The ability to control, and not merely distribute, content has become central to cable TV operators' futures as new technology redefines how media-and advertising-will ultimately be delivered to consumers.
Industry observers say a new wave of ventures and partnerships is on the way that may redefine the cable landscape.
The notion of linking content and distribution is far from revolutionary. But it has now become almost critical in an environment where alternative distribution, from broadband and same-wire Internet phone service to wireless and TiVo-like offerings, is bubbling up as both cable-controlled products-and competitors.
Microsoft Corp., for one, has been pushing the notion of IPTV, a service that allows telecoms, among others, to get into the video-delivery game. Bell Canada is currently conducting a trial of the service. Similarly, Time Warner Cable is running its VoIP Digital Phone service in Portland, Maine, and five other markets, and expects to be in 31 cities by the end of the year.
As media giants like Comcast and Time Warner align with additional content providers, the effect on marketers will be subtle. While there may be fewer media conglomerates with which to negotiate, cable companies will have more platforms across which to sell, maintaining a degree of checks and balances, says David Joyce, an analyst with Miami-based Guzman & Co.
MAJOR SHIFT APPROACHING
Advertisers will feel the change most when the emerging technologies of video-on-demand and personal video recorders approach critical mass, enough to significantly disrupt traditional ad viewing. Marketers will need to be opportunistic to capture eyeballs, and solutions could involve downloading advertising to the PVR and making more entertaining and/or interactive commercials.
Meantime, Comcast has proved that scale and scope work, and that the operator is destined to get bigger-both in footprint and in content ownership.
Other cable operators will likely expand, too, especially given that Adelphia Communications' 5 million customers will almost certainly be dispersed over the next 12 to 18 months now that it's on the market. Likely suitors include Comcast, Time Warner and News Corp. Comcast, in addition to Sony Pictures Entertainment, is also said to be interested in acquiring MGM as another way to extend its content-generation tentacles.
Owning both content and distribution protects a company when value shifts from one side of the entertainment supply chain to the other, says Doug Shapiro, managing director of Banc of America Securities. "It's an offensive and defensive component. If you are in just one box, you are exposed to value shifting away," he says, adding that more deals mimicking the proposed Disney-Comcast union will come.
Speaking at the National Cable & Telecommunications Association's National Show in May, Comcast CEO Brian Roberts declared his company is still shopping and said, "Hopefully, we'll be able to build those assets whether it's on our own or acquiring others."
Horizontal integration is a strategy proven by the marriages of Time Warner and Turner Broadcasting System; Liberty Media and TCI; and News Corp. and DirecTV. NBC and Vivendi Universal Entertainment just completed their merger, another sign that growth and the cross-promotion that scope affords are critical to survival. Meanwhile, cable and broadcast giant Viacom has gone against the grain and continues to focus on ads as its revenue source.
"We will see another round of consolidation on the distribution front, and you will see [cable] distributors opportunistically try to align themselves with some content over the next few years," says Ted Henderson, analyst with Stifel Nicolas & Co. in Denver. "You will see distributors grow in scale and scope."
Now that Adelphia is in play, Comcast, Time Warner and Cox Communications are expected to divide the booty. In addition, most observers believe it's only a matter of time before Time Warner swallows up Cablevision in New York, and its coveted footprint that includes Manhattan and its rich local entertainment and sports franchises.
"Because the bigger companies keep getting bigger and the content companies are quite large, you really have to be on an even playing field with your peers in size to have relatively fair or comparable negotiating power when it comes time to renegotiate programming contracts," says Mr. Joyce.
Comcast understands the value of content plays through its ownership stake in popular networks like E! Entertainment Television, as well as emerging networks such as TechTV/G4, Outdoor Life and its regional sports networks. But a stable of programming like Disney's-with ESPN, ABC and Disney Channel-is in a class by itself and no doubt will continue to be pursued by distribution powerhouses.
Analysts say the key fact is that content ownership helps control programming costs for distribution.
In fact, News Corp.'s plan to introduce another cable network, possibly this year, underscores the importance and advantage for distributors to pump their own product into the pipeline. That network, which is rumored to be an outlet for news, sports or entertainment headlines, would have an immediate guaranteed customer base of 12 million-plus homes through News Corp.'s stake in DirecTV.
bevy of new technologies
The need for strategic acquisitions is heightened by the dynamic and uncertain state of new technologies like wireless communications, broadband content delivery through home computers, PVRs and VOD that are rapidly cementing their roles in mainstream media. As alternative distribution become more prevalent, cable operators view content development as a hedge.
A recent study from the Pew Internet & American Life Project found that the number of adults who have broadband Internet access at home or at work reached 68 million as of March 1, signaling that broadband is growing more potent as a service and distribution platform.
That's both a threat and an opportunity for cable operators, since they sell high-speed access but also run the risk of having their primary TV/video pipelines bypassed by the Internet as its role in distributing content expands.
In fact, when the NCAA basketball tournament in March ran live on both Viacom's CBS and online, Tom Wolzein, an analyst with Sanford Bernstein, highlighted this threat in a research note. "The games destroyed any notion that the computer is any different from television, or that cable operators are anything more than a dumb pipe in the future unless they actively negotiate to keep content off the Web," Mr. Wolzein said.
One of those alternative distribution systems, Feedroom.com, streams news and sports video. "Ninety percent of TV viewing is concentrated over only 30 or 40 channels," says Feedroom.com CEO Jon Klein. "So if they don't watch out, cable operators are going to find their customers watching TV delivered over IP, paying the [multiple system operator] for the high-speed connection only and not for hundreds of channels they could care less about."
This array of new technologies is challenging traditional business models and creating new ones. By 2007, cable will control 10.9 million of the 24.7 million home PVRs in use, while satellite will account for 9.9 million, according to the Yankee Group. At that time, VOD will be in 30.7 million homes, according to research from Leichtman Research Group.
That potential has made advertisers take notice. On-demand and PVR advertising has the potential to co-exist with linear ads because marketers view linear and non-linear ad options differently, says Joe Uva, president-CEO of Omnicom Group's OMD Worldwide, New York.
"I think the piece gets a little bigger," he says. "The personalization aspect and the convenience are really what drives the advertising there and because there is the opportunity to create different [types] of marketing messages on a one-to-one basis."
The cable industry's technological infrastructure is being transformed to enable advertising in next-generation services. For instance, Time Warner in Portland, Maine, uses Gotuit technology to index VOD content from Scripps Networks outlets like Food Network or DIY-Do It Yourself Network, so that viewers can pause the show and then view long-form advertising related to the programming.
Another example is the introduction of a new software solution called AdPoint from VOD services company N2 Broadband. The software allows cable systems to insert ads into on-demand content.
VOD and PVRs aren't yet influencing advertising and buying decisions, but they need to be top of mind for advertisers, Mr. Uva says.
These new systems will be providing richer data about consumers' media consumption and habits, which will be a key advantage for advertisers, Mr. Uva says, noting that PVRs have "given control to the consumer."
The growth of new consumer-controlled media technologies may compel advertisers to push creativity so far that someday it will be more akin to entertainment than to marketing, says Guzman's Mr. Joyce.