Taking Another Look At Cable... Things Change

(excerpted from PDS Consulting 2009 New Year's Day paper to Friends & Colleagues)

• Stock market still doesn’t “get” cable.
• Mobile wireless in cable’s future.
• From Internet TV: Growth or dumb piping.
• The coming of convergence.

The Market
By December 2008, shares of Comcast, our proxy for the US cable industry, were 56% of their 1999 value, their lowest end-of-year level of this decade. Meanwhile, cable’s average revenues per basic subscriber were up, with Comcast’s 2.58X higher than in 1999[1], as more subscribers bought cable’s triple play of digital video, broadband access, and cable telephony.

In earlier New Year’s notes[2], I argued that the market was undervaluing the MSOs’ strong market position and growth potential. This disconnect persisted during 2008, a year that in economic terms qualifies as a full-fledged Queen Elizabeth II annus horribilis. Despite the recession, 2008’s parting gift, the facts about cable that the market doesn’t “get” are still valid and therefore are not repeated here. However, things can change.

When Internet access and cable telephony were added to cable’s original hybrid blend of TV broadcasting and common carrier, “cable” took on a new meaning. The National Cable Television Association (NCTA) was re-named National Cable and Telecommunications Association (still NCTA!). Now the cable industry’s boundaries may shift again due to mobile wireless, Internet TV, and convergent services.

Mobile Wireless in Cable’s Future
Why mobile wireless matters to cable:

• Quadruple play, adding mobile wireless to fixed TV, broadband, and phone, has proven highly successful for operators outside the US .
• According to a recent national survey, 17.5% of US households are now wireless-only; Over 30% of adults aged 18-29 live in wireless-only households; Among households with fixed and wireless phones, over 20% receive all or almost all calls on cell phones[3].
• Wireless is a magnet for innovation, VC investment, and market buzz. It’s the next new thing for multiplatform advertising and distribution of multimedia content.
• Competitive vulnerability: The big telcos have mobile wireless and the MSOs don’t. Before too much longer, cable’s triple play will be trumped by attractive quadruple play offers from AT&T U-verse/AT&T Mobility and Verizon FiOS/Verizon Wireless. Verizon is now negotiating programming content deals that encompass both FiOS TV and mobile distribution. Growth of cable telephony will be eroded by wireless substitution.

Among US MSOs, only Cox has announced that it will build mobile wireless network facilities in its service areas. Cox’s mobile wireless initiative will set precedents for cable operators in testing features, pricing, and bundling options. Cox will also determine availability and cost of roaming agreements with incumbent wireless operators for calling that occurs outside of Cox’s initially-limited service areas.

For now, the other major MSOs are following a different path. Comcast, TWC, and Bright House (along with Intel and Google) recently purchased minority shareholdings in Clearwire, which is now building a 4G WiMax network. Using the Clearwire network, these MSOs plan to offer data-centric nomadic and mobile extensions of their fixed Internet access services. If they decide to add mobile voice, which is vital to compete with the incumbent wireless operators, the MSOs may do so as re-sellers of Sprint’s 3G network capacity.

The MSOs’ Clearwire-based strategy is not a slam-dunk. A WiMax network operator will have higher cost and sparser choice of equipment than operators employing the much more widely adopted LTE (Long Term Evolution) 4G wireless technology. In the US , three of the four largest wireless operators have stated they will deploy LTE, leaving only Sprint/Clearwire with WiMax. Both Alcatel-Lucent and Nortel have decided to allocate their technology development resources to LTE while reducing their spending on WiMax. Fewer handsets will be available for WiMax (or WiMax plus 3G voice) than for the competitive 3G and 3G/LTE systems.

To compete effectively, the MSOs must have flexibility to implement their own features and pricing priorities for wireless voice, data, and multimedia without having to rely on third-party network operators that have separate agendas such as Clearwire and Sprint. On this, we’ve heard discouraging words from Clearwire’s CEO who said that its [ MSO ] shareholders “do not have the ability to direct the activities of the company nor is their approval required to undertake major business initiatives such as where or when we build our network[4].” The Clearwire deal may provide a useful learning experience but is unlikely to get the MSOs where they need to be.

