Editorial : A Radar Screen for Cable MSOs

In the midst of all the telecom failures these past two years, the cable industry has been-relatively speaking-a roaring success. Today it is best positioned to carry out the residential market triple play: TV, voice and Internet access.

Out of 65 million U.S. subscribers, the MSOs have installed 16 million digital set-top boxes (25 percent) and 8 million cable modems for Internet access (13 percent), and have signed up 1.9 million voice subscribers (3 percent). But to succeed big time, or to get a real return on the $60 billion invested in two-way system infrastructure, they will have to invest in new technologies and at the same time compete against those who have a host of new counter-technologies. So, here are my top 10 technologies or competitive considerations that should be on cable MSOs' radar screens, while of course highlighting the real challenges for next-generation cable: billing and OSS.

1. Next-Generation Set Tops

If there ever was a gap between reality and what you see on a cable TV trade show floor or what you read in vendor press releases, next-generation set-top boxes are it. Today's digital set-top boxes basically give you extra channels for more premium movie packages. These boxes eventually will take advantage of the two-way channel that can incorporate personal video recording (PVR) so you can see programming packaged for your preferred viewing time, video on demand (VOD) for VCR-like movie experiences, home networking with IP devices and more.

All this sounds good for cable operator revenue, but neither the standards (middleware between set-top applications software) nor the hardware is ready. Who knows how all of these software applications will play together, let alone how billing, service provisioning and other cable OSS development will be accomplished? With an embedded base of 16 million first-generation digital set-tops, CPE or non-cable-owned PVRs on the market, and no real billing or OSS development progress, next-generation digital set-top boxes are out of my three-year radar range.

2. DOCSIS 1.1 and VoIP

Whenever I hear cable TV executives talk about DOCSIS 1.1 and/or VoIP, I chuckle, but I give them the benefit of the doubt regarding their intelligence. I say to myself, OK, they are trying to drive up the value of their stock by differentiating themselves from their RBOC competitors, or trying not to be embarrassed over all the wasted dollars used to develop the technologies for VoIP via cable TV.

First, what's DOCSIS, what's good about it, and what doesn't make business sense? Data-Over-Cable Service Interface Specification (DOCSIS) comes in three basic flavors:

o DOCSIS 1.0-A basic cable modem providing Internet access and a little more.

o DOCSIS 1.1-Can support VoIP, constant bit rate services, security, public key management and more.

o DOCSIS 2.0-The future, very high speed standard, but not on anyone's development radar screen, yet.



DOCSIS 1.0 is a technology success because it's the basis of today's cable modems, and they produce all that new revenue from Internet access. DOCSIS 1.1 is the basis for cable companies providing VoIP, but in terms of new revenue it's a turkey. Here's why, from an infrastructure perspective.

Upgrading the cable modem via a truck roll-Yes, most DOCSIS 1.0 modems can be upgraded by sending out a truck and technician. The specification says you can download the software upgrade-but don't believe that's all you need to make VoIP work. Truck rolls will be needed, and they are expensive.

Upgrading the CMTS-The operating system in the Cable Modem Termination System (CMTS) has to be upgraded. No cable operating system has done this to date outside a laboratory environment. Also, a public key manager, bandwidth, provisioning systems and other OSSs are needed to make this happen in an operational environment. None of these OSS systems today are off-the-shelf.

MTA Device-To interface a conventional telephone or in-house wiring system into an upgraded DOCSIS modem, you would need a multimedia termination adaptor (MTA). Yes, you can get a call over the link from MTA to CMTS in the lab, but where's the real-world billing and/or OSS connection? Not here yet!

