The week started off Monday morning with this article – “In the Living Room, Hooked on Pay TV” – by Matt Richtel and Brian Stelter in the New York Times.

The proliferation of Internet video has led to much talk of “cord-cutting” — a term that has come to mean canceling traditional pay TV and replacing it with programming from a grab bag of online sources.

But so far Americans are not doing this in any meaningful numbers. “Nor is there any evidence of it emerging in the near future,” said Bruce Leichtman, the president of Leichtman Research Group, which studies consumer media habits.

Good news for cable. But the next day, SNL Kagan reported that the 2Q numbers for paid TV subscriptions fell for the first time ever. Kagan attributes the downturn to the weak housing market and high unemployment (plus the loss of customers who had initially signed up during the DTV transition).

NewTeeVee reported this as “New Numbers Reveal: Cord Cutting Is Real,” despite including cautionary quotes from SNL Kagan analyst Mariam Rondeli. Then, NewTeeVee’s Ryan Lawler claimed “The Future of TV Is Not on Cable.” (There was also this disappointing NPR story.)

It’s important to look at these numbers in context:

• Second quarter subscriptions dip every year, as students go home from school and “snow birds” close up their winter homes.
• The Multichannel Video Programming Distributor (MVPD) market is quite mature and penetration is high. Most households that want multichannel video service have already subscribed.
• Some former over-the-air households, who had long held out on getting cable, took advantage of deals offered during the DTV transition of 2009 to become multichannel customers, but as those deals expired, they’ve cancelled. While looking like a group of disconnects, it’s more representative of people that resisted such services before and are now going back to their old ways.
• Total housing units were essentially stagnant for the previous five quarters (from Dec. ‘08 to March ‘10). Even so, over the last six quarters, the number of MVPD subscription additions (+2.1 million) have outpaced additions to housing units (+0.3 million) by 6.5 times. But a weak economy is having an effect. Even Karl Bode, in a post that said “Cord Cutters Are Very Real,” admitted that “it’s being driven primarily by the economy.”

A Merrill Lynch report on the 2Q numbers pointed out that the Netflix platform is growing (available on Xbox 360, PS3, Wii, and many Blu-ray players) and Hulu engagement is now up to 2.6 hours, but that Nielsen says that “American [households] are watching more TV than ever before,” up to eight hours a day (with that figure rising each year).

As if to put the icing on the cake, Wednesday brought a Bloomberg story that reported that Apple was looking to introduce 99-cent rentals of television shows. Some interpreted this as a threat to cable and the advent of true “à la carte.”

Jason Perlow at ZDNet ran some numbers to see if such a “pay as you go” approach makes financial sense (also see the analysis at GigaOM).

Previously, TechnoBuffalo noted that 99-cent rentals might not make much sense; last week, they pointed out that $40 per month for 70+ channels comes to less than $1 per channel.

So now Apple wants to charge you $1 per episode of any particular show?  Remember it’s a rental and if Bloomberg is correct, it’s only yours for 48 hours.  Pff.

Joe Flint notes some other causes of skepticism, including the critical point that “content providers need to make sure that their eagerness to embrace the future doesn’t undercut the present because if it does, there won’t be a future to embrace.” Robert McGarvey at Internet Evolution also said it might be a little too early to declare Apple’s victory.

It’s worth pointing out that 2Q reports also showed that cable took all of the net adds for broadband service. You have to connect to the Internet to get that streaming video. And Joel Johnson at Gizmodo answered the question “Why Are You Still Subscribing to Cable Television?” with some pretty good reasons to not cut the cord. Plus, some have noted that in tough economic times, cable can provide great entertainment value.

We’ll continue to see consumer have more choices for ways to enjoy video content both in and out of the home.  But it’s clear that cable’s video service is a viable choice for many.

The study noted that the rate of broadband growth is slowing (which happens as any new market begins to mature); and that a large percentage of non-subscribing consumers don’t believe that the government should be involved in addressing this issue.

The most pertinent findings from the report are that:

• 66% of Americans currently subscribe to high-speed Internet access at home, which equates to 3% year-over-year growth
• There was a 22% year-over-year growth rate in adoption by African Americans, by far the biggest growth rate of any major demographic group
• 53% say the spread of affordable broadband should not be a major government priority
• Respondents older than 50 were most skeptical that they would benefit from the Internet.