Alternatively, the MSOs could buy Sprint. It would immediately establish the MSOs as credible mobile wireless competitors to own the third-largest US wireless operator with 41M mobile wireless subscribers, nationwide spectrum, a nationwide 3G mobile wireless network, plus its 51% ownership of Clearwire, a worldwide Tier 1 Internet backbone network, and a large Long Distance telecoms business. Because of well-publicized problems and the overall stock market debacle of 2008, Sprint is cheap. Its market cap has shrunk to $4.6B[5], down 88% since its peak on the first trading day of 2008. Given Sprint’s $23B enterprise value (market cap plus debt less cash), each Sprint subscriber is currently valued at $579 (10 months of postpaid per-subscriber revenue), as compared to Comcast’s $3,094 (28 months). For Comcast and other MSOs that might take this leap, integrating and managing Sprint would be a major challenge; however, given the cable operators’ unique assets, it is not beyond their abilities. It would be a game changer for the industry.

Getting serious about mobile wireless will require substantial MSO capital investment, a prospect from which Wall Street invariably recoils. To appease the analysts, MSOs ritually take the pledge not to violate the No-New-Major-Capex taboo. But kowtowing to this taboo is getting in the way of cable operators’ making decisions that are optimal for their shareholders. Given a well conceived, communicated, and executed strategy for the MSOs’ market entry in mobile wireless, eventually Wall Street will accept that the required investments are necessary and will pay off.

From Internet TV: Growth or Dumb-Pipe
US viewers watched 9.5 billion videos online during November 2008[6] during which time they were not watching cable’s TV channels, VOD , or advertising. While the majority of these Internet TV videos were probably transmitted over cable’s high-margin broadband connections, most also involved no direct technical or business participation by cable operators, indicating the risk that cable systems could become dumb pipes for Internet TV content. No-one wants to end up as a dumb pipe.

There’s still time to get this right, from cable’s perspective. Professionally produced TV content that is available online does not yet match the programming on cable; the good stuff that you want to watch online is still hard to find; the picture quality of impulse-selected streamed video is still subject to impairments; Internet TV business models are still evolving and some video aggregators will fail; and there is not yet a convenient-enough way for consumers to be able to watch Internet TV on their new flat screen HD TVs.

On the other hand, progress is being made on each of these gating factors. For example, since consumers are generally reluctant to accept another set-top box, Netflix has now arranged to deliver its online content to TVs via existing in-home devices including Microsoft’s Xbox 360 game console, an LG Electronics DVD player, and/or a TiVO DVR, as well as through its dedicated set-top box from Roku. On choice of online TV programming, while Netflix’s selection of 12,000 titles is much smaller than its DVD library due to licensing restrictions, I suspect (without side-by-side checking) that it is at least comparable to the selection available via cable VOD . If you like NBC series such as 30 Rock, you can see complete episodes on Hulu.com shortly after their original NBC broadcast, and with less intrusive commercial interruptions.

In defensive mode, MSOs have complained about paying cable carriage fees to programming networks whose video content can also be consumed online for free. Some cable programming networks are responsive to such hints and are pledging to limit the content that they make available online. Cable operators are also effectively (if not necessarily intentionally) slowing growth of Internet TV by what they are not doing, i.e., by not supporting reception of online content on cable set-top boxes, and by not marketing a home networking product that would facilitate TV display of PC and online video content.

MSOs can participate proactively in growth of Internet TV by negotiating with online content partners to provide higher-tier, more reliable delivery of their premium content. Cable operators have technical means to accomplish this since they manage the QoS (quality of service) of their broadband access connections. This is sensitive politically because net neutrality proponents would likely accuse the MSOs of discriminating against non-affiliated sites or against sites unable or unwilling to pay for higher-level connections. To reduce political risk, until now the MSOs have shied away from offering such deals.

However, on balance the cable (and telco) ISPs will likely prevail if they seek to exploit this opportunity. After all, the ISPs’ network facilities were built with their own risk capital. Good-better-best options are common in the marketplace and generally are not perceived as discriminatory. To stay on the right side of net neutrality, the ISPs would allow any online content provider to select (and pay for) the higher-tier broadband connections on equivalent terms. The ISPs would also perpetuate the status quo by placing no restrictions on user access to any online destinations.

Another proactive step is for major MSOs themselves to become providers of online infrastructure and content. For example, Comcast has moved deliberately to establish a significant online presence by acquiring online assets including thePlatform (video content management, transcoding & syndication), Plaxo (online address book and social networking), Fancast.com (online TV), Fandango (movie trailers and tickets), and FearNet.com (online & multiplatform horror TV). Comcast has also upgraded its portal, Comcast.net, at which users can find “over 137,876 videos” among other attractive features.