Softswitch Readiness-Finally, you need a softswitch between the CMTS and the PSTN. There isn't a softswitch in this country that performs as a Class 5 local switch in the PSTN other than in a field trial environment. The first cable operator to deploy a softswitch in a local, Class 5 environment and serve more than 2,000 homes will be the record-holder-as long as the service lasts more than a month before being abandoned like the other cable softswitch projects. The biggest barrier to softswitch deployment is the lack of support for switched voice billing, service provisioning and more in this environment. And if you have any doubt about vendor support for cable softswitches, look at the exhibitor list at the NCTA Cable 2002 show. Where were Lucent, Nortel, and other big switch vendors? Not there-market abandoned.

Bottom line: Traditional circuit-switched technologies support the 1.9 million cable telephony subscribers today. Both AT&T Broadband (1 million subscribers) and Cox (500,000) say they are profitable with this service. Consumers are going for the bundled package of cable TV, Internet access and voice, and they understand basic circuit-switched voice service. Besides, 30 percent of residential consumers would probably switch to anyone as long as it's not the local phone monopoly.

Given the above, proponents of cable VoIP DOCSIS 1.1 argue that VoIP is more bandwidth-efficient. True, but the percentage of voice traffic should be very small compared with two-way Internet traffic in the future. The cable MSOs will have substantially increased return path capabilities via fiber to the neighborhood upgrades, mini hubs and improved modems-not for voice, but data traffic. Today's 1.9 million users of circuit-switched cable voice haven't crashed the network capacity-wise yet, and neither will the next 30 million new voice subscribers expected in the years ahead.

VoIP does support voice for video gaming, but you don't need VoIP via a softswitch for that. Create a service package that handles LAN-based Session Initiation Protocol (SIP) phones. Then you can support multimedia via LAN phones plugged into existing standalone DOCSIS 1.0 modems. On the other hand, if over half the phones in a cable operator's world would eventually be used by these gamers, then it's time to think of VoIP technology-and of course, then I'd be wrong. Highly unlikely!

The bottom line: Circuit switching technology-with all its legally mandated 911, wiretap, operator intercept and PSTN interconnection features, plus all its billing, service provisioning and other established OSSs-is generating cable profits. The existing local phone market is $100 billion, of which the cable company has less than 3 percent. There is so much potential growth for POTS, so why screw up with an unproven technology like VoIP? Cable VoIP and DOCSIS 1.1 are off my radar screen for years to come.

3. Cable Home

One of the major challenges homeowners are going to have to deal with is the expected explosion of IP devices in the home. Everything from home security to entertainment components, cable set tops, PCs and even refrigerators will require not only LAN connectivity but also wide area network (WAN) connectivity as well. Not many consumers have the technical talent to become a LAN network manager, and even fewer will be interested in coming home after a hard day's work to start configuring IP devices around the house.

Ignoring, for the sake of argument, the consumer's skill or interest level, one could buy a home router, plug it into a cable modem and assign private IP addresses to home units. The problem with this, from a cable operator's perspective, is that the operator would have no visibility into the home and virtually no opportunity to add value (in other words, generate more revenues).

Well, you say, the cable operator could assign IP addresses to every appliance in the house. This is not practical, because address management would become a nightmare; there aren't enough permanent IP addresses to go around, and every time a PC sends a diagram to a printer it would have to go to the head end and back, wasting loads of valuable two-way cable bandwidth.

So enter CableHome, CableLabs' answer to this problem (and revenue opportunity). The cable operator would provide a portal to the home, IP address allocation to PCs and IP appliances, network management and testing, security and more. Sounds great, but all this would be usage- and resource-intensive, including expensive manpower for customer support. And a real billing system challenge.

CableHome is a great idea for revenue today, but billing and OSS are too complex, and the customer service manpower would be too expensive. CableHome is not on my MSO radar screen for years to come.

4. Open Access

Time Warner merged with AOL, and AT&T Broadband acquired Media One. The FCC required both cable operators to open their networks to equal ISP access. This opportunity and $1.00 will get ISPs a cup of coffee. If you have Time Warner's Road Runner or AT&T Broadband's ISP service, why pay an extra $20 a month to get AOL? In fact, my understanding is that some of Time Warner's CSRs will tell customers who sign up for Road Runner that they don't need AOL.

