Revenge of the Cable Guys

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March 11, 2010, 5:00PM EST

If you think online TV will be free forever, think again. The cable companies have a plan to keep control—and stick you with the bill

By Ronald Grover, Tom Lowry and Cliff Edwards

Once upon a time, not so long ago, a bunch of small companies in Silicon Valley thought the future of television was theirs. Soon, the thinking went, TV would be everywhere. Frequent fliers would tune in on laptops and vacationers on tablets from the beach. If so inclined, you'd be able to watch Glee on a cell phone in a tree house. The network suits and the cable guys just didn't have the digital chops to make it happen. Fueled with venture money, tech companies with names like Boxee, Roku, and Sezmi pursued their dream of untethering viewers from their TV sets—and owning a piece of the advertising revenue.

As the big picture comes into focus though, it looks like the cable guys are playing the lead roles, using the $32 billion they pay content providers each year as leverage. The alphabet soup of newbies is still waiting in the wings for a moment that might never come.

What happened? Part of the answer is TV Everywhere, a service in its infancy, conjured up in quiet strategy sessions by Jeff Bewkes and Brian Roberts, the CEOs of Time Warner (TWX) and Comcast (CMCSA). They took a lesson from the music labels, which looked up one day to find that Steve Jobs and Apple (AAPL) had taken control of their inventory. The cable guys came up with a quick fix, one so technologically simple that you don't have to be a geek to get it: Viewers can watch shows for free, but only if they're cable subscribers first. In other words, as long as you tap a subscription code into your device—any device—you can watch anything you want, whenever you want.

It's worth hitting pause here for a moment. Right now, Time Warner is offering the service in only a few markets. Comcast has rolled out a trial, or beta, version to about 80% of its subscribers. There are plenty of kinks to be sorted out. And as usual when it comes to show business, nothing is quite as simple as it appears. For TV Everywhere to work, the behemoths of the business must stand together and stamp out the rampaging weed called free. After all, if you can get programing for free—real free—why would you ever pay a cable bill?

SELF-PRESERVATION

That's what was worrying Time Warner's Bewkes in the fall of 2008. Back then, Time Warner ran the country's second-largest cable operator (spun off in March 2009) and was also a content provider. Bewkes had previously been in charge of the company's HBO unit, turning the premium cable channel into a profit machine with 30 million subscribers.

Bewkes watched with growing alarm as Hollywood stampeded online to offer TV shows and movies for free, say two Time Warner executives. At the time, Hulu, a video site operated by Fox (NWS), NBC Universal, and Disney, (DIS) was about a year old. For TV addicts, Hulu was a near miracle. Miss the latest episode of Damages on the FX channel? If so, you could watch Glenn Close play a conniving lawyer on Hulu 24 hours later for free. Hulu's owners shared the advertising revenue from the site, but everyone knew it wasn't making money and there was no clear path to profitability. As he watched one entertainment company after another put their TV shows and movies online for free, say the executives, Bewkes began to fear that the pay TV industry would eventually find itself in the same untenable position as newspapers.

That's when the scene shifts to Wisconsin, where HBO was running an experiment in Milwaukee and Green Bay. HBO was letting people watch its programing online as long as they could prove they were HBO subscribers. The results of the test were unexpected: Viewers who tuned into Big Love on their laptops didn't spend any less time watching HBO on their TV sets. Bewkes was buoyed by the possibility that the same model might work more widely and that his cable properties might be able to keep subscribers from gravitating elsewhere, says a Time Warner executive involved in the discussions. Bewkes told his team: "We can't just talk about it, or play the victim. We need to build a model," the executive recalls. The Time Warner CEO was unavailable for comment.

It wasn't the first time the cable industry had found itself in danger of being outflanked by tech-savvy rivals. In 1999, TiVo began selling a handy little box that allowed people to record dozens of hours of TV shows on a hard drive. After a certain amount of handwringing, the cable guys struck back with overwhelming force. They figured out the technology and marketed their own digital video recorders, for which they charged subscribers an extra $10 or so a month. Next came Apple. Along with Amazon.com (AMZN) and others, Steve Jobs began renting TV shows online. The cable companies beat back that onslaught by beefing up their video-on-demand offerings and giving subscribers a bunch of free shows with a few clicks of the remote. "The cable industry has been very good at not jumping too early on a technology, and watching it play out first," says Colin Gounden of Grail Research, which advises companies on new products. "They have a knack for getting the timing right."