The Coming of Convergence
Convergent services variously combine TV, Internet, phone, and mobile wireless components in a new product category.

Such services have been discussed for a long time but, for various reasons, they have not yet made a significant appearance on US cable systems. Now conditions are becoming more favorable for wider deployment, potentially generating additional revenue streams from advanced advertising, subscriptions, and transactions.

Examples: A PCCW ( Hong Kong ) subscriber can purchase a movie theatre ticket on a TV channel that shows movie trailers, download the “ticket” to his or her wireless device, and show the ticket information as a barcode when entering the theatre. TV Caller ID provides information about an incoming phone call on a subscriber’s TV set so that the subscriber can decide whether to heave himself off the sofa to pick up the phone or allow the call to go to voicemail. With Integra5’s MediaFriendsTM TV Chat, a new application that will combine elements of TV, social networking, and mobile wireless, like-minded viewers can coordinate their watching of the same TV shows and communicate with their buddies by texting SMS messages that appear on all of their TV screens.

One of the obstacles to rapid deployment of interactive services has been non-standard video operating environments across cable’s disparate local systems. To create a national footprint for interactive services, CableLabs’ “tru2way” middleware platform is being installed on new consumer electronics devices, including new set-tops. Meanwhile, pending availability of the new devices, CableLabs’ less fetchingly named EBIF (Enhanced Binary Interchange Format) specification will enable interactive TV and advanced advertising apps to run on millions of legacy set-top boxes that have limited memory and processing capacity.

Convergent applications will come sooner, better, and in greater quantity, once MSOs have practices in place that welcome innovations from third-party developers. Among their New Year’s resolutions for 2009, the MSOs might include a task to implement such practices, along with taking another look at strategies for mobile wireless and for Internet TV.

------------------------------------
[1] Comcast operating cash flow margin also has increased, to 40% (same as in 2007), from 34% in 1999.
[2] See Telling Cable’s Story _ 1 January 2008 , Re-valuing Cable_ 1 January 2007 , and Why Cable Shares are Undervalued_ 1 January 2006 , at www.pdsconsulting.net.
[3] Blumberg SJ, Luke JV. Wireless substitution: Early release of estimates from the National Health Interview Survey, January-June 2008. National Center for Health Statistics. Available from: http://www.cdc.gov/nchs/nhis.htm. 17 December 2008
[4] CEO statement was made during conference call with analysts on 1 December 2008
[5] As of market closing on 24 December 2008
[6] Nielsen data, in Advertising Age, “Hulu November Viewers Down, but Total Viewing Up,” by Michael Learmonth, 22Dec08.

DISH Is Cooked!

AT&T’s announcement that it selected DirecTV as its sole partner for satellite video is really bad news for DISH Network, but it doesn’t ensure long-term success for DirecTV either.

During the first six months of 2008, AT&T accounted for 15% of DISH ’s gross subscriber adds, or 222,000 of its 1.48 million gross new subscribers. During this same period, almost as many DISH subscribers churned off the service as were added, leaving DISH with only 10,000 net new subscribers. Without AT&T’s contribution as a distribution channel, DISH would have suffered a net loss of over 200,000 subscribers during the first half of the year. DISH ’s churn rate during this period, which averaged 1.78% per month, is attributed to competition, the economy, signal theft, and operating inefficiencies. Given that these are long-term factors, it will not be easy for DISH to reduce churn significantly. However, unless and until this happens, DISH faces ongoing net subscriber losses. In recent years, cable operators also have reported losses of basic video subscribers so DISH will be in good company. However, cable MSOs can point to counterbalancing growth in multiplay RGUs (revenue generating units). For cable operators, it’s arguable whether small to moderate losses in their basic video subscribers really “matter.” For DISH , these losses will hurt.

DirecTV gained 404,000 net new subscribers during the first six months of 2008, reaching 17.16 million in total, and is clearly pulling away from its smaller DBS rival with its 13.97 million subscribers. Given the new AT&T deal, DirecTV will have distribution agreements with all the former Bells -- Verizon, AT&T and Qwest – and in the current competitive environment, telco distribution makes a difference. In its 2Q08 report to the SEC , DirecTV states that its gross subscriber adds during the quarter declined relative to a year earlier “primarily” due to the April 2008 termination by AT&T of its prior distribution agreement in the former BellSouth territory.