On my radar screen is the slow demise of dial-up Internet access and the position of traditional ISPs. The cable companies will eat the lunch of ISPs, and Time Warner will be spun off from AOL because it's more valuable on its own.

5. Revenue Sharing and Settlements

The key to super success of cable in the future lies in its ability to deliver IP multimedia-based content, so being able to customize billing, revenue sharing and settlements with content providers is a must. The cable industry, however, in its standard processes of late tends to collect every requirement imaginable and tries to create an all-in-one standard. Not only does the standard become too complex (CableHome, OpenCable, DOCSIS 1.1 etc.), but billing and the other OSSs become ever more complex, let alone revenue sharing and the settlements process.

On my radar screen is a movement of individual cable operators and content providers focusing on new-generation content delivery models, with revenue sharing and billing as starting points.

6. Wi-Fi and Cable

Wi-Fi or 802.11b is sweeping the nation, if not the world. The basic technology components are a 802.11b interface plugged into a laptop providing a radio connection to a multi-user access point. This box in turn interfaces typically to a T1 circuit (1.5 Mbps) providing a connection to the public Internet or a corporate private IP network. The interface is embedded in either the laptop or an external interface card that costs $50 or so. The access points can connect about 64 laptops to a server at data rates from 100 Kbps to 11 Mbps (in theory), at distances up to 300 feet or more using unlicensed, free spectrum in the 2.4 GHz range.

The reality is that by the end of the year, almost every laptop sold will have a Wi-Fi connection that can be used to access the Internet in almost any airport, hotel, coffee shop, university campus and more. Hundreds of entrepreneurs providing authentication, authorization and billing systems will be backed by wireless service providers such as Sprint PCS and VoiceStream. The cable industry hasn't paid much attention except for consumer-based products such as access points you can plug into cable modems and wirelessly interconnect PCs. In addition, the consumers electronics industry is promoting 802.11a, which has higher capacity (up to 54 Mbps) and operates at a higher frequency (5 GHz).

On my cable radar screen, Wi-Fi is a disruptive technology and will lead to reduced cable MSO opportunities and revenues:

Customer point of contact-For a consumer driven by high-speed Internet access, Wi-Fi is a dream. The problem for cable is that it loses its customer contact to another player other than the conventional ISP. Someone else is providing authorization, authentication and accounting (billing). This user is not the cable MSO customer, it's someone else's customer. The cable operator is just providing a dumb, flat-rate broadband pipe connection.

A fourth broadband pipe to the home-Rightly so, most cable operators see the RBOCs and satellite providers as their competition. The reality is that anyone with a T1 connection to their home or apartment building can become a "hot spot" service provider, reselling Internet access to neighbors within a 300 feet range, and further with Wi-Fi repeaters.

Bottom line: Cable and RBOC DSL providers are viewed as monopolists. A dependable rule in the residential marketplace is that 30 percent of a monopoly's customers will change to an alternative provider even without a cost savings benefit.

7. 3G and Cable

Wireless cellular or PCS companies are generally not viewed as cable competition. The limited wireless operator spectrum assignments today permit asynchronous data transmission at only tens to hundreds of Kbps. Such speeds are not competitive with cable modems or any entertainment video products cable offers today.

On my cable MSO radar screen appears a lot of synergy between 3G and Wi-Fi operators. Throw in direct broadcast satellite (DBS) and you have a triple play hybrid competitor, particularly in rural areas or areas where you can't get cable modem or DSL service. All that's needed is billing and OSS solutions for this collection of network technologies.

8. DBS

Cable knows DBS is a competitor, and in a few years it will be close to filling the residential anti-monopolistic penetration rate of 30 percent. In its favor, DBS has a national coverage footprint, 23 percent subscriber penetration, and the National Football League (NFL) Sunday package. The negative for DBS is high transmission latency (about a quarter of a second to go from the DBS head end to the subscriber satellite dish) and lack of a cost-effective return path other than a dial-up telephone connection.

