Cables State Is One of Rapid Change

The following is an excerpt of the "State of the Communications Industries" address

that National Cable Television

Association president and CEO Robert Sachs delivered Nov. 15 at the Lotos Club

in New York City.

Looking at the cable business in the year 2000, it's hard to recognize [the way it was] in 1966. Back then, cable operators provided only a handful of analog television channels over a one-way delivery system. Our tree-and-branch architecture involved a cascade of amplifiers and coaxial cable that was prone to service interruptions.

There were no cable networks like HBO [Home Box Office] and Discovery Channel. Indeed, three commercial broadcast networks-ABC, NBC, and CBS-defined American television and captured virtually all of the viewing audience. Known then as CATV-Community Antenna Television-cable was essentially an antenna service for extending the reach of local broadcast stations.

Continental [Cablevision Inc.] provides a good illustration of the transformation our industry has undergone.

Having grown from two small franchises in Northwest Ohio to 4.2 million customers in over 33 years, Continental was acquired in 1996 by U S West, then spun off as MediaOne [Group] Inc. in 1998, and finally acquired by AT&T [Corp.] in June of this year. The former Continental systems are now part of AT&T Broadband, which today counts about 16 million cable customers-most of whom were customers of Tele-Communications Inc., which AT&T acquired in 1999. Many of the people who worked for Continental and TCI have continued with AT&T, but the companies, as we knew them, are no more.

For those of you who do not work in the cable business, and perhaps even to some that do, this whirlwind of acquisitions must seem very confusing. But at its core is the reality that some of the largest and most successful cable companies had to combine with larger and better-financed firms in order to be competitive and provide consumers with an array of new, advanced services.

But despite this trend toward convergence and consolidation, not every marriage works out as intended. Just three weeks ago, barely 18 months after it acquired TCI, AT&T announced plans to separate into four separate business units.

In the largest media deal on record, America Online Inc. is in the process of acquiring Time Warner Inc., the parent company of Time Warner Cable, the industry's second-largest operator. When the AOL-Time Warner deal closes, half of the cable subscribers in the U.S. will be under different ownership than they were at the beginning of 1998.

While AT&T, AOL, and Microsoft [Corp.] entrepreneur Paul Allen have been placing their bets on TCI, MediaOne, Time Warner, and Charter Communications [Inc.], cable pioneers like Comcast [Corp.], Cox [Communications Inc.] and Adelphia Communications [Corp.] have secured their positions as industry leaders through strategic acquisitions, network upgrades and investments in new technology. Companies like Cablevision [Systems Corp.] and Insight [Communications Co. Inc.] have demonstrated that if you concentrate your activities in a few selective markets, you don't have to serve 5 million customers to be successful.

Or you can take the approach of CableOne [Inc.] and Mediacom [Communications Corp.], which focus on smaller markets where competitors are unwilling to make the same investment.

And system ownership is not all that is changing.

Programming ownership and practices are as well. Each of the major commercial broadcast TV networks is now owned by a media company, which has interests in 10 to 20 cable networks. ABC, NBC, CBS, and Fox all have multiple cable outlets for their programming. Some are analog cable channels, some digital. Some are nationally distributed channels like CNBC, while others are regional channels like Fox Sports Net.

Just two weeks ago, Viacom [Inc.] announced plans to add Black Entertainment Television to its array of cable networks, which already includes Showtime, MTV: Music Television, and Nickelodeon, among others.

All this raises a question as to how long broadcasters should continue to receive preferential regulatory treatment over cable programming networks. Indeed, as broadcasters cut back on political coverage and are relieved of their few remaining public-interest responsibilities, it is increasingly difficult to justify a regulatory regime that favors broadcasters.

Adding to the fuzzy boundaries between broadcast and cable programming is the fact that the so-called "free" major commercial broadcast networks now seek to charge the public to receive their signals. Four out of five TV households today receive ABC, NBC, CBS and Fox via cable or satellite. Increasingly, the networks are demanding compensation for retransmission of their broadcast signals from cable and DBS [direct-broadcast satellite] providers, who must, in turn, pass these costs on to subscribers.

