Battle Stations: Wireless Cos. Challenge Traditional Media

Intensifying free-market competition will accomplish what the Federal Communications Commission did not: Entice heady cable operators to give consumers more choice and less bundled bull. The same goes for telephone and satellite rivals, which have learned everything they know from the cable giants.

Market forces generally take care of things on their own, given time and a hands-off policy by legislators. It happened with the broadcast television networks, whose decades-long monopoly of mass media was stunted by cable and satellite. Now, the Internet is giving all media players a run.

Today, an emerging cadre of alternative wireless service providers will challenge established media players by providing consumers more of the cherry-picked selection of products and services that digital technology affords. It's just that cable system operators, satellite service providers, and cable and broadcast TV networks prefer serving bundled products in ways that work best economically for them.



This will change--and not because the FCC deemed it or FCC Chairman Kevin Martin pushed for a la carte programming to assure consumers more choice.

The bevy of wireless service options--from Verizon's newly announced nationwide open network to Google's Wi-Fi promise--will provide consumers with new untethered options, like streaming video and downloads and high-speed data platforms, the cost for which will be amortized in ways other than randomly hitching them to unwanted services.

The digital interactive arena presently is dominated by service providers that control and price access according to their business needs. Cable operators such as Comcast and Time Warner have long argued that it would be economically impossible to offer as many niche programming options to subscribers if they were offered a la carte, rather than part of cost-efficient bundles.

Cable programmers such as Walt Disney, Time Warner, Viacom and News Corp. claim the economics of pairing lower-cost, less popular content with product that has broad appeal will result in less diverse, more costly fare. That may not be true in a digital interactive marketplace, in which "long tail" dynamics pay off by charging advertisers a premium for connecting and transacting with targeted consumers. The current bulk distribution of media fare may be less financially lucrative that the combination of single selection and smaller bundled offerings they have yet to try.

"Despite soaring consumer demand for bandwidth, true broadband access remains scarce" for specific, individual uses, concludes a recent Bernstein Research report on the digital revolution. With telcos' massive fiber builds eventually reaching fewer than half of all U.S. homes, and cable penetration teetering between 60% and 70% (the FCC is still trying to figure that out), too little of broadband available through gatekeepers is delivered the way consumers want it and prefer to pay for it.

Unfortunately, the fundamental question of whether cable operators are giving consumers what they want, lamely dished up by FCC chairman Martin, has been lost in a sea of political haggling and heavy-handed lobbying. Martin suffered an uncommon defeat Tuesday in failing to get the FCC to conclude that cable has reached 70/70 market deployment. Such payment penetration levels could be used to justify new regulation to promote greater cable programming diversity. More data is being secured from cable companies in order to draw a firmer conclusion--and we know where that will lead.

However, the FCC's call for consumer-friendly open networking has lit a fire under Google, Verizon and others now scrambling for a share of wireless mobility by leveraging their own tightly controlled networks and bidding for the last big batches of the 700 MHz spectrum being auctioned early next year. The eleventh-hour posturing is not as important as the long-term collective impact of these events to move the digital world a step closer to universal access. Whether Verizon, Google, AT&T, Comcast and others that formally bid choose to partner or go it alone, they all eventually will be forced to work together to assure consumer choice, which may become the new standard.

Google's announced open-network software package Android, designed to work on all cell phones and other mobile devices, was all the catalyst needed for many other media players to join the cause. By the time broadcasters surrender their analog spectrum in 2009 to create the newest wireless plane, many smaller, more unconventional players will be offering consumers universal access to the individual content, products and services they want without all the bundled baggage. That will begin to erode the closed and controlled premise on which cable and satellite operators have built their multibillion-dollar empires.

Despite all the political minutiae at the FCC this week about whether a quantifiable case can be made for imposing requirements on the cable industry, it appears that a laissez-faire market may take care of things on its own. Verizon's offer beginning in late 2008 to "provide customers the option to use, on its nationwide wireless network, wireless devices, software and applications not offered by the company" is the shape of competition to come. It represents a strategic shift for mobile phone companies that will trigger changing business models across the distribution spectrum--and none too soon.

According to Bernstein analyst Craig Moffett, true cable and telco duopoly only exists in about 15% of the U.S. In another 60% of the country, "the need for speed means that cable wins in a walk off--and not just in broadband." In 60% of the country, satellite providers DirecTV and EchoStar are paired with a telco product that is not yet good enough to counter cable's only true broadband pipe into the home.

"Cable has an incumbency advantage in broadband and a dramatically advantaged marginal cost structure by virtue of a single network. Satellite loses in 60% of the country. In the other 40% of the country, telcos cease to be partners with the satellite providers and become their direct competitors instead. Satellite loses in that 40% of the country, too," Moffett explains.

That is why the disintermediation or Internet bypass, represented by the wireless open networking being advocated by Google and others, is an important liberating movement. In its many alternative forms, it should, over time, represent an important marketplace change agent. While it won't bring cable to its knees, wireless alternatives will provide consumers with innovative options to get exactly what they want through all kinds of devices and platforms.

Cable may enjoy a certain amount of monopolistic-like comfort with a triple-play pricing power as a consumer staple of sorts today. But when alternative wireless services are far enough along, in the not-too-distant future, technology-empowered consumers will ultimately decide who wins.

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