Cable's data, voice biz encroaching on video

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CHICAGO -- Despite all the fuss about online video and the stampede of television and film producers into digital downloading, at least one major industry player concedes video content is not the long-term be-all and end-all of the new media age.

Comcast says that within the next several years, half of its overall cable subscribers will not be taking video services- opting, instead, for data and voice that don't pose copyright issues but present plenty of untapped opportunities.

"Over the next two or three years, 50% of our subscribing customers will not be in video...half of our business will be transformed," Comcast chairman and CEO Brian Roberts declared during a Citigroup media investor presentation last week. If the prediction that Comcast bases on its core business run rates holds true, it will have dire implications for the hundreds of video companies attending this week's National Association of Television Program Executives conference in Las Vegas that are fighting for their share of space on cell phone, television, computer, MP3 and other screens where future demand may wane.

Comcast is not alone in introducing the contrarian notion that video may be subdued by stronger emerging data, voice and transaction services for consumers and for businesses by decade's end.

CitiGroup analyst Jason Bazinet predicts that by 2010, cable and satellite providers actually will lose video subscribers as consumers are more scattered among an endless array of personalized data and voice services across competing platforms that thread through the 115 million households that will exist by then.

With total broadband growing about 20% annually to about 86% penetration, or 71.4 million households, by 2010, the commoditization and "homogenization of service offerings" across telephone companies, cable, satellite, cell phone, wireless and other communications networks is inevitable Bazinet says.

Multichannel video services that already enjoy nearly 79% penetration of the nation's 110 TV households as well as the content creators that supply them risk slowing growth and market shares, as well as being competitively and economically compromised by the sustained boom in user-generated content. Content saturation will shift value from traditional, big players at the top of the media food chain (where select TV and film product will remain strong) to the middlemen content aggregators and packagers including Google, Yahoo! and Apple, according to Bear Stearns analyst Spencer Wang.

At the same CitiGroup media conference last week, Peter Chernin, News Corp. president chief operating officer also warned about the industry overestimating the worth of slippery use-generated content that can be picked up everywhere, may appeal to a relative few, and have questionable value to marketers.

So, while video of all kinds will always be popular, mega growth will come from the personalization of data, communications and interactive advertising for consumers and businesses.

So, despite its public attention to the strength and importance of the triple-play, Comcast is quietly repositioning itself for the ongoing transformation of video, voice and data in an Internet Protocol-world that will see 50% of its subscribers shift out of video over the next several years. Pali Capital analyst Richard Greenfield points to Comcast's recent invest in $1.3 billion wireless spectrum as just the first of what will be strategic "big picture acquisitions to enhance its long-term flexibilities." Wild speculation persists that Comcast will use its $3 billion-plus free cash flow to buy Sprint or RCN, or Viacom or NBC Universal.

However, Comcast's recent widespread content alliance with Walt Disney Co., a foiled acquisition target, marks a continuation of content access through numerous partnerships, its prudent organic development of content hubs such as G4 and Fear Network, and its targeted content investments in regional sports and specialized networks like E! Entertainment and the Style Network.

Comcast is becoming less dependent on video price increases to sustain revenue growth as it holds steady its annual $5 billion program cost base even as premium channels, pay-per-view and video-on-demand pricing increases slow, depending upon the timing and quality of available content. In fact, Comcast's 2007 innovation "to do" list includes more personalized video applications such as celebrity greetings and online TV planners.

But Comcast will best offset the half of its estimated $111 billion equity value that is related to video by seizing mega growth opportunities in commercial small and medium-sized business services, addressable advertising, and new forms of wireless data and voice services which will be major contributors to the media revolution.

Within five years, Roberts said he expects small to medium businesses services to be growing by at least a 25% compounded rate and contributing $1 billion in earnings. Comcast will invest $3 billion in capital ($250 million of it in 2007) to generate between $12 billion and $15 billion in annual revenues from small businesses , or more than half of the total $25 billion telecom business market in its 21 million subscriber household footprint.

Bernstein Research estimates addressable advertising in an untapped $140 billion linear TV market that provides tractability and information about target consumers that will productively and profitably be applied not only to video, but to all forms of data, voice and interactive services out of sheer competitive necessity.

Cable operators will find that by partnering with advertisers, they can generate "vastly more information than Google and Yahoo ," Bernstein said. The only way t distributors or advertisers can hope to capitalize on the narrowly focused, special interest user-generated content and social networks representing the thin end of online media's so-called "long tail" is to reach well beyond the nascent $16 billion in online advertising business and take a bigger piece of such segment spending as $67 billion in annual television advertising that Google is on the verge of invading with a new sales mechanism by taking new, unconventional business approaches to mining much more than simply video in the digital interactive universe-a point also underscored by a new PriceWaterhouseCoopers Lifestyle Advertising study out this week.

To be sure, that is a driving, subtle force behind the push by Apple, Microsoft and other major players to establish in-home media hubs and rollout sophisticated devices such as the new iPhone (as much a wireless touch screen Internet receptor as a widescreen for video and phone), which will be the battleground for competitive interactive data, voice, marketing, and other services. Customized commercial as well as grassroots video is just an easy, logical startling point for all of this. It certainly won't be Desperate Housewives TV episodes, films even as celebrated as Star Wars, or home spun video delights off of YouTube that ignite the creative and financial fires of new media in the coming years. And it won't just be consumers giddy with their own new tech power.

Boston Consulting Group estimates the voice and data services market for small and medium business is about $40 billion, or the same as residential voice revenues with double the profit margins of about 55%. The hidden telecommunications gem is the T1 market, where a routine connection delivers only half the speed of residential cable but sells for as much as 10 times the residential monthly rate, according to Bernstein Research. That may not sound as sexy as television and film VOD, but it's a gold mine. For instance, professional and business information services will grow an average 8% annually to $182 billion in 2010 compared to an average 4% growth in entertainment media to an estimated $101 billion by decade's end, according to Veronis Suhler Stevenson.

Services to small- and medium-sized businesses could generate $1.4 billion in earnings on $2.6 billion in revenues by 2011, according to Merrill Lynch analyst Jessica Reif Cohen, who has boosted her target price for Comcast stock to $57 a share from $47 a share, noting that Comcast's commercial revenues now are a mere $250 million. .

Those are the kind of robust non-video numbers that prompted Comcast's Roberts last week to declare: "The next five years will be better than the last five years."
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