Digital Media

Instead of a bloody price war between cable operators and phone companies in the TV market, battle lines are now being drawn over who has the most compelling new features.

Digital video recorders, on-demand services, and more recently Web sites such as Hulu.com have taught people that they don't have to be beholden to a TV schedule. But the TV industry is about to be shaken up even more as phone companies and cable operators, which are all vying for your viewing eyeballs, add new features to their services to lure customers.

So what's it mean for you, the consumer? Well, it's not likely to mean lower prices on the services you already buy. Verizon Communications has already started moderately increasing the price of its service bundle for new customers. But what it's likely to mean is that consumers will get a lot more bang for their buck. When it comes to TV, that means a lot more access to the shows and movies you like, when you want to watch them, and on any device you want to view them on. At least that's the promise.

Whether the dream lives up to the expectation is another story. While some of these new services are being rolled out as we speak, some are still being tested and aren't quite fully baked. But at the very least the revolution is quietly under way and TV viewing could be a whole lot different in just a few short years.

"I think what we (Verizon and AT&T) are doing is pressuring the rest of the market to respond," said Shawn Strickland, vice president of Fios product management for Verizon Communications. "So Comcast can't just respond to what we are doing in a single market, but they have to respond to AT&T too and it drives innovation in the entire market."

For years, not much had changed in terms of the TV viewing experience. Programmers would highlight their popular shows and vie for top ratings in Nielsen surveys. And viewers would sit back and enjoy their favorite shows. Aside for some competition from satellite providers, for the most part, the cable industry had enjoyed a near monopoly on the TV market. That is until the phone companies came along with their dreams of marrying Internet technology to the TV.

Who would have thought just a few years ago that it would take the old stodgy phone companies to stir things up in TV? But that is exactly what's happened as AT&T has entered the TV market with its U-verse service and Verizon Communications has taken on cable operators with its Fios service.

In just a few short years, these phone companies have gone from playing catch up to their rival cable providers, to actually leading the industry in terms of innovation with new interactive services that leverage their Internet-based networks.

But the cable industry hasn't sat idly. The major players in the market, namely Comcast and Time Warner Cable, have been upgrading their networks to add more capacity both to their Internet services and to their video services. And they've been forging ahead with new digital video recording features and video on demand content. Now, they are about to take the biggest plunge yet into the uncharted territory of online on-demand access to TV shows and movies.

For consumers these new services will soon offer broader access to more content, on more screens and at times that are convenient for viewers and not TV programmers. And thanks to the wonders of the Internet, consumers will also be able to interact with what they're watching.

More interactivity for viewers
For the phone companies, the future of TV is also about deepening the experience and providing more interactivity for viewers. For Verizon's Fios customers this means being able to discover new shows by checking what is the most popular content being watched in their neighborhood. The company also offers sports and news widgets, and its working on social-networking applications that will integrate TV viewing with Twitter and Facebook.

For AT&T's U-verse customers it means taking a TV event and providing a deeper dive. During the PGA Masters golf and the March Madness NCAA basketball tournaments this spring, AT&T partnered with CBS Sports to provide Web-based applications to coincide with TV viewing (CNET News is owned by CBS.) During basketball games, statistics and scores were added to March Madness fans' online brackets so they could be viewed as the games were unfolding.

And Masters golf fans were able to view multiple video feeds on their TV screens to keep up with action at different points on the course. Viewers could also check the score board online to see how the leaders were shaping up. And this information wasn't just available online or on TV, but using an application for the iPhone, it was also available on mobile devices.

"With this kind of experience viewers start to have more control and a deeper engagement with the content," said Jeff Weber, vice president of video products for AT&T. "This is very clearly for customers who care about these types of events, but it gives them an opportunity to be engaged in a way they couldn't before."

But Weber also acknowledged that viewers were primarily interested in watching these sporting events. And he said there was a fine line between balancing the deeper richer experience with not interfering with the primary activity of TV viewing.

"At the end of the day, the killer application is still watching TV," he said. "So we needed to deliver ESPN with as good a quality or better than the cable companies into the living room. But now that we have done that, we are pushing ahead to make it a much richer experience for the consumer."

Verizon's Strickland said adding interactivity to the TV viewing experience also increases the opportunity for advertisers. And it offers a new way to monetize the TV viewing experience.

"The TV is the best entertainment storefront out there," he said. "People spend an average of six hours a day in front of the TV. And interactivity with that audience provides a lot of opportunity to advertisers."