The new attack from Silicon Valley was the most serious yet, because it threatened to permanently cut the coaxial connecting the cable companies and their subscribers. "We wake up every day and there is some new competitor out there—a Roku or a Boxee," says Melinda Witmer, Time Warner Cable's programming chief. "People like to think of cable operators as monopolists, but we face a lot of competition just to keep the business we have." Technically there was nothing too complicated about Bewkes' plan to expand the Milwaukee experiment.

The new service would need a way to automatically confirm that people were paid-up subscribers. Other than that, TV Everywhere, as Bewkes called it, would mostly use existing online infrastructure and established user interfaces.

"FRIEND, NOT A FOE"

Far more daunting was the prospect of persuading the rest of the industry to join up. Unless most of the pay TV and content players banded together, TV Everywhere wouldn't work; viewers could simply flock to sites that didn't require a cable subscription. Bewkes, say two Time Warner executives, decided to float his proposal with Roberts, the chief of Comcast, the largest cable system in the U.S., with 24 million subscribers. In early 2009, Bewkes began wooing Roberts, traveling from his New York City office on Columbus Circle to Comcast's imposing 57-story headquarters in Philadelphia.

Roberts long ago realized that online video was important to the future of his company. In 2006, Comcast had created an interactive media unit that poached heavily from Silicon Valley. The company's first major development project was Fancast, a video site like Hulu that offered hundreds of shows free to all comers. Roberts, who declined to be interviewed for this story, had unveiled Fancast at the Consumer Electronics Show in Las Vegas in early 2008. Before long, says one Comcast executive, he began thinking about a service that would offer much more content—but only to Comcast subscribers. When Bewkes came calling he didn't have to convince Roberts of the importance of preserving the subscription model online. And like most everybody in the cable industry, Roberts was aware of HBO's online experiment in Wisconsin.

Roberts and Bewkes initially disagreed on one big point, say two Time Warner executives who say they can't speak on the record because the discussions were sensitive. Roberts believed subscribers should be required to go to a central site operated by their pay TV provider in order to view cable shows. Bewkes, true to his divided soul as a content creator and distributor, felt users should be allowed to tap into any cable channel's Web site as long as it was part of the TV Everywhere ecosystem. Bewkes, say the executives, reasoned that letting individual channels keep their own sites would allow them to maintain their brands. Eventually, Roberts agreed.

WINING AND DINING

The Time Warner executives say Roberts and Bewkes saw the cable industry's annual convention, held last April in Washington, D.C., as an opportunity to proselytize about TV Everywhere to the rest of the industry. During one panel discussion, Roberts told his audience that online video was "a friend, not a foe" and that for Hollywood it represented a new way to make money "in this horrific advertising environment."

In Hollywood, studios and cable channels were hearing a very different message from the Silicon Valley upstarts who wanted to cut deals for their programing. Netflix's (NFLX) Ted Sarandos pushed studio executives to give his company the latest movies for its online video service. Steve Jobs proposed launching a stripped-down cable service that would cost consumers $30 a month. Boxee founder Avner Ronen says he traveled to Los Angeles from his base in New York so many times that his "plane knew the way."

Phil Wiser, founder of Sezmi, an online TV subscription service, says his goal was simple: to "replace cable and satellite." He flew executives from NBC Universal, Sony (SNE), the Discovery Channel, and others to Sezmi's offices in a converted horse barn in Northern California, where he wined, dined, and pitched them. Sezmi wanted the content creators to allow him to use their movies and TV shows for an à la carte service that would give customers the freedom to pay for only what they wanted to watch. The studios declined, so he decided to borrow the industry's subscription model. Owners of Sezmi's $299 set-top box would receive network and cable shows for $19.99 a month, about a third the cost of a typical cable subscription.

Wiser told the studios that he would match what cable was paying for episodes of such shows such as The Real World, Top Chef, and Damages. It was an unprecedented offer for a startup, but only one company initially agreed to make its content available: NBC Universal, which is already available on Hulu. Wiser says it took another 18 months to lure more content providers, including Turner Broadcasting (TWX) (owned by Time Warner) and Discovery Networks. What's more, Wiser acknowledges he had to pay the content guys more than they get from the big cable companies. When Sezmi boxes went on sale in Los Angeles in February, the service was missing ESPN, The History Channel, The Food Network, HBO, and other popular channels. "Trying to do this is not for the faint of heart," says Wiser, a former Sony (SNE) executive. "These firms see dozens of new pitches every week, so they're skeptical."

