Even long-time veterans in the U.S. cable industry are often not familiar with the very vibrant international cable business.  It’s typical for some people to look to other countries for models of what might work in America, but it’s important to understand that the competitive landscape and regulatory infrastructure in those countries are dramatically different from our own.  Before you suggest we ought to do things like they’re done in Finland, it’s helpful to understand what’s going on in those markets.

For example, South Korea and Japan are viewed by some Westerners as great broadband success stories. In reality, those markets’ policies have prohibited certain kinds of competition, which has restricted broadband growth outside key areas. And as for their vaunted speeds, there is evidence to suggest that narrative is flawed as well.

Therefore, I’m pleased to present a guest post from John Medeiros, the Deputy Chief Executive Officer of the Cable & Satellite Broadcasting Association of Asia (CASBAA).  His organization is an industry-based advocacy group dedicated to the promotion of multichannel television via cable, satellite, broadband and wireless video networks across the Asia-Pacific.

Sitting in Asia, where the pay-TV industry is growing by leaps and bounds, and reading about the debate in the U.S. on the cable industry’s success (or lack thereof) in stimulating broadband development, leads one to muse about the definition of success.

Some American observers have argued that Asia is so far ahead in broadband that the U.S. should look here for tips on how to catch up.  But with 56% of US broadband connections supplied by the cable industry [according to SNL Kagan], and with many parts of the country witnessing aggressive, creative competition between cable companies, satellite providers, and traditional telcos, the U.S., as viewed from Asia, looks mighty good.

Of course, there’s no reason this had to be the case – what made the difference in North America was the shift of US regulatory policy beginning in the mid-1990s.   The pricing and bundling freedom that U.S. cable operators have enjoyed since then has made it possible to build out high-capacity networks and develop new, high-quality content offerings on a continental scale. It’s also spurred growth and competition from other platforms. The free hand the cable industry has enjoyed in making technological choices has ensured the networks meet the real demands of paying customers.

Contrast this relatively enlightened regulation with some of the protectionist psychology that still prevails in some Asian markets.  A good example is Taiwan, one of Asia’s richest markets, which has a regulatory system where the government applies a regulatory strait-jacket to all operators (cable and IPTV).   Cable operators are all required to run the same 90-plus analog channels, and – never mind the rising global prices for content – they have not been allowed to raise rates in over seven years (and last year, during elections, the companies were forced to swallow rate reductions that had no rational basis, other than “the constituents like it.”). The result has been very limited investment in new infrastructure or in quality content.  Taiwan is well behind Asia’s other advanced economies on the digital curve, with the first digital STBs rolling out only this year.

Another example of over-rigid regulation is India, at the other end of the per capita GDP chart.   Apart from rate controls that have no clear economic justification (why should every channel cost consumers precisely 5 rupees per month, no matter what kind of content it airs?), India’s regulators have hobbled the market by requiring that every pay TV system (whether cable, IPTV or one of the 6 DTH operators) has access to the same content on “non-discriminatory” conditions.  So TV becomes a commodity without differentiation.   The inevitable result is that in that country, too, cable network upgrades and digitization are proceeding slowly, and regulators fret that national digital development goals are not being met.

India’s initial cable-TV development was, by contrast, one of the great success stories of private entrepreneurship in human history.  In an infrastructure-weak developing country, totally private capital and skill were mobilized to wire more than 80 million homes in about 17 years – a huge accomplishment (in sharp contrast to the 50 million homes wired by the state-owned telecommunications establishment, in about 100 years of trying.)   But now, with the cable industry firmly established as a part of India’s modern infrastructure, the government insists on hobbling it in the name of “consumer interest.”   The result will be that cable networks – starved of enough revenue to justify rapid upgrading – will remain low-capacity and analog far longer than they should.

Despite these problems, the Asian pay-TV industry is growing very rapidly.   This continent is still in the rapid-build-out phase of connection.  One recent report estimated that the top 40 pay-TV operators will add 11 million new subs this year, for about a 20% annual growth rate.  Growth is strongest in the low-ARPU emerging markets such as China and India, but it is warped by uneven regulatory policies (because India’s cable regulations are so draconian, the biggest growth is coming on DTH platforms; China has lots of digital cable growth, but it is centrally-ordered not market-generated).