This aspect of the new television age may or may not appeal to consumers. But the truth is that providing TV service and creating content is expensive. And as more people gravitate toward watching recorded TV shows and skipping advertising or even viewing video on demand content, TV providers and the programmers that create the content need to find ways to make money to augment losses in the traditional business model.

Because the phone companies have built their networks using IP technology, they've been able to push the envelope in terms of interactive features. And in the case of Verizon, its fiber architecture has also given it a considerable amount of bandwidth capacity to push the envelope in terms of on-demand services. As a result, today Verizon is offering more than 100 channels of high-definition content. And it's able to match cable competitors in terms of video on demand services.

Cable upgrades
But the cable companies haven't been sitting on their hands for the past few years. They've been upgrading their networks and innovating too. Comcast already has Docsis 3.0 technology, which greatly increases broadband speeds and network capacity, in at least a dozen markets. Time Warner Cable was one of the first companies to introduce its start-over solution that allows viewers to start a TV show from the beginning if they come into the show late and haven't recorded it.

But the boldest move by the cable companies is about to get off the ground. Leveraging existing relationships with TV programmers, cable is striking deals to put more video content online. The popularity of Web sites such as Hulu.com, which offers mostly broadcast TV shows for free online after they air, along with other free online video programming, has spurred the cable companies into action.

Time Warner Cable has been trialing a service with HBO that allows people in Milwaukee to watch on-demand HBO TV shows and movies on their laptops. And now Comcast and Time Warner, the media conglomerate and former parent company of Time Warner Cable, are working together to test a new authentication system for accessing Turner Broadcasting content from TNT and TBS.

On Wednesday Comcast and Time Warner announced their new plan to provide authentication to securely distribute video online to cable subscribers. The companies highlighted the importance of allowing their viewers to access content, which they've already paid for via a cable subscription, from anywhere, anytime and on any device.

"This a very logical next step in the evolution of TV," said Brian Roberts, CEO of Comcast during a press conference Wednesday in New York. "Comcast alone has had 12 billion on-demand streams. iTunes has had about 6 billion downloads. This is how consumers want to get their content."

Jeff Bewkes, CEO of Time Warner agreed. "Consumers have spoken," he said. Bewkes added that putting video online for viewers to watch anytime they want on any device will greatly expand the audience and actually provide more revenue opportunity for advertisers. He used HBO as a perfect example. He said that when the company decided to add HBO content on demand for free that viewership went up and people were able to follow more shows. He said he is willing to work with any TV provider to make the Time Warner content available elsewhere.

While it's important to give people a choice in where and when they watch something, Bewkes also noted that the most important thing is simply providing access to the content.

"There has been so much focus on broadband," he said. "But don't miss the importance of the video on demand aspect. Whether its over a set top box or broadband, it will have a dramatic increase in audience."

For an industry that's supposedly struggling to keep up with customer demand for more bandwidth, the nation's two largest cable operators seem to be doing pretty well.

This week Comcast and Time Warner Cable each reported strong earnings, in spite of the fact that Time Warner has said recently that it needs a new business model to handle growing broadband demand.

Comcast beat analysts' expectations and increased profits 5.4 percent to $778 million. Time Warner Cable's profits fell 32 percent, but this was mostly due to costs associated with the split from its former parent company, Time Warner. The company's revenue was actually up 5 percent to $4.4 billion when compared to the same quarter a year ago.

Comcast also increased revenue by about 5.3 percent to $8.4 billion.

Meanwhile, both companies reduced capital spending. Comcast cut capital expenditures by 19 percent to $1.16 billion. And Time Warner Cable cut its spending by 18 percent to $33 million. For broadband specifically, Time Warner increased revenues 11 percent to $1.1 billion.

The companies also increased subscribers. Time Warner added 225,000 new broadband users and 166,000 new voice-over-IP customers during the quarter. Comcast added 328,613 high-speed Internet customers, down 33 percent from the previous year, and it added 298,433 digital phone customers, also down about 53 percent.

Even though Comcast isn't adding new customers as quickly as it did a year ago and Time Warner's profits aren't as high as they were a year ago, the companies are still adding new subscribers and making money. And yet they are also cutting capital spending.

This financial reality is very different from the one Time Warner Cable has been touting recently, as it tries to explain why it wants to start billing customers based on how much bandwidth they use. Outraged consumers mounted loud protests when the company said it would expand trials of the new billing system. Time Warner backed off the plan for now. But the company still argues that it must do something because the current business model is "not viable."

Time Warner's views are shared throughout the industry. Kyle McSlarrow, president and CEO of the National Cable & Telecommunications Association, supported Time Warner Cable's trials in a blog post stating that they "may serve the vast majority of their customers better by reflecting the growing reality that some consumers utilize far more high speed bandwidth than others."