Skeptical—and satisfied. The makers of movies and TV shows are attached to the billions they receive from cable companies and are understandably reluctant to engage in grand experiments with upstarts touting unproven business models. Joshua Sapan runs Rainbow Media Holdings (CVC), which controls AMC, IFC, the Sundance channel, and others. He says tech companies have approached him about licensing AMC shows, but, he asks: "Why would I license my channel to someone and give them Mad Men the day after it shows up on AMC?"

Back at Time Warner Center in New York and One Comcast Center in Philadelphia, the cable operators began to realize they had the studios locked down. As Frank Biondi, former president of the media giant Viacom (VIA), puts it: "Why would [the studios] make a deal with a competitor to their largest customer and risk angering them?"

In summer 2009, Bewkes and Roberts joined forces to take the TV Everywhere model out for a spin with 5,000 Comcast subscribers across the country. Those viewers were able to tap into programing provided by cable channels TNT and TBS, both owned by Time Warner. The speed with which the industry moved on from that trial balloon is a measure of just how important locking in subscriber revenue is to cable's future. In December, Comcast rolled out a beta version of the new service, now christened Fancast XFinity TV. Time Warner Cable has a trial going with nearly 10,000 customers in Syracuse, N.Y., New York City, and Columbus, Ohio. Verizon Communications (VZ) is testing a service nationally, and DirecTV, the satellite operator, plans to as well.

Comcast's service is the furthest along and provides a window on where TV Everywhere is headed. Only subscribers who pay for digital cable—and take Comcast's broadband service—are eligible. (The company is still working out how to bring XFinity TV to the third of its subscribers who get broadband from other companies.) Subscribers can tune into two dozen channels, from CBS to Animal Planet, and view 19,000 full-length TV shows and movies. They can use it on as many as three PCs and get most episodes 24 hours after they first air on TV. Much of that was available on Comcast's free site, but now shows on HBO and the Discovery channel have been added to the lineup. Eventually, Comcast aims to let subscribers access XFinity on their smartphones and tablets.

TV Everywhere has a ways to go before the cable guys can declare victory. There's a ton of stuff to figure out—how the ad model will work, devising a new ratings system with Nielsen. And then there's the question of profits. The cable guys like them, and they're not real comfortable with free. So chances are, down the line, the costs of the new free will probably sneak onto subscribers cable bills. And you know what? We'll all keep paying.

Grover covers the media and entertainment industry for Bloomberg Businessweek in Los Angeles. Lowry is a senior writer for BusinessWeek in New York. Edwards is a correspondent in Bloomberg BusinessWeek's San Francisco bureau.

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Flush With Cash and Fearing Tighter Rules, Major Carriers Shun Broadband Stimulus

By Cecilia Kang
Washington Post Staff Writer
Friday, August 14, 2009

The Obama administration made a national priority of spreading high-speed Internet access to every American home and offered stimulus money to help companies pay for it, but the biggest network operators are staying away from the program.

As the Aug. 20 deadline nears to apply for $4.7 billion in broadband grants, AT&T, Verizon and Comcast are unlikely to go for the stimulus money, sources close to the companies said.

Their reasons are varied. All three say they are flush with cash, enough to upgrade and expand their broadband networks on their own. Some say taking money could draw unwanted scrutiny of business practices and compensation, as seen with automakers and banks that have taken government bailouts. And privately, some companies are griping about conditions attached to the money, including a net-neutrality rule that they say would prevent them from managing traffic on their networks in the way they want.

"We are concerned that some new mandates seem to go well beyond current laws and [Federal Communications Commission] rules, and may lead to the kind of continuing uncertainty and delay that is antithetical to the president's primary goals of economic stimulus and job creation," said Walter B. McCormick Jr., president of USTelecom, a trade group that represents telecoms including AT&T and Verizon.

Yet those firms might be the best positioned to achieve the goal of spreading Internet access to underserved areas, some experts say.

"If you want to get broadband out, you have to do it with [those] who brought you to the dance in the first place, and in this case it is the incumbent cable and telephone carriers who have 85 percent of lines in the country," said Robert Atkinson, president of the Information Technology and Innovation Foundation, a Washington tech policy think tank. "This is not basket weaving. This is really complex and intensive technical stuff that takes a fair amount of sophistication and scale to be able to do right and to continue to upgrade."