In delving deeper into the latter two statistics, Pew reports that, “Those who are not currently online are especially resistant to government efforts to expand broadband access.”  This is not necessarily surprising and points to an issue – relevance (i.e., “How will I benefit?”) – that has repeatedly been identified as a barrier to broadband adoption.

NCTA and the cable industry have been talking a lot about relevance and other broadband adoption issues for the past few years.  On this blog, we’ve talked about broadband adoption and considered the reasons why some people don’t choose to have home access.

In the community, we’ve seen firsthand that some consumers simply see no benefit in broadband…that is until they start using the service and then they can’t stop.

High-speed Internet service is available to 95% of American homes, but the Pew report found that 21% of American adults still do not use the Internet (and about 90% of those people say they aren’t interested in going online in the future).  So, while we seek to deploy broadband to areas that do not have access, we must also find ways to increase adoption of broadband technology.  The statistics clearly show there are a significant number of people who can get Internet service at home, yet have not jumped on the broadband bandwagon.

To help give adoption a push forward, NCTA and cable operators are finding ways to encourage adoption, improve digital literacy, educate on broadband issues and provide affordable broadband access, including:

• Digital Adoption Coalition. Led by the nonprofit organization One Economy, this coalition hopes to bring broadband to as many as 250,000 low-income households.  The coalition, which includes computer technology companies, ISPs, and the U.S. Department of Housing and Urban Development (HUD), has applied for funding to get broadband to citizens in public housing facilities via computers, low-cost access, and training programs.
• Adoption Plus. Last year, NCTA proposed the Adoption Plus (A+) Initiative, a public-private partnership designed to provide discounted computer equipment, media literacy training and deeply discounted broadband service for middle school children in low-income households.  A+ program would help give millions of students the opportunity to become digital citizens of the 21st Century by driving sustainable broadband adoption and positively affecting educational outcomes.
• Digital Connectors. Comcast is actively involved with non-profit One Economy in the Digital Connectors program.  This program provides talented youth with technology, leadership and 21st Century workplace training in return for their volunteer time providing service to their friends, families and community.
• LULAC Partnership. This summer, Time Warner Cable (TWC) and the League of United Latin American Citizens (LULAC) announced a partnership to increase broadband technology training.  TWC is providing a three-year grant for technology centers in Latino communities for training, technology and support services.  The technology centers across the country will become a part of LULAC’s Empower Hispanic America with Technology Network which already provides free broadband access to 100,000 people.  The centers will receive computer equipment, high-speed Internet access and educational curriculum.
• Cox’s Computers for Families (CFF) Program. Cox Communications a few years ago began their CFF program in Santa Barbara, California to promote broadband adoption.  This two-year public-private partnership provides sustainable broadband adoption for middle school-aged children in low income households that do not currently receive broadband service.  Sound familiar?  NCTA’s Adoption Plus program builds on this initiative at Cox.  In addition this past May, Cox began a new program in Fairfax County, Virginia called “Broadband CNCT” (Computers & Neighbors Coming Together) where homes of school-aged children in one neighborhood will receive high-speed Internet service at a discounted rate.  This is a pilot program the company hopes to replicate in other areas.

These programs are just a few examples of how industry, government and non-profit partners can address the core reasons why some Americans say they don’t and won’t subscribe to broadband.

I don’t want to come across like I don’t think that over-the-top video services are great for consumers. I’m a consumer and I love ‘em. So, I wanted to point a few cool things you can see via online video.

Hulu is known primarily for its ability to catch up on the last few episodes of TV series, primarily from broadcast television. But did you know you can also watch movies?

If you like documentaries, there’s Dig!, a profile of the amusing friendship/rivalry between the bands The Brian Jonestown Massacre and The Dandy Warhols, and Big Rig, Doug Pray’s artful look at the world of long-haul truck drivers. If you enjoy Samurai cinema, check out the Zatoichi: The Blind Swordsman series (26 films were made from 1962 to 1989, plus a TV series); you can start with The Tale of Zatoichi. For comedy, revisit Mystery Science Theater 3000 or watch An American Werewolf in London for scary laughs.

If you do want to watch TV, you are strongly urged to check out the British series Spaced, with Simon Pegg and Nick Frost, plus director Edgar Wright, known from Shaun of the Dead; Jessica Hynes stars with Pegg and the two created the program. Hulu has all the episodes.

I’ve written many times about the assertion that Netflix is a perfect substitute for cable service, which doesn’t make sense. Netflix’s Watch Instantly feature is limited in its offerings, but it has a lot of excellent films tucked away in dark corners.

