications Commission. Therefore, according to USC, if current spending rates are maintained, devoting $422 billion over 20 years to this end may be within budget, with much of this cost covered by individual customers choosing the new advanced services.

Other cost estimates by Bruce Egan of Columbia University's Teleinformatics Institute indicate that the timeline for the application of future fully interactive cable and telephony architectures will span the next 10 to 30 years. In addition, the cost calculation for building fully integrated, fiber optic and interactive switched systems could be between $100 billion and $500 billion.

Short-term upgrade estimates, more in line with the type of system restructuring and new hybrid fiber/coaxial constructions are now being analyzed by the cable and telephony industries. It is estimated that this next generation of technological development will take 3 to 10 years, costing $5,000 to $150,000. Part of the objectives of the schedule already developed by the cable and telephony industries are presented in Figure 3.

It is difficult to predict specific policy and regulatory outcomes. What is not difficult to predict is a new era of increasingly stringent restrictions and regulations that will result in a more open and even more competitive business environment in the field of communications in the United States. For the future, an environment characterized by a predominant and accelerated massive progress can be foreseen. The trend towards seamless convergence between the worlds of wired and wireless electronic communications will continue with an impact that will undoubtedly have profound consequences.

Convergence does not occur in a vacuum. What was once a slight wave has become a strong wave that is felt in all sectors of the world of communications and in all markets at the local, regional, national and international level. Accelerated by recent convergence alliances, sectors that were previously individualized in the broader communications market are becoming increasingly intertwined. As a result, the conventional division between video and telecommunications services used here is obviously not suitable for today's changing environment but, in the absence of a better organizational hierarchy, offers a general frame of reference for analyzing new developments.

The competitive analysis of the video markets includes comprehensive studies of the competitors of Direct Broadcast Satellites (DBS) and Wireless Video, in addition to the so-called "wireless cable" or Multichannel MDS service transmitters and the new Local MDS services, in the 28 GHz band.