Smaller cable operators are already starting to meter bandwidth, according to a recent article by the Web site Broadcasting & Cable. Sunflower Broadband in Northern Kansas has been using metered pricing for the past four years. And Wave Broadband, which provides service in Oregon and Washington, is about to launch metered billing on its network.

The chief operating officer of Sunflower Broadband, Patrick Knorr, says bandwidth-based billing is the only way to manage infrastructure, the B&C article said. He believes that with all the high-definition content being downloaded that there is no way a cable company could keep up with demand at current flat rate prices. And like Time Warner's CFO, Landel Hobbs, Knorr says that consumption-based billing is "unsustainable."

But when cable operators add customers and cut capital spending on infrastructure, it doesn't seem as though they are even attempting to keep up with customer demand for more bandwidth. And the fact that they are still making profits also shows that they have the money to spend. So for consumers--who already feel they pay too much for broadband services compared to people living in other countries--Time Warner's argument that it has no choice but to meter traffic is a hard to pill to swallow, especially in this economy when so many people are financially strapped.

Joost is actively seeking a buyer and the beleaguered video service has told cable and satellite providers that it could be their online video solution, said sources close to the companies.

Time Warner Cable is one of the companies that has expressed interest in Joost, the sources said. Spokespeople for Joost and Time Warner Cable said they don't comment on rumor or speculation.

Joost is a story of missed opportunities, bad luck, and the folly of thinking whiz-bang technology alone is enough to forge a winning entertainment site.

Joost launched in 2007 with seemingly everything going for it. The company's founders are Janus Friis and Niklas Zennstrom, the same pair who founded Skype and Kazaa. The thinking in the media was the site couldn't lose with Friis and Zennstrom's peer-to-peer technology, which was supposed to be more efficient and provide higher-quality video.

Two years later, and after the company struggled with management shakeups, technology setbacks, as well as a failure to land top TV shows and films, Joost's traffic and content library are mediocre at best. In the Web video sector, Joost has fallen far behind the leaders: YouTube and Hulu, the site formed by NBC Universal and News Corp.

The latest setback came earlier this month when Sony Pictures did not renew its licensing agreement with Joost. At about the same time, Sony Pictures was striking a licensing agreement with YouTube, the much larger and more successful Joost rival.

It should be noted that CBS, which owns CNET News, is investor in Joost.

Time Warner Cable took a hit from a weak economy and growing competition from phone companies in the fourth quarter as subscriber growth slowed.

Time Warner Cable, the second largest cable operator in the U.S. behind Comcast, met financial expectations on Wednesday for the fourth quarter, but it added fewer subscribers during the quarter.

CEO Glenn Britt cited a weak economy and growing competition from phone companies AT&T and Verizon Communications.

The cable operator only gained about 49,000 new lines for a total of 34.2 million during the quarter. And basic video subscriptions decreased by 197,000, to 13.1 million. This drop was attributed to customers ending their service, but was also due to the fact that Time Warner Cable sold some properties.

Even though the company saw subscriptions slow and even decline in some areas, it still managed to increase its revenue, mostly due to higher prices. In video, it increased revenue by about 4 percent to $2.65 billion. Revenue for its high-speed data service also increased 11 percent, to $1.08 billion. And voice revenue increased 29 percent, to $435 million.

Meanwhile, Verizon Communications, which competes head-to-head with Time Warner in several markets, including New York City, had its best quarter yet in terms of signing up new Fios broadband and TV subscribers. For the fourth quarter, Verizon added 303,000 Fios TV customers and 282,000 Fios Internet customers. Verizon ended the year with 1.9 million Fios customers, doubling its base in 2008.

AT&T, which also sells broadband and TV service, also had a strong quarter. It added a total of 264,000 new TV subscribers in the fourth quarter, up from 232,000 added in the third quarter of 2008. The company now has more than 1 million subscribers for this service.

AT&T's U-Verse broadband service also helped push growth in the company's IP data services. In total, AT&T grew its consumer IP data revenue, which includes broadband and AT&T U-Verse services, by 21.4 percent.

Time Warner Cable also wrote off a big portion of its investment in the high-speed wireless network being built by Clearwire. The company took a noncash impairment of about $367 million on its $550 million investment. The company expects to roll out wireless service with Clearwire in at least one city in 2009.

Meanwhile, Time Warner Cable's parent company, Time Warner, also reported a loss of $16.03 billion for the fourth quarter of 2008, compared with last year's profit of $1.03 billion. Much of the loss came from $24.2 billion in writedowns, a big portion of which came from the cable operator.