The Swedish version of The Girl with the Dragon Tattoo has recently become available and it’s a great adaptation of the popular book. If you like foreign movies, there’s also Costa-Gavras’ classic thriller Z, Jean Renoir’s 1939 film The Rules of the Game, the soon-to-be-remade vampire film Let the Right One In, and the gritty immigrant drama Entre Nos. For documentaries, there’s the Oscar-winning Man on Wire, The King of Kong (a hilarious look at competitive arcade gamers) and It Might Get Loud (a look at electric guitarists Jimmy Page, The Edge and Jack White).

For TV, you can catch up on all three seasons of Veronica Mars and all the seasons of Lost.

As for pure Internet content, I’ve been feeling really bad lately about not watching more of Felicia Day’s Web series The Guild, a comedy about online gamers, since the bits I’ve seen are so funny. On the other hand, I’ve become a regular viewer of Kevin Pollak’s Chat Show. Pollak has described his show as “Charlie Rose with a sense of humor” and that’s a good way to put it. As I said on my pop culture blog, it’s refreshing to see lengthy meaningful conversation. There are various ways to stream shows like these to your TV, such as through Xbox LIVE, PS3, TiVo, or the forthcoming Boxee Box.

With all these options, why still subscribe to cable? Well, I have an HD set and I like to watch hi-def programming, whether live or through VOD. Much as I enjoy streaming Netflix, the movies just aren’t as crisp and clear. This is also true of  the Internet content I watch on my TV.

With these cord-cutting options, my viewing choices are limited. I want to be able to watch news, when it happens, on the big screen. There are a number of cable programs I can’t get online. With my subscription to premium services, I get access to a lot of fairly recent theatrical films.

With my cable service, I’m also getting broadband, which enables me to get all this additional content. Even if I was inclined to “cut the cord,” I’d still need cable to get to the Internet.

With all these new services, I need additional equipment to connect the video to my television (For example, I stream Netflix through my Wii and I use a Bose SoundDock to connect my iPod to the TV). That’s fine, but what about my second TV upstairs?

Bottom line: I find the two to be complementary. They’re both useful, but my cable video service is still of value.

FINAL NOTE: I should point out that I’ve said before that any content producer needs to figure out how to recover productions costs and achieve profitability. I’ve also called attention to the news that Netflix (a distributor) is looking at having to spend more to get access to content and also noted that some video distributors have looked at moving from a free model to a subscription business. And I should note that if cable TV is a niche business, then Internet video is a super niche business.

Instead, I usually read some “kill your cable” rhetoric.

So, that’s why I return to the topic of cord-cutting: Because everybody else keeps writing about it, often in an oddly hostile fashion.

CNET’s Marguerite Reardon started off an Ask Maggie column on cord-cutting this way:

If you are like me, you cringe every month when you pay your cable bill. And you dream of the day you can cut your cable cord and stop paying that monthly bill.

It’s not that I don’t like to watch TV. I do. But I can’t stand that I pay $140 a month to watch a handful of shows on five or six channels.

First, that $140 probably covers more than just standard programming . I pay about $180 a month to Comcast, which includes video, Internet and phone, including HD, a DVR, premium channels, and so on.

When a reader writes in how to watch video online, Reardon answers, “Good for you for cutting the cable cord!”

There are certainly people who choose not to subscribe to multichannel video services. Nothing wrong with that. But if you want to watch the programming – cable’s original shows, news, sports – then that’s how you get it.

Aaron Barnhart of TV Barn helpfully points out that, for all the complaining, people are continuing to subscribe to multichannel video service in growing numbers. But, counterintuitively, Reardon love to recommend that people unhappy with cable service should turn to cord-cutting – which doesn’t allow you to access all you can get from cable programming.

It would probably be along the lines of suggesting that people unhappy with cable should try reading a book. Did you know that libraries loan them out for free?

Replacement v. Substitution

This is a critical point: Cord-cutting is not a replacement, it’s a substitution.

What do I mean by this? If you subscribed to cable to get access to over-the-air broadcast channels – like NBC, CBS, ABC, FOX – and then canceled your service and instead used an antenna to get that programming, that is a replacement. You get the same content through alternative means.

But if you have cable to watch cable shows, as most people do, and then cancel cable, turning instead to the Internet to watch non-cable content on YouTube and Hulu, it means you substituted one kind of content for another.