The disruptive technology here regarding cable operators is the falling cost of set-top storage permitting PVCs, and of course all the channels are digital on DBS, instead of only the premium pay channels for cable. Couple this factor and the interest consumers have in HDTV for sports viewing and you have a strong competitor for next generation cable.

In addition, a disruptive trend for cable is the potential merger of the two major DBS players, DirecTV and EchoStar. A merger would mean much more satellite capacity because of the elimination of redundant channel distribution. For example, with extra channel capacity, DirecTV consumers in the Washington, D.C., area would be able to get HDTV via satellite at a better elevation angle. Today they have to aim their dishes just 10 degrees above the horizon-meaning that if they have a tree behind their house to the southwest, they're out of HDTV luck.

The other disruptive trend is marketing. People say they will buy an HDTV set first for DVDs, second for video games, and third for access to satellite or cable. The interest in satellite or cable goes up immensely if sports are broadcast in HDTV format.

Watching a hockey game on conventional TV means watching the players but barely seeing the hockey puck and never seeing the goal shot. Sports packages could be the HDTV killer app. The other bad news for cable is that the extensive sports packages are secured by DBS.

9. DSL

The RBOCs have made a miserable showing with DSL Internet access compared with cable companies. For every RBOC DSL line sold, cable sells two or more cable modems. The other good news for cable MSOs is that you can't get quality entertainment video with today's DSL technology. Also, the RBOCs seem more directed at slow rolling the CLECs in the local business market and pushing their entry into long distance rather than pushing DSL competition with the cable MSOs. Moreover, since cable is the only real competition to the telco local loop, regulators don't appear ready to regulate cable TV (meaning that the regulators have not tromped on cable's triple play, although they haven't been helpful at all regarding phone service interconnection to ILEC networks).

So what's the RBOCs' threat regarding DSL? In terms of technology, it's the arrival of MPEG-4 and IP video streaming over the Internet. MPEG-4 is the next-generation compression technology. It provides good quality video at 0.5 to 1 Mbps-low enough to go over DSL-compared with today's MPEG-2, which requires 3 to 4 Mbps and is out of DSL's range. IP video streaming, however, requires managed IP networks, which means new IP billing, provisioning, inventory control and public key infrastructure (PKI) for authentication, authorization and security.

On my cable MSO radar screen appears RBOC video competition, but not for years to come. For now the RBOCs are again very focused on crushing the CLECs and getting into long distance.

10. Fiber to the Home

The optical products people pumped billions of dollars into fiber R&D, peaking at $25 billion in 2000. The fallout is that the economics of passive optical networks (PONs) equal that of cable's hybrid fiber coax (HFC) networks. The comparative residential triple play performance (video, data, voice) of PON against HFC is a wash. But if your residential customer is looking for enterprise or business performance, PON has significant advantages.

The other bad news for cable operators is that CLECs, electrical utilities and municipalities today are making deals with new home developers. Home developers are smart business people, and the deals go like this: When you buy this new home, you must join the homeowners association. Included in your mandatory monthly flat fee is phone, Internet access and cable TV (via fiber to the home, or FTTH). If you want to sign up with another service (cable, Internet access, RBOC phone), go ahead, but you aren't going to get a refund on your monthly homeowner dues. Is that a great way to get a near 100 percent triple play service penetration take, or what?

The good news for cable MSOs is that only 1 percent of the market consists of new home builds. The bad news is that many will go with FTTH. So FTTH is on my cable MSO radar screen today.

This is my watch list for cable MSOs. If you have to be brought up to speed on these new broadband technologies and opportunities, TeleStrategies offers a number of seminars, conferences and programs on these topics in many cities. Go to www.telestrategies.com or call 703-734-7050 for program details.