There is no pleasure in piling on DISH Network, an innovative and entrepreneurial company. For what it’s worth, DirecTV is also far from a long-term sure thing. For several years, I have opined that both DBS operators face a strategic competitive disadvantage vis-à-vis the multiplay cable and telco operators. Now apparently even Rupert Murdoch recently has uttered the same opinion in explaining why he disposed of his interest in DirecTV. Although perhaps Murdoch was just saying this to tease John Malone, his fellow media mogul who took DirecTV off his hands as ransom for Malone’s large shareholding in News Corporation.

Verizon and AT&T will undoubtedly give top priority to their own multiplay services and will cut back on marketing DirecTV as they expand FiOS and U-verse, respectively. In areas un-reached by FiOS and U-verse, where DirecTV will remain the only video option for telco households, its companion telco DSL broadband product will represent an ever-weaker competitor to cable modems, and the telco/DirecTV team will still have nothing directly comparable to cable VOD . The bidding war between DISH Network and DirecTV to win the AT&T deal must have been intense and whatever DirecTV promised is likely to be reflected in raising DirecTV’s already high subscriber acquisition cost.

Thus while DISH Network faces tough times, for DirecTV the words of poet John Donne also apply, “…send not to know for whom the bell tolls, it tolls for thee.”

Eye-to-Eye with Unions: Verizon Blinks To Avert Strike

In the tentative agreement with the CWA and IBEW announced August 10th, Verizon conceded on points that were headlined as key to both sides.

First, Verizon will continue to pay 100% of health care premiums for current employees and retirees. Second, some jobs that have been in the non-union Business (ex-MCI) group, and some formerly non-union temp workers, have been re-classified as permanent union jobs. Third, Verizon agreed to wage and pension band increases (10.87% compounded over three years), plus an additional cost of living bump in wages.

The agreement is complex and the specific starting positions of each side have not been disclosed, so it is unclear how far Verizon and the unions each fell short of their original objectives. For example, while the unions celebrate that formerly non-union SMB tech jobs will obtain union recognition, VZ management indicates that this is achieved by transferring positions to the unionized Telecom group rather than by admitting the unions into the Business group. Also, there is a long-standing theatrical convention, involving parts played by both management and union negotiators, that agreements must be presented by union leaders as representing hard-fought gains won on behalf of dues-paying union members. However, one of the agreement terms reveals that Verizon management believes that it did not achieve the cost savings that it sought. Unlike the earlier five-year contracts, this new agreement will run only three years which Verizon explains will provide “additional flexibility to closely align future agreements to marketplace changes.”

Each side had reasons to fight and reasons to settle. In the end, it looks like Verizon’s big reason to settle – no interruption to marketing and installation of FiOS in New York City and elsewhere – outweighed the unions’ concerns about what they refer to as “a very tough economic and political environment.”

For cable operators, this outcome of Verizon’s latest confrontation with its unions means no time off from FiOS competition, continuation of Verizon’s current labor costs, and a new benchmark for the MSOs’ own labor relations.

Verizon’s top executives may now be hunting for other ways to off-set ongoing high labor costs. It’s unlikely that their first choice will be to sacrifice their own bonuses. Perhaps, as occurred after the last Verizon labor agreement in 2003, they will find cost savings by laying off lower level managers. And then, three years from now, they’ll have an opportunity to arm-wrestle again with the CWA and IBEW.

DISH Network Nail-Biter As ATT Decides Next DBS Deal

In April, AT&T said it would no longer offer DirecTV in its former BellSouth territory, leaving DISH Network “for the near term” as its sole satellite TV provider across the 22-state AT&T footprint. Then, in June, AT&T notified DISH Network that its distribution contract will terminate at the end of 2008.

This does not mean AT&T will stop offering satellite TV. AT&T now forecasts that U-verse will be built-out by end-of-year 2010 to reach 30 million households, up from 11 million today. Even if this is achieved, it would still leave 40%-50% of the households in AT&T’s footprint with no “advanced TV” option unless AT&T has a satellite TV partner.

Although still needed, satellite TV seems to have lost its magic for AT&T as a draw for new subscribers, which may help to explain why AT&T would want to change its DBS distribution deal. AT&T’s growth in satellite TV connections, net of churn, declined precipitously during the last four quarters, from 140,000 (3Q07), to 130,000 (4Q07), to 116,000 (1Q08), down to just 3,000 (DISH-only 2Q08). AT&T attributes this in part to the greater appeal of U-verse, which gained 318,000 subscribers during 1H08, almost three times AT&T’s net new satellite TV subscribers during this period.