There’s certainly some cable programming you can watch for free online, but there’s lots you can’t.

As I already noted, people continue to subscribe to cable in relatively stable numbers (as we’ve covered before) and they watch TV a lot (Nielsen reports 158:25 monthly hours, as opposed to “a handful of shows.”). Recent data shows that “for the most part online-video viewing continues to be a work-time distraction,” with the 4:00 – 5:00 p.m. slot showing more video streams than any other daypart.

And it’s probably worth noting NewTeeVee’s post on the study from online video search site Clicker, which showed that even though 90% of broadcast content is put online, it’s typically removed in six weeks or less.

Meanwhile, some think the current system is a conspiracy, and they find the new “TV Everywhere” service to be a conspiracy designed to stave off cord-cutting and the inevitable migration of all content to the Internet for free or for some minimal price.

The Salvation of Over-the-Top Video

What about competitive services like Netflix? Their latest Q2 reveals that they’re increasingly about streaming, so why aren’t they a threat?

Well, as they continue to build their business, access to exclusive content gains in importance.  That’s the importance of their deal with Relativity or their deal with Warner Bros. At some point, getting access to content, especially very popular content, gets expensive.

Suppose that’s the Netflix model: They deliver video directly to your television; you pay a monthly subscription fee and get to watch as much as you want. In order to offer you the content you want, Netflix then has to make further deals with studios, eventually ponying up real money in order to get the content. In order to recoup those costs, they may eventually have to increase their subscription fee.

Is that a substitution  or a replacement?

UPDATES: NewTeeVee hits exactly on my point: The Real Cost of Netflix Streaming is the Movie, Not the Bandwidth. Key quote: “…the real cost of running its streaming business is in acquiring the content, not delivering it.”

In addition, I linked to an article in my post that I felt exemplified the notion that online could provide a substitute for cable. I received a message that the author of that piece felt I had made an unfair comparison; I have removed that link.

While acknowledging these successes, the FCC’s Sixth Broadband Deployment Report – or 706 Report – nevertheless concludes that broadband is not being deployed to all Americans on a “reasonable and timely” basis because five percent of American households don’t have access to broadband with speeds of at least 4 Mbps.

It’s worth noting that the 4 Mbps threshold is new and represents a significant increase from the 768 Kbps used in the 2008 report, and the 200 Kbps used in the first four reports.  We have no problem using a 4 Mbps threshold for defining broadband:  I have argued for several years that 200 or 768 Kbps was an inadequate threshold for a policy definition of broadband (pages 5-6).  But if the 706 Report is to retain any value as a measurement tool, the Commission must heed its own advice and use the definition as “a relatively static point at which to gauge progress and growth… from one Report to the next.” If the Commission continually increases the speed threshold to reflect “current demand patterns” and “estimated future demand” as it did this year, it becomes a circular nullity and it will be a certainty that deployment never will be considered reasonable and timely.

While we respectfully disagree with the report’s overall conclusion, I do understand and agree with some of the policy implications embedded in it. Why?  Because the report plainly acknowledges that there is no reasonable business case to be made for extending broadband facilities to many of the unserved homes.  So instead of viewing the report’s finding as an indictment of broadband providers, it’s  perhaps better read as a statement of principle by the Chairman and two commissioners that, in their opinion, broadband already should be universally available, and, if there is no business case for that universal deployment, the government may have to step in to achieve it. So far as that goes, we agree.  For example, we support the report’s call to action on specific items that will speed broadband deployment to unserved communities.  Immediate FCC action on Universal Service Fund (USF) reform and pole attachment policy is critical to connecting unserved areas.

As explained in comments we filed last week, our industry strongly supports the USF reforms recommended in the National Broadband Plan (NBP).  To fund the FCC’s broadband USF proposals, we recommend adopting our proposal – filed in a November 2009 rulemaking petition – to reduce subsidies in rural areas where ample phone competition exists.  The sooner the Commission reduces unnecessary funding in the existing high-cost support program, the sooner it can direct funding to broadband deployment and adoption.

We also strongly support the recommendations in the NBP to establish low and more uniform rates for pole access, expedite the attachment process, and improve rights-of-way management.  As we’ve explained in numerous pleadings, lowering the cost and improving the process for attaching broadband network to utility poles will make a significant difference in the business case for broadband in rural areas.