Of course, talking about “Asia” in a single breath is a bit nonsensical, as this continent is easily the world’s most diverse region when it comes to pay-TV development.  There are examples of over-rigidity in some places, but some other Asian markets have regulators who are among the world’s best – enlightened, transparent, market-friendly and globally aware.   And in places like Indonesia and Vietnam, the regulators and the industry are striving to liberalize their markets and bring them up to global benchmarks, in order to overcome the handicap of years of excessive state control.

It makes for a fascinating mix of issues.  People who are interested in learning more about the Asian pay-TV market – with all its opportunities and obstacles – should consider attending the Asian pay-TV industry’s annual convention. This year’s event will be held in Hong Kong from Nov. 3-5.  More info can be found here: www.casbaaconvention.com.

Sean Fallon has a post up at Gizmodo titled “Life Without Cable or Satellite Is Easier Than You Think.” Fallon’s central argument is that all the shows you watch are available freely online, and you just need to connect a PC to your TV to get all the same content. It’s a premise we have seen before in countless posts and newspaper articles. As in those articles that came before it, however, the premise is simply not true.

Broadcast Programs Aren’t Cable

To begin with, Fallon makes the same mistake others have made in confusing broadcast versus cable content. His list of favorite shows is rich with broadcast content.

I’m not a TV addict by a long shot, but there are shows that I watch religiously. These shows include 30 Rock, Lost, Family Guy, Californication and Dexter. The following graph illustrates the pluses and minuses of viewing a handful of different shows—not just my favorites—from popular networks.

The graph includes those mentioned plus The Daily Show, CSI, Deadliest Catch, and Entourage. Of the nine programs he specifically mentions, four (30 Rock, Lost, Family Guy, and CSI) are broadcast offerings available with nothing more than rabbit ears (for those with an HDTV or rabbit ears and a converter box for those without an HD tuner).

The other 5 are actually cable content. So, let’s focus this discussion on those to see how “easy” it would be to get them online.

The Daily Show makes most of its content available online for free. The program is relatively inexpensive to produce and Viacom has chosen to make it widely available via the Internet. Based on one network’s decision to make its content available for free, Fallon makes the laughable suggestion that all cable operators, regardless of the production costs of their shows, “move away from old revenue models and look towards the future.”

So what, exactly does Fallon’s future business model look like? To answer that, let’s look at one of Fallon’s examples.

Time Sensitivity and Value

Comedy Central’s Daily Show and The Colbert Report are often cited as examples of the new business model based on giving away content for free. For the most part, both of these shows are placed online almost immediately after their original air date. People arguing for “cord-cutting” often cite them in their arguments. Unfortunately, they’re actually very poor examples for one specific reason. They’re time-sensitive.

These two programs, being based on current events, lose value as the viewer is further and further removed from the context of the events. Yes, the shows may still be humorous if viewed weeks later, but what about months? What about years? In other words, their shelf life is limited.

Typical sitcoms, where the humor is situation-based, can be viewed much later and retain relevance. The clothes may appear dated, but the story still rings true. That’s why shows like Friends, Cheers, and Gilligan’s Island may be in syndication for a decade or more after their original air date. Shows like The Colbert Report and The Daily Show have almost no syndication value. Comedy Central can pick up more revenue through online ads in the days and weeks immediately following broadcast than they would be able to with DVD sales months later.

So we see in one of Fallon’s specific examples a clear reason for making the content available online. What about the rest?

Broadcast Versus Cable Business Models

Since we have begun the discussion of value, we should look at the ways that programs earn revenue. Broadcast programs typically earn the bulk of their revenue from advertising based on their original air date. Broadcasters sell ads and support the programs with that revenue. Shows are routinely canceled when they don’t draw enough viewers to earn a return based on advertising. This has become a particularly troublesome business model as ads are increasingly avoided through the use of DVRs and online viewing.

Cable programming is based on a different model. While cable show still feature advertising, cable programmers also earn a per-subscriber fee from the operators who carry their channel. This revenue model works better as it provides a stable source of revenue separate from the regular fluctuations of ad income. Under this model, the subscriber fees are based on exclusivity of content. If the same content were suddenly available for free elsewhere, the incentive to subscribe is gone and you’re suddenly back to a purely ad-supported model.

