• by Diane Mermigas , January 9, 2008

Just as the long-anticipated Internet-bypass is materializing, the cable and satellite distributors most threatened are shifting their content offerings into high gear to the cheers of many Wall Street analysts. It is one of the more intriguing paradoxes to watch unfold this year.

The annual CES show in Las Vegas is heavy with devices designed to deliver every kind of content directly to interactive consumers without relying on traditional middlemen. Their Internet-connected platforms bypass cable, satellite and telephone companies--the gatekeepers whose fees and pre-configured packages define consumer access and choice.

This notable end-run is possible because electronics companies are producing a tier of stand-alone Internet-enabled devices that are cheaper, more compact and simple to use. With the price of lightning-fast broadband access rapidly declining, consumers care most about the end result.

But the Internet bypass is looming in some unexpected places.

Matsushita Electric Industrial's Internet-connected televisions developed in association with and for access to Google its YouTube social network represent a long-predicted convergence of television and the Internet. It also is being mimicked by the Sony- and Sharp-produced flat-screen TVs. It's fertile ground for an Internet-powered a la carte free-for-all that cannot be contained by cable, or mandated by the Federal Communications Commission.

Cable and satellite operators are countering with content options and interactive connections of their own in order to maintain dominance in a media world centered outside the home. Never mind that AT&T and Verizon Wireless (armed with high-speed fiber-optic) and Google (armed with universal search and advertising placement) are battling over spectrum to provide broader, deeper wireless connections that could challenge cable and telephone services, as well as handset and converter manufacturers.

To play to any and all distribution options, content providers are flooding the market with new download offerings from plans for consumer electronics maker LG and Netflix to stream movies directly to televisions, to Comcast's 10-fold increase in on-demand fast-load HD movies and partnered syndicated TV content, to Apple's plans to announce its own video download service.

Many industry analysts are giving cable and satellite providers high marks for their efforts, even if investors are loath to reward them with high stock prices that more accurately reflect their company values. Bear Stearns analyst Spencer Wang this week said he remains positive on the cable industry, since it should sustain high single-digit annual revenue and earnings growth over the next five years--even with intensified competition in multi-channel video and broadband. Wang concedes to "resetting" the expectations bar by basing his risk/reward assessment on cable's new trading lows (dropping his price targets for Comcast and Time Warner Cable 10%), as well as reducing five-year average growth forecasts (6.6% for revenues and 8.3% for earnings).

Few analysts have yet to factor in the Internet bypass, for which the cable industry has no obvious strategy. Cable also is turning a blind eye to fully extending its services outside of the home and fully embracing online video. Yet there is more reason than ever to expect consumers to eventually access much of their video, information, film and communication directly from Internet-connected sources.

The plasma HD TV Panasonic this week announced it will manufacture, in conjunction with Comcast, a built-in set-top box that will allow consumers to use a portable DVR to transport the records they make from cable content options. Rival Time Warner Cable has something similar in the works. The backbone of this much-ballyhooed embedded "tru2way" standardized technology is upgraded service in cable's walled garden.

Even if you don't subscribe to the theory that all media eventually will flow through the Internet and various portable wireless devices, there is no reason to believe that it will continue to be primarily serviced by cable, satellite and telco providers. It's certainly no accident that Sony Pictures Television said it is working with Nielsen Media to develop metrics to quantify the comprehensive impact of its content across all television and Internet platforms.

Sony should know, having been one of the founding creators of video game consoles, a quintessential stand-alone interactive platform that's a powerful alternative to television, computers and mobile phones. It's also no coincidence that Cisco this week unveiled Eos, an entertainment operating system that provides a social networking overlay to allowing content providers to mine the paramount connections they make on a host of interactive platforms and devices. (Such dramatic promise flies in the face of the ongoing technology stock selloff--down nearly 10% already this year.)

Intel CEO Paul Otellini in his CES keynote referred to the development of a "ubiquitous, wireless broadband infrastructure" that eventually will blanket the globe "in wireless broadband connectivity. Instead of us going to the Internet, the Internet comes to us," through exponentially more powerful processors--not just designated media and tech devices. In particular, Intel unveiled what it called the pocket-sized mobile Internet device, which delivers the full Internet "with no compromises" to consumer access.

The millions of new mobile devices (somewhere between a cell phone and computerized notebook) powered by Intel's 16 new low-power processors will revolutionize the way consumers access and interact with communications, information and entertainment now primarily funneled through cable, teleco and satellite providers. That sure sounds like an Internet bypass revolution.