We appreciate that the report did not point to the Commission’s pending “Third Way” or “Open Internet” proceedings as potential solutions for connecting unserved areas.  There has been, and will continue to be, extensive debate on the merits of the Commission’s proposals in those proceedings.  But no one could credibly argue that adding Title II regulation, in any form, will have the effect of encouraging providers to invest in remote areas that they are not serving today.

But we’re disappointed with the Commission’s use of data in the report.  The report relies almost completely on stale data, flawed data, or undisclosed data.

The key statistics in the report are drawn from Form 477 data for December 2008, data that was out of date when it was released earlier this year and is now 18 months old.  Broadband providers have made two subsequent Form 477 filings (with another one scheduled in a few weeks), so the reliance on stale data is frustrating.

Equally troubling is the Commission’s repetition of the NBP’s claim that “actual” broadband speeds are only half of “advertised” speeds.   After the NBP was released, we submitted an expert technical report demonstrating that the comScore data used was deeply flawed.  Since then, cable and telco ISPs have been working constructively with Commission staff on a hardware-based testing regime that should produce more accurate results.  Given the hard work that has been devoted to produce accurate speed measurements, it is disheartening that the 706 Report chose to perpetuate the NBP’s flawed speed data conclusions.

Finally, some of the data relied on in the 706 Report is not publicly available.  The report relies extensively on a cost model created for the NBP, but that model hasn’t been released, making it impossible to validate its results.  The Commission also repeatedly refers to an FCC staff report on international trends, but that report also has not been released.

The good news is that these data hurdles can be overcome, and the Commission is embarking on a major initiative to revamp its data collection and reporting processes.

As we continue to reflect on the findings of the 706 Report, keep in mind that broadband has been adopted faster than any other major consumer technology ever.  We still have some work left to ensure that every American can reap the benefits of this service but let’s not lose sight of our success.

I think about this when I hear people complain bitterly that the U.S. is dangerously behind on broadband – there’s not enough broadband available, it’s too slow, it’s too expensive. Nobody can get online!

Of course, we have to ensure that as many Americans as possible have access to the Internet. Read this February post from Kyle McSlarrow or this one from James Assey in March. The cable industry has deployed broadband to 92% of American households. We continue to regularly increase broadband speeds and we’re rolling out wideband service based on the DOCSIS 3.0 standard (now reaching 65+ million homes). We proposed the Adoption Plus program to bring broadband to lower income households.

This is a time when:

• 95% of U.S. households have availability to Internet access with speeds of 4 Mbps or more
• 82% of HHs can choose from two or more wireline platforms
• More than 90% can choose from several 3G mobile options

Internet access is important. We can and should do more to get Americans connected. But are we really so bad off?

I Don’t Think We’ve Surrendered to Sweden.

Last month, we blogged about how high consumer satisfaction is with their current Internet connections, but all you’ll hear is about how slow our connections are.  Surveys show that an increasing number of people are using mobile devices to access the Web, but some wouldn’t count those consumers when measuring “broadband.”

Adam Theirer pointed out last year that the speed of adoption for Internet access is far faster than other technology developments (See this Pew report). With three-quarters of Americans currently using the Internet, adoption hit 50% in a decade, ahead of multichannel video (35 years), wireless phones (20 years), home computers (20 years), telephone and electricity (50+ years). Are we crawling along or well ahead of schedule?

Nokia Siemens Networks’ annual broadband development index, the Connectivity Scorecard, just came out and it showed that the U.S. just lost the #1 slot to Sweden. Sweden is beating us!

Of course, Sweden’s population is 3% of the U.S. population; it’s 4.57% of our land mass; the Swedish government owns 37% of the incumbent telecom provider (TeliaSonora) and the Finnish government owns another 13%, making the incumbent half-owned by the government.  Still, look at how bad we have it.

It’s not like I can buy a little device for a couple hundred dollars that I can carry around in my pocket and access most of the Internet, anytime and anywhere. It’s not like I can watch one of thousands of movies 24 hours day by firing up my Wii to reach the Netflix library or by tuning to my VOD service. It’s not like I can get on an airplane and fly across the country while surfing the Web.

Oh, wait. Yes, I can.

[NOTE: I should probably mention Louis C.K.'s terrific FX show Louie. And check out George Ou's debunking of the Berkman study – a key tool used to "prove" how the U.S. is behind – here and here.]

We’ve already responded via filings of our own  – making the points that Tuning Adapters are generally working and the TiVo proposed “fix” doesn’t withstand scrutiny  – but I wanted to take some time to explain where we think TiVo gets it wrong. (Coverage of this battle of filings can be found at Multichannel News and Light Reading.)