DISH Network has the most to lose if AT&T doesn’t renew. In the DISH Network quarterly SEC report for 1Q08, AT&T is credited with producing a “significant percentage” of DISH’s gross new subscribers. Of 730,000 gross ads during 1Q08, DISH gained only 35,000 net new subs. Lacking AT&T distribution, DISH may start to suffer net losses of subscribers.

In DISH’s favor, AT&T’s innovative Homezone product integrates DISH satellite TV and DSL Internet access, in order to provide VOD-like online movie downloads and remote DVR management, among other features. However, Homezone may not swing a big enough tail to wag the DISH dog. Its subscriber count is unreported by AT&T, but is probably nothing to brag about given that it is a subset of newly-added DISH Network subscribers. An AT&T deal with DirecTV would not necessarily mean the end of Homezone, although the Homezone DVR receiver would need to be adapted to work with DirecTV.

DirecTV is probably less desperate than DISH, but nevertheless would benefit from a distribution agreement that covers AT&T’s entire footprint. DirecTV’s earlier arrangement with BellSouth produced 818,000 subscribers by 4Q06, when AT&T’s purchase of BellSouth was consummated and DirecTV subscribers were last reported by AT&T separately from DISH subscribers.

DISH Network or DirecTV? “In terms of AT&T Homezone, it is premature to speculate. AT&T continues to discuss options with DISH, in addition to evaluating other short- and long-term options,” an AT&T spokesperson says.

Verizon Strike Talks Down To The Wire

Union contracts at Verizon East (former NYNEX and Bell Atlantic) will expire at midnight, tomorrow, August 2nd. There has been no public indication of progress on key sticking points between Verizon and the CWA and IBEW. Union members have authorized a strike which could start on August 3rd if a new contract is not agreed.

The Unions are providing a running update on the negotiations, from their perspective, at http://www.cwa-union.org/verizon/. Excerpts follow:

Verizon Northeast (former NYNEX), 25 July.

CWA/IBEW 2213 and IBEW New England resumed negotiations with Verizon this morning in Rye, New York. …The focus of today’s meeting was on the marketing department side of Verizon. The Unions has raised the issue of the jobs of the future during numerous bargaining sessions since the beginning of these talks. No progress has been made on this important matter.

Our contracts expire on Saturday (sic), August 3rd. Strike preparation continues on both the National and Local Union levels. Members should be contacting their Locals about picketing and strike duty assignments if they have not already done so.

Verizon Mid-Atlantic (former Bell Atlantic), 28 July

The Unions and the Company met today and the Company provided counter-proposals to the Unions' health care proposal made in earlier meetings. The meeting adjourned and the Union will assess the counter-proposals and prepare a response.

Only a few more days remain until the contract expiration and we are still far apart on all critical issues and without any agreement on any issue. While it is still possible an agreement can be reached, it is most important that we are ready in the event this contract has to be negotiated in the street.

This contract is about the future. It will do us no good to win wages and benefits and then lose our jobs. Our members have made it clear that they understand and support our bargaining agenda. Special notice: Alpha Units and Moonlight Units are to stay on stand-by. Absolutely no jumping the gun. These units must act at the same time when the signal is given.

Meanwhile, Verizon is starting this week to install FiOS in New York City in the midst of an intensive marketing campaign. A strike that disrupts growth of FiOS in this market, and elsewhere, will be inconvenient for Verizon’s wireline business which increasingly relies on FiOS to compensate for decreases in local phone lines and DSL connections.

Strike Clouds at Verizon Bring Spring to Cable MSOs' Steps

Battle lines are forming for a strike at Verizon beginning in early August that could end up as an industry-changing confrontation.

On 2 August 2008 , existing contracts expire between Verizon East, the combined wireline operations of the former NYNEX and Bell Atlantic, and the CWA (Communications Workers of America) and IBEW (International Brotherhood of Electrical Workers). The parties are now negotiating such difficult issues as how to allocate cost of health care and prescription drugs and which jobs are covered, or not, by labor contracts.

Much has changed since August 2003 when Verizon and CWA/IBEW last approached a strike, which in that instance was averted at the last moment. Some of these changes are exerting new pressures on each side to reach agreement before the picket lines go up:

On Verizon

• In 1Q08, Verizon reported a net loss of 576,000 residential phone lines primarily to cable and to wireless substitution. Service disruptions caused by a strike will accelerate this erosion.
• Verizon has cleared almost all regulatory hurdles to offer FiOS TV in New York City and expects to start doing so by late 2008. A strike would put on hold this much-awaited expansion of FiOS TV as well as stopping new installations of FiOS (and other Verizon services) elsewhere.