We saw this in the ABC-Time Warner retransmission-consent dispute. We saw this when NBC used retransmission consent as a vehicle to compel cable operators to pay a surcharge for its expensive purchase of Olympic broadcast rights. We saw this as the broadcast networks extracted compensation from DirecTV [Inc.] and EchoStar [Communications Corp.] to retransmit local signals. And we are seeing this right now as ABC demands 65 cents a month per subscriber from Comcast for its broadcast signal.

At the same time that cable ownership and network models are changing, so too is the very business we're in.

Today, cable uses a combination of optical fiber and coaxial cable to deliver several hundred channels of TV and a wide array of two-way services, including high-speed access to the Internet, and cable telephony. Reliability and customer satisfaction has improved dramatically, and we are competing head-to-head with satellite, telephone, broadcast, and wireless companies.

Just six years ago, there was no such thing as DBS [direct-broadcast satellite]. DirecTV and EchoStar were ideas on the drawing board. Since then, things have changed.

DBS, which launched in June 1994, has been one of the most successful new consumer products ever marketed. Compared to zero subscribers six years ago, it boasts 13 million today. Last November, Congress gave DBS operators the right to retransmit local broadcast signals, thus putting satellite on a competitive plane with cable. During the past year, DBS subscribership has jumped three million, or 30 percent.

It now serves more than 15 percent of all multichannel-video households, and cable's share of the video market has fallen to 79 percent. To put this in perspective, DirecTV today has more subscribers nationwide than all but two cable operators, AT&T and Time Warner, while only five cable MSOs have more customers than the Dish Network.

Although the two major DBS companies are available to consumers nationwide, they are by no means the only competitors to incumbent cable operators. The convergence of broadband voice, video and data services-and the proliferation of new competitive telecommunications companies made possible by the Telecommunications Act of 1996-appears to be changing the economics of "overbuilds"-facilities-based, wireline alternatives to cable.

The ability to provide "full-service" packages of voice, video, and data services has made it possible for overbuilders like RCN [Corp.], Everest [Connections Corp.], WideOpenWest [LLC] and a dozen other providers to challenge cable operators with a second broadband wire down Main Street. As a result, cable companies are now or will soon be competing against alternative broadband providers in the top nine-and 21 of the top 25-Nielsen Media Research television markets.

Our industry has not been standing still. To compete with satellite and other broadband providers, cable operators have been upgrading their networks and deploying digital-video services at a record pace. During the first nine months of this year, the number of digital-cable subscribers grew nearly 60 percent-from just under five million to 7.8 million.

Meanwhile, competition between cable and its new broadband competitors-especially the phone industry-is heating up.

Cable's deployment of high-speed cable modems has spurred local telephone companies to deploy digital-subscriber-line service (DSL), a broadband data technology that has been available for almost 10 years. When there was no competition from cable, companies like NYNEX and Bell Atlantic [Corp.]-now Verizon [Communications]-preferred to sell more expensive T-1 and ISDN lines. However, as soon as cable offered broadband access to the Internet, the phone companies quickly dusted off DSL and are aggressively selling it in telephone exchanges throughout the nation.

As of the end of the third quarter, cable operators had nearly 3 million high-speed data customers, compared to 1.6 million DSL consumers for the phone companies.

The Telecom Act's deregulation of cable TV and local phone service has given investors the confidence to pump billions of dollars into both markets. Since 1996, cable has raised and invested $40 billion to upgrade its networks.

The good news is that cable's upgrade is now 70 percent complete, and cable telephony is beginning to do exactly what Congress hoped it would do: give value-oriented consumers choice in local telephone service. The cable-TV industry started this year with about 200,000 residential phone customers. It doubled that number in the first six months and will more than double it during the second six months, ending the year 2000 with more than 800,000 residential customers.

The Presidential election could have its greatest impact on communications policy through the next president's appointments to the Federal Communications Commission. It is the FCC which, on a daily basis, implements the laws Congress has enacted.

But whether the next FCC chairman is a Republican or a Democrat, I believe that the regulatory restraint exercised by the current commission with regard to new technologies and the Internet will be a beacon for future FCC policymaking. This policy has spurred the rapid deployment of broadband networks, bringing new, advanced services to consumers.

And as the saying goes, if it ain't broke, don't fix it.