TiVo has proposed that, in lieu of the Tuning Adapter solution, the government should require the cable industry to engineer a new Internet pathway to cable headends that will handle SDV signaling from third-party devices. It’s probably worth noting that this IP backchannel approach, targeted at getting rid of the Tuning Adapters, would not eliminate CableCARDs which serve a different function – enabling UDCPs (Unidirectional Digital Cable Ready Products) to access scrambled cable programming.

I must first point out that this proposed alternative is meant to replace the Tuning Adapters that TiVo itself helped develop (as described in my previous post and on TiVo’s website) and despite the fact that TiVo has admitted publicly that “there are no known issues with Tuning Adapters.” In addition, ARRIS (the manufacturer of Moxi, the second-leading CableCARD-enabled retail device) reports that Tuning Adapters “work in providing Moxi customers with access to SDV channels and give them the experience and functionality they expect from the UDCP.”

The Issue of Size

TiVo complained about the size of a Tuning Adapter and showed a picture of a Cisco Tuning Adapter sitting on top of a larger TiVo.

However, the Motorola Tuning Adapter is smaller than Cisco’s and is much smaller than the TiVo device, as can be seen in this photo (Also shown above). Also, TiVo actively markets a Western Digital Hard Drive for its customers to use whose size is comparable to the Cisco Tuning Adapter, as shown in this side-by-side photograph (Also seen to the right).

The fact that Tuning Adapters work is much more important than their size. The reason they are their current size is because they have not been needed in sufficient volume for manufacturers to justify the cost of designing a smaller form factor.

It’s important to note that only a tiny percentage of cable customers need a Tuning Adapter. Thus, one key advantage of the Tuning Adapter is that it is scaled precisely to its purpose: It is deployed only to those customers who 1) use UDCPs with a USB port and the necessary firmware, 2) subscribe to a system deploying SDV, and 3) wish to receive SDV channels.

Should all cable systems be reengineered in order to accommodate this small number of TiVo users when it has always been clear that UDCP devices could not receive two-way services and there is already a means for them to access SDV programming?

The Not-Ready-For-Primetime Proposal

Unlike the Tuning Adapter, TiVo’s IP proposal is not ready for primetime and would impose unnecessary costs on the vast majority of cable subscribers who don’t need this additional functionality.

For starters, TiVo’s IP proposal doesn’t address what’s to be done about security and authentication or how new standards and protocols should be established that will address the wide variety of equipment used in the field.

The FCC also asks whether TiVo’s solution would result in unnecessary costs, acting as a disincentive for investment by the cable industry in switched digital. This is a reasonable question, because what TiVo’s proposal seeks is to force cable operators to engineer and deploy a new pathway to their headends to accept communication from one-way retail devices when a satisfactory solution already exists. As TiVo has said in another context, “if Congress or the Commission chooses a particular technological implementation over other technically feasible alternatives, innovation will be choked off.”

TiVo brushes off concerns about development costs, claiming, “No technical problems need to be ’solved’ for the Commission to move forward with these reforms – just some choices, involving existing technologies, to be made.” However, Cisco’s comments estimate that 30-42 months would be required to implement TiVo’s proposal, and even that schedule assumes resolution of the technical uncertainties that now exist. In its filing, ARRIS warned, “Any alternative approach would need to be evaluated for the incremental investment it demands of operators and suppliers alike, along with operator implementation costs and risks.”

Instead, we think there is a better way forward for consumers. As we say our filing:

There may well be creative IP solutions and technological designs for interactive services, but they should be addressed for all MVPDs on an AllVid basis in the NOI, not in this short-term cable-centric proceeding.

Read this blog post from NCTA President & CEO Kyle McSlarrow, in which he argues that “the only way a retail video device marketplace can fully work for consumers is if all MVPDs participate.” That’s the path forward that will offer the greatest return.

Standard cable service, both analog and digital, works on a “broadcast” model, in which every available channel is sent to every subscriber all of the time, regardless of what is actually being watched. Sending more channels than you’re actually watching just takes up more of the capacity on the cable pipe – capacity that could be used for other important purposes.

As this article succinctly puts it:

One of the primary benefits of SDV is that it frees up bandwidth because it only delivers the channel a customer is viewing.