Fallon cleverly ignores the fact that most of the shows he cites are among the most protected of cable’s programs. Deadliest Catch, Dexter, Californication, and Entourage are exceptionally difficult to find elsewhere. As he mentions, only one episode of Californication and Dexter were made available via Netflix, and only for a short time. He is correct that you can buy entire seasons on DVD, or rent them, but that is typically months after their original air date. If you want to watch these shows when your friends are watching and talking about them, a six month or greater delay is simply not an option.

So How “Easy” Is It To Drop Cable And Get It All Online?

Fallon’s central thesis and the title of his post come down to it being “easier than you think” to have life without cable. Yet his post demonstrates quite the opposite. He freely acknowledges that 4 of the 5 cable shows he watches are not at all easy to find without a cable provider; the one program that is easy to find is available primarily because it carries an expiration date; and the remaining 4 programs aren’t cable programs at all.

We have stated on a number of occasions a simple truth: If you are watching cable to get broadcast programming, you may be paying for a service you don’t need.

If, however, you are subscribing to cable because you enjoy the tremendous variety of cable programming – everything from Entourage and Jon & Kate Plus Eight to Real Housewives of Orange County and ESPN sports, then you simply won’t find the programs, or the quality of programs available anywhere else.

In the early days, cable television didn’t use set-top boxes, since only over-the-air broadcast channels were being carried. With the advent of cable programming, which was transmitted on midband frequencies, came the initial wave of basic converter boxes that were necessary to convert the cable feed to an analog RF signal so it could be displayed on a TV set. But today’s digital set-top boxes are quite different, as they allow the reception of hi-def signals, protect against signal theft, enable the use of an on-screen guide and parental controls, provide a DVR for time-shifting of programming, and more.

But despite the advanced features that today’s boxes offer, and their broad consumer use, not everyone is a fan of these devices. Washington Post tech columnist Rob Pegoraro apparently falls into this camp and recently wrote a column expressing his frustration with boxes – explaining that “three digital-cable technologies have failed to usher the cable box and its button-strewn remote from most living rooms.”

Pegoraro focused on the cable industry in his column, but did note that other video providers also require set-top boxes, certainly an important point in a competitive marketplace. As I was quoted in a story on the TV Barn blog last year:

If you switched to DirecTV or Dish, you have to have a new box. If you switch to Verizon FiOS or AT&T’s U-verse, you have to have a new box. It baffles me to no end why there are four companies competing with cable and nobody has ever complained that you have to have a set-top box for them.

The Progress of CableCARDs

Set-top boxes are necessary in many circumstances, but the cable and consumer electronics industries have been working for years on providing cable customers with ways to receive service without them. The first approach was one-way Digital Cable Ready TV sets – also known by the unfortunate legal term Unidirectional Digital Cable Ready Products or UDCPs (the history of them was discussed in this post from last year) – which utilize CableCARDs to provide security, ensuring that only paying customers can receive cable service.

NCTA periodically reports to the FCC on the number of CableCARDs that have been issued to customers for use in UDCPs purchased at retail. Last week, we reported: “As of August 31, 2009…there have been over 443,000 CableCARDs deployed for use in retail devices by the ten largest incumbent cable operators who serve approximately 90% of the cable subscribers in the country.” When compared against the cable’s 63 million video subscribers, my math shows that CableCARDs are being used in retail devices by well under one-percent of the overall base (.0008 to be exact).

Some blame cable operators for the low number of CableCARDs in use in retail devices, but that fact is that one-way Digital Cable Ready devices do not support Video-on-Demand (VOD), electronic program guides (EPGs), and other two-way services that cable customers want.

As the FCC has recognized more than once: “market demand for UDCPs is not strong”; “it is apparent that consumers have not shown significant interest in one-way devices, which cannot access features such as EPGs, VOD, PPV, and other ITV capabilities provided by cable operators“; and “many consumer electronics manufacturers have discontinued the manufacture of UDCPs because consumers are more interested in advanced two-way functions that UDCPs by definition cannot perform.” (Also, see this related article.) In fact, with the exception of certain TiVo digital video recorders, the consumer electronics industry isn’t building one-way Digital Cable Ready devices for the retail market.