On CWA/IBEW

• If a strike causes Verizon’s wireline business to shrink, or puts FiOS at risk, Verizon’s need for union workers will be reduced. Other major telecoms employers in Verizon’s territory, including cable MSOs and Verizon Wireless, have minimal union representation. A strike that undermines VZ’s business would shrink the pie that feeds the major telecom unions and their members.
  

Despite pressures to settle, Verizon may decide to take a strike. A potentially key factor in this decision is that Verizon’s senior management has been taken over by C-level imports from Verizon Wireless starting with Denny Strigle, president and COO , formerly president and CEO at VZW. Unlike its parent, Verizon Wireless is non-union. Might this be Strigle’s moment to take a stand against the CWA/IBEW, as in Ronald Reagan Smites the Professional Air Traffic Controllers Organization? According to a CWA online newsletter in April 2007, a Verizon executive who was urging workers to rethink their support for a union was quoted by witnesses as saying “we are under wireless now,” which the CWA observed was “a reference to Strigle’s harsh anti-union stance when he headed Verizon Wireless.” ?

Although the cable MSOs are on the sidelines, they have a stake in the outcome. They will benefit if the unions “win” and Verizon is forced to carry higher labor costs and has less flexibility in managing its operations. Even if Verizon “wins,” the MSOs may still see their glass as half-full if this weakens the CWA and IBEW which are also knocking on the MSOs’ doors. Either way, the MSOs’ interest in these proceedings has at least a tinge of schadenfreude.

Verizon FiOS Magic Words to Subscribers for Digital Transition: ‘Free’ and ‘Easy’

Verizon is now telling its FiOS TV subscribers that beginning in May their analog TV channels will be transitioned to a digital format. This will affect all subscribers who have directly connected any of their TV sets to receive FiOS’ analog TV package of local broadcast and access channels. The magic words that Verizon is using to break this news—improved, more, free and easy — may be of interest to cable operators who are fretting about how to deliver the same message to their own subscribers.

Cable operators are worried that their analog subscribers will resent having digital set-tops foisted on them versus no set-tops or low-cost analog STBs. The broader context of broadcast TV’s digital transition should alleviate some of this potential resentment. A positive spin on the digital changeover, as is now being modeled by Verizon, could further help to make the medicine go down more smoothly although admittedly Verizon has less to fear since there are relatively few analog-only subscribers to its low-profile local TV package, as compared to the still numerous legacy analog cable subscribers.

In a letter to FiOS TV subscribers, Verizon headlines “an exciting change” that will “…continue to improve the Verizon FiOS TV experience….extending quality of digital to all TVs in your home…to bring you even more of the great HD and special interest content.”

Then, the catch: “Each TV in your home will need one of the following devices to receive the new digital signal: a Verizon-issued digital adapter, or a Verizon-issued set-top box or CableCARD.”

But then, the good news: Verizon offers to provide this equipment for free, as in FREE, all caps, repeated twice. “To avoid disruptions to your service,” subscribers are told to contact Verizon “to order your FREE equipment.”

The letter concludes: “…an all-digital signal will give us the chance to provide improved picture and sound quality, including more HD channels and programming…We will make going 100% digital 100% easy!”

Verizon is fulfilling its commitment to the FCC to complete FiOS TV’s transition to all-digital by February 2009. The FCC requires cable operators to continue to deliver local broadcast TV stations in analog form until 2012 or until a cable system has transitioned to 100% digital, whichever happens sooner. Whenever cable’s digital transition occurs, perhaps cable’s legacy analog subscribers will be mollified if they are persuaded that it will be easy, will improve their service, provide more content, and require only that they accept FREE equipment.

While FREE may work for subscribers, it does have financial implications for MSOs facing substantial capex for the digital set-tops. The financial equation is made more complex by the fact that subscribers who currently have digital STBs now pay a monthly fee for this equipment. Offering digital-transition STBs for free could put this existing revenue stream at risk. FiOS subscribers also currently pay for digital STBs, generating revenues that presumably Verizon also wishes to retain. Here, again, Verizon’s approach may be suggestive for MSOs. Verizon will limit the free devices to reception of linear TV channels with no VOD access, thereby reducing their value for subscribers relative to revenue-generating STBs.