In previous posts – like this one on net neutrality or this one on consumption-based billing – we’ve referred to the competing demands on network bandwidth. Your local cable system has a finite amount of capacity over which to provide all of the voice, video, and data services that its consumers demand.  A tool like SDV is one method of clearing up bandwidth for other services, allowing your cable provider to offer faster broadband speeds, more HD and niche programming, and other new services.

That’s why the FCC has endorsed cable’s use of SDV (For example, see this FCC Order regarding deployment of SDV by Cox and Time Warner Cable.).  Other multichannel video providers use SDV, including AT&T’s U-verse service, which is 100% switched digital.

Two-Way Services Need Interactivity

Some people want to receive digital cable service with devices other than a cable-provided set-top box, such as a TiVo DVR.  For purposes of authentication, a CableCARD needs to be used as part of that connection. You can read this blog post to get the background on CableCARDs, but the salient detail here is that the  2002 agreement between the cable and consumer electronics industries that led to CableCARDs only covered devices that receive one-way cable services, such as the channels that are continually “broadcast” on the cable pipe without anyone actually requesting them.

These one-way devices are known by the long – yet descriptive – name “Unidirectional Digital Cable Ready Products.”  UDCPs were never designed or intended to be able to receive Video-on-Demand, electronic program guides, and other two-way services that require interaction between a set-top box and the cable operator’s plant – and the FCC required UDCP manufacturers to expressly warn consumers of those limitations.

Based on the description above, you might easily surmise that SDV requires interactivity.  A channel request goes up the line to your cable provider, and then the requested content is sent back.

Even though UDCP devices were never intended to receive content delivered over a two-way platform, the cable industry and TiVo worked together to develop a solution for consumers who were using TiVo UDCP devices on systems where some channels were delivered using SDV.  That solution is called a “Tuning Adapter,” because it is a device that connects to a consumer’s TiVo box and provides the two-way functionality to request (or “tune” to) SDV content.  A TiVo press release (NCTA and TiVo Announce Switched Digital Solution for HD DVRs) and this 2007 news story (TiVo, NCTA Team Up on Switched Digital) outline the joint development.

In April, the FCC launched two proceedings about video devices, one of which asked questions about whether Tuning Adapters are working.  Although TiVo’s website asserted that the Tuning Adapter “works well” for accessing SDV content (TiVo’s website declared “there are no known issues with Tuning Adapters and Premiere/XL, TiVo HD/XL, and Series3 HD DVRs”), TiVo is now proposing that the FCC mandate a completely different solution. Or as Todd Spangler put it in Multichannel News, TiVo wants to replace “the Tuning Adapter that cable developed in conjunction with TiVo.”

My next post will look into just that issue.

Before we start, it’s worth noting that much of the cord-cutting coverage I see online seems to begin with frustration at prices (somehow never compared to the costs of other entertainment options) or by desired flexibility in purchasing options (they just want to get the one network or the one show).

Then, the subsequent reporting or blogging is driven by a fierce conviction that the Internet and the Digital Age is changing the “cable model” – as everything must be changed under the new regime (“Resistance is futile!”) – and that it’s only a matter of time before the whole existing infrastructure comes tumbling down, to be replaced by a Bright New Tomorrow.

I must point out that the Internet offers a technical solution to delivery of content. It does not address the business models involving the production of content.

Everybody’s Dropping Cable and Its Days Are Numbered

“It’s only a matter of time,” critics will say. Pretty soon, a Hulu subscription will “kill your cable.” Or perhaps Google has the answer to “kill your cable bill.” In fact, it’s already happening now! The cord-cutters are taking over!

Just as a brief sample of cord-cutting claims, here’s Fierce IPTV from April and the L.A. Times from eight months ago.

About a month ago, I fact-checked two major cord-cutting reports from earlier in the year. Now, a new Nielsen report confirms that “cord cutting to date has been limited to very specific demographic segments.” See this finding from the report, as quoted by Connected Planet:

The survey’s key metric: 3.9% of the U.S. population had broadband Internet but no cable TV service in January 2010. That’s the same percentage reported for the same month a year earlier. In January 2008, it sat at 3.2%.

At the same time, the percentage of people with both cable TV service and broadband was 66.3% in January of this year, compared to 61.6% in January 2009 and 54.8% in January 2008.

But maybe there’s another threat to cable.