There is another explanation for the low level of consumer interest in these devices. As Consumer Reports said as far back as its November 2006 issue, it makes no sense for most consumers to buy DVRs (“cable ready” or not), let alone “Plain Jane” digital boxes, when they can rent them from their cable company for a low, government-regulated monthly fee and exchange those boxes for more advanced models when they become available. Multichannel News’ Todd Spangler also recently examined the question “Why Haven’t CableCards Taken Off?”

The next step in cable’s set-top box evolution was the development of tru2way, which is a middleware stack that is being installed in cable headends nationwide and allows retail devices to access cable’s two-way services. Last year, the six largest cable operators concluded a landmark agreement with major consumer electronics companies (including Sony, Panasonic, Samsung, LG and Funai Electric (which trades products in the United States under the brand names Philips, Magnovox, Sylvania, and Emerson)) laying the foundation for development of two-way digital cable ready devices which would not need a set-top box to access cable’s two-way services. Those tru2way devices also use CableCARDs for security.

Panasonic has been selling, and cable systems are supporting, tru2way digital TVs in three major markets: Atlanta, Chicago and Denver (as we reported last year).

Clearing Up QAM

Another method for cable reception without a box is through the use of a device with a built-in QAM tuner. QAM (pronounced “kwam”) stands for quadrature amplitude modulation and is a method for putting digital signals onto a carrier so that it can travel from your local cable company to the home.*

You might recall a FiOS commercial from a few years ago where the tech rattles off a bunch of technical stuff and then refers to “true QAM.” Cable systems have been using QAM for years because it’s faster and more efficient than some other digital modulation techniques.

But there is a catch to consumers counting on QAM tuners. Currently, some QAM signals are sent in the clear and others are encrypted, but, increasingly, channels are being moved to the digital tier and are being encrypted. In some circumstances, with the right TV, you could receive the “clear QAM” signals, but you’d need a set-top box or a CableCARD-enabled device to receive the encrypted signals.

Pegoraro referred to “Hollywood’s paranoia about shows being shared online” and said that “this encryption doesn’t stop shows from being shared online.” I think that’s the point: Not all programming is encrypted at this point and it’s fairly easy to digitally copy a television program (or movie) and distribute it online. The proliferation of content online will require a level of confidence by content owners that their shows won’t end up being widely digitally bootlegged.

Protecting channels through encryption also allows cable companies to offer the opportunities to consumers to buy different tiers of service – such as basic, expanded basic and digital, as well as your pick of premium channels – or to select among packages of programming, such as kids, sports and news.

The Correct Approach to Ditching the Box

While the pace of progress hasn’t been rapid enough for some, cable has been leading the way on the development of solutions to serve customers who don’t want boxes. But there are other multichannel video programming distributors (MVPDs) than just cable companies (services like DirecTV and Dish, and telephone company offerings like FiOS and U-verse) and, as mentioned earlier, they also require set-top boxes.

To help achieve a universal “box-free” solution for all providers, NCTA has suggested an “all-MVPD” solution. Under this scenario, the consumer could buy a TV set or other device at a retail outlet and successfully connect it to any MVPD without a set-top box from that provider.

I’ll quote from a 2008 NCTA letter:

Verizon also expresses support in its [July 31, 2008] ex parte for an “all-provider” plug-and-play solution (i.e., a solution that uses a standard network interface that is platform agnostic). This is something that NCTA and traditional cable operators spent more than a year advocating. In the summer of 2007, the cable industry asked the FCC to encourage an all-provider solution, and actively sought support for the concept from AT&T, Verizon, and satellite providers during the summer and fall of 2007, including numerous high-level contacts among the parties. Unfortunately, AT&T, Verizon, and satellite all declined cable’s invitation, and cable proceeded with its plan to negotiate and conclude the Two-Way MOU with major consumer electronics and information technology companies. When we announced the MOU in June, 2008, we specifically renewed the cable industry’s invitation to collaborate on a voluntary all-provider solution. We are pleased that Verizon is now calling on the Commission to encourage all parties to work towards that goal.

More recently, TiVo has supported an “all-MVPD” solution as well. We would welcome further discussion of this concept.

Undeniably, there are challenges to providing service without a traditional set-top box. It involves issues of technology, regulatory policies, innovation, and consumer choice. For those who are deeply interested in getting rid of the box, we suggest that effort should focus on developing an effective solution for the reception of multichannel video that would work for all consumers and all providers.