Obama has pushed for universal access to broadband since his presidential campaign, saying it would underpin the country's economic future. The stimulus funds target homes and businesses in the hinterlands that have largely been overlooked by broadband providers because of the hefty costs to lay down fiber-optic and other broadband pipes to small communities.

At the same time, the government has promised more scrutiny of industry practices that seem to limit consumer access to services, such as Comcast blocking the peer-to-peer file sharing service BitTorrent in 2007 and Apple's recent decision to block Google's voice service and the free Internet calling service Skype on the iPhone.

Those efforts have alarmed the major carriers. Specifically, some of the biggest firms fear that a clause in the stimulus plan that says recipients of the grants cannot "favor any lawful Internet applications and content over others" -- the concept known as net neutrality -- could lead to more rules down the road.

This condition goes beyond guidelines at the FCC that have been criticized by consumer advocacy groups as too vague. Carriers have pushed to keep current rules in place and see the condition on the stimulus grants as a potential precursor for additional rules at the FCC on how carriers can manage content over the Web.

The companies paint dire scenarios where new rules would lead to networks getting clogged with spam and too much video content, slowing down service for all users.

"It's not cost-effective for the big network operators to play in rural [markets] in the first place, and if they take federal money that comes with all these strings attached to it, they are opening themselves up to being regulated even further," said Roger Entner, head of communications research for Nielsen IAG.

McCormick said net-neutrality conditions on the grants are fuzzy and may give network operators pause before investing in long and expensive projects that could end up in a tangle of technical and legal hang-ups over how the firms oversee their networks.

"Clearly, it's causing potential applicants to reflect upon the uncertainties," McCormick said.

Verizon said it decided not to apply before conditions were announced. Comcast, which mainly serves urban and suburban areas, said it would also abstain. AT&T said that it likely would not apply but that it is open to partnership with state and local governments who win the grants.

Corporate officials have also said it would look bad for a company like AT&T or Comcast to come to the government with hat in hand when they are among the few companies in the economy flush with billions of dollars in cash reserves.

One official at a large network operator said on the condition of anonymity that once taken, government funds incite a "mob mentality" that could preclude sponsoring golf tournaments or giving executives bonuses, for fear of political backlash.

Some public advocates and analysts say the carriers never had a compelling reason to seek the grants.

"They weren't going to apply," said Ben Scott, head of policy at public advocacy group Free Press. "They are using this as an opportunity to grandstand against net neutrality."

Rebecca Arbogast, head of tech-policy research at Stifel Nicolaus, notes that the biggest carriers would be less inclined to deploy networks in rural areas because there is not enough demand to justify the ongoing financial investments. She said the companies should have expected stronger net-neutrality conditions because it was mandated by Congress in the stimulus act.

"With a few exceptions, the net-neutrality provisions were not a great departure from what I think was already out there and is consistent with the path that most recognize we were already headed down," Arbogast said.

The Commerce and Agriculture departments, which are handing out a total of $7.2 billion in broadband stimulus grants through 2011, say the plan to bring high-speed Internet to the hinterlands and urban poor can be accomplished without the big carriers. Companies like wireless broadband provider Clearwire and small cable and telecom operators may introduce more competition into the industry by using the funds to build networks that could compete with AT&T, Verizon and Comcast, analysts and government officials say.

"I think if the big carriers want to participate and play by the rules, great. If not, I'm not that concerned," said Mark Seifert, a senior adviser for the National Telecommunications and Information Administration, which is overseeing grants for the Commerce Department.

Seifert said the rules for broadband grants were not written to favor any size or kind of network operator. Further, the $7.2 billion is not intended to complete Obama's goal of spreading broadband to every home; rather, it is a "down payment" on a larger plan being crafted by the FCC, he said.

Electrical Storms Are Evil

Apologies for no new blog postings over past 4-5 days. Severe electrical storm fried a lot of cable modems in this area, and Comcast didn't have the manpower (and maybe not the pecuniary will) to get its techs out expeditiously to mere residences with replacement gear.

Appreciated the unexpected heavy traffic on the blog during the enforced lull as duly recorded by the invisible StatCounter app. All comments on postings submitted have been moderated and approved. Replies to emails will take a little longer. Regular posting should resume about mid-day, Tuesday, June 16.

Catchup? Surely you jest. It just doesn't happen. Keeping up is the best I can manage.