Drop Cable and Still Get Sports

About a week ago, ESPN and Microsoft accounted a deal that would bring the ESPN3 online service to Xbox 360 customers. There was much rejoicing in certain quarters, with MG Siegler writing at TechCrunch, “Xbox 360 Gets Live Sports In HD From ESPN. Canceling My Cable In 5, 4, 3…” Two days later, Karl Bode noted at DSLReports, “ESPN/Xbox 360 Deal Less Sexy Upon Closer Inspection.” He noticed that ESPN’s streaming video service has a model similar to its multichannel video business. ISPs are affiliates, much as cable operators are. And ESPN3 doesn’t offer all the same content that the television version does. (Also, see this post from the Sonic.net CEO Blog, arguing that “the Internet is ‘à la carte’, and it should remain that way.”)

So, I Should Still Cancel Cable, Right?

People like to complain. They threaten to cancel their service. But if you like to watch the programming, how else are you going to watch it?

CNET’s Rick Broida writes The Cheapskate column about saving money. He posed the question this week, “Is it time to pull the plug on cable TV?” He notes that you can use streaming services or a media center PC.

However, these options will get me only so far. If I want to watch shows like “Breaking Bad” or “Mad Men,” I’m sunk: they don’t air anywhere except on AMC. My only option would be to wait for them to come out on DVD. And even then, they won’t be high-def.

I also have kids who would probably require hospitalization without daily doses of “iCarly” and “Phineas and Ferb.” Granted, both are available through Netflix, but not the latest episodes.

And then there’s sports. I don’t watch a ton, but I do like my college basketball. The question is, do I like it enough to justify $70/month (especially when the season lasts only six months or so)? Dunno.

If You Want a Revolution, What’s the Solution?

As I’ve said before (see this post), people like to claim you can replace cable with something else, but the “something else” is often just broadcast programming streamed online.

Broadcast television has been around since the 1940’s and has a business model based on broad distribution; the free online viewing of those shows is just ancillary revenue. Cable has always offered niche content and has a dual revenue stream of advertising and affiliate fees.

Cable and other multichannel video providers are now responding to consumers’ interest in accessing cable content in new ways; that’s why we’ve seen the launch of “TV Everywhere” kinds of services, which allow subscribers to watch online the content they’re already paying for.

All those prognosticators who claimed that the cable model is doomed should try to answer the fundamental questions of how the television business is supposed to transition into this Bright New Tomorrow, while still maintaining the ability to recover production costs and generate revenue.

The latest data comes via a report from Leichtman Research Group, finding that, “71% of US broadband Internet subscribers are very satisfied with their current Internet service at home.”  On top of that, the report says people are even pleased with the speed of their Internet connection.

If this sounds familiar, the FCC’s own broadband study which we covered here a few weeks ago that said 91% of home broadband users report being at least somewhat satisfied with the speed of their service (with 50% saying they are very satisfied).  Also similar to the FCC’s survey, the Leichtman research notes, “77% of broadband subscribers do not know the download speed of their Internet service at home.”

This last data point raises an interesting question – If consumers are satisfied with their broadband service and it performs the functions they want, is it important to know the exact speed of your home broadband service?

The Institute for Policy Innovation recently tackled this question and raised some interesting analogies:

Can most people rattle off the horsepower of their car or their lawnmower? Can most people even tell you what “horsepower” means? (Horsepower is a measurement of work over time. Move 33,000 pounds one foot in a minute and that is one horsepower). What about their furnace? Can they opine on how many BTUs it produces? (BTU stands for British thermal unit. Heat one pound of 60 degree water by one degree at a pressure equal to one atmosphere and you have one BTU).

I am guessing that people are satisfied with their service because it consistently works, it consistently zips along at a pace that accomplishes what the user is trying to do, and it consistently helps them with school, business and entertainment activities.

It is great news that most consumers are satisfied with their Internet service, but cable is continuing to invest so we can offer even faster Internet speeds and a variety of tiers for consumers to choose the service that best meets their needs.

Cable operators have invested more than $160 billion over the last decade in infrastructure upgrades, maintenance and equipment, but more is happening everyday.  And many cable operators are increasing speeds for customers, often without increasing price.

Ultra-fast Internet – or DOCSIS 3.0 as we know it – was deployed to 52 million homes and business around the country, or 43% of cable’s national footprint, by February 2010.  Offering speeds from 50 to 100Mbps, DOCSIS 3.0 is providing cutting edge services for many homes and businesses now, and well into the future.

The reason why we continue to invest in our network and increase the speeds we’re delivering is to ensure this